Salaried Employees May Pay More Tax on Company Cars Under Draft Income Tax Rules 2026
Salaried Employees May Pay More Tax on Company Cars Under Draft Income Tax Rules 2026
Salaried employees who use company-provided cars could soon see their tax bills rise. The Draft Income Tax Rules, 2026 propose a major overhaul in how the taxable value of employer-provided motor vehicles is calculated, potentially reducing the tax benefits that made company car arrangements attractive in the past.
If these draft rules are cleared by Parliament, the revised valuation norms will apply across both the old and new tax regimes. This is because the changes deal with the valuation of salary-related perquisites, which remain taxable regardless of the regime chosen by an employee.
What the Draft Rules Aim to Change
Under the existing Income-tax Rules, 1962, the taxable value of a motor car provided by an employer was calculated using fixed, relatively low notional amounts. These values had remained unchanged for years, despite rising vehicle costs and maintenance expenses.
The Draft Income Tax Rules, 2026 propose updating these figures to better reflect current economic conditions. While the framework for classification remains the same, the actual monetary values used to compute taxable perquisites have been increased in several cases.
As a result, employees using company cars—especially for both official and personal purposes—may have to report a higher perquisite value as part of their salary income, leading to a higher income tax outgo.
Rule Reference: Old vs New
Earlier Provision: Rule 3(2) of the Income-tax Rules, 1962
Proposed Provision: Rule 15(3) of the Draft Income Tax Rules, 2026
Chartered Accountant Avinash Kumar Rao, Partner at Mohindra & Associates, explains that the earlier rules classified motor car perquisites based on three key factors:
Whether the car is used for official purposes, personal use, or a mix of both
Who bears the running and maintenance expenses
Whether a chauffeur is provided
According to Rao, while the draft rules continue to follow the same classification structure, the valuation amounts have been substantially revised to align with today’s cost realities. This shift could significantly impact salary structuring and take-home pay, making it important for both employers and employees to reassess existing arrangements.
Higher Perquisite Value, Higher Tax
One of the most significant changes proposed under the Draft Rules is the increase in taxable value for employer-owned cars used partly for official work and partly for personal use by employees or their family members.
This change directly affects popular CTC-based car leasing models. Earlier, employees benefited from a tax arbitrage—the difference between actual lease rentals and the lower notional perquisite value. With the revised, higher perquisite values, this gap is expected to narrow, reducing overall tax savings.
From an employee’s point of view, a higher perquisite value means higher taxable income and, consequently, more tax payable.
Illustrative Scenarios
Example 1
Monthly lease rental: ₹25,000
Engine capacity: 1.7 litres
Usage: Official and personal (mixed use)
Running and maintenance expenses: Paid or reimbursed by employer
Lease tenure: 1 year
Example 2
Monthly lease rental: ₹25,000
Engine capacity: 1.5 litres
Usage: Official and personal (mixed use)
Running and maintenance expenses: Paid by employee
Lease tenure: 1 year
In both cases, the revised valuation under the Draft Rules would result in a higher taxable perquisite compared to the earlier rules.
Clear Increase in Monthly Taxable Value
To understand the impact more clearly, consider a common scenario. If an employer provides a car for mixed use and the employee pays for fuel and maintenance:
Earlier rule:
If the engine capacity was below 1.6 litres, the taxable perquisite value was ₹600 per month.
Draft Rules, 2026:
For the same category, the taxable value increases to ₹2,000 per month.
This change alone can significantly increase the annual taxable income of salaried employees who rely on employer-provided vehicles.
Engine Capacity Matters
The draft rules continue to differentiate vehicles based on engine size. For reference:
The Hyundai Creta with a naturally aspirated petrol engine has an engine capacity of 1.5 litres (1,497 cc).
The Volkswagen Virtus is available with turbo petrol engines of 1.0 litre (999 cc) and 1.5 litres (1,498 cc), depending on the variant.
What This Means for Employees and Employers
The proposed revisions signal a clear shift by the tax authorities toward more realistic valuation of non-cash benefits. While this may improve fairness in the tax system, it also means that company car benefits will no longer deliver the same level of tax efficiency they once did.
