Car leasing under new regime: How it can reduce taxable income

Car leasing is one of the ways salaried individuals can structure their compensation efficiently under India’s new income tax regime, which does away with most exemptions and deductions. Rather than a trend-driven shift, it can be understood as a mechanism within existing tax rules that can, in specific cases, help reduce taxable income.

How car leasing works

In a typical corporate leasing arrangement, the employer leases a vehicle from a service provider and assigns it to the employee as part of the compensation package. The employer pays a fixed monthly lease rental, which is adjusted within the employee’s salary structure.

Unlike a car loan or outright purchase, the vehicle remains owned by the leasing company. The arrangement often includes bundled services such as insurance, maintenance, and registration.

How it can affect taxes

The potential tax impact comes from how the Income Tax Act treats such arrangements:

• Lease rentals and salary structuring: The lease cost is typically adjusted against the employee’s gross salary, which can lower the taxable component depending on how the package is structured.
• Perquisite valuation: For company-provided cars, tax is calculated on a fixed perquisite value prescribed under tax rules (based on engine size and usage), rather than the actual expense incurred. This value may be lower than the real cost of owning and running a car.
• Running expenses: Costs such as fuel, driver salary, and maintenance—if paid by the employer—are treated under defined rules, which may be more tax-efficient than paying these expenses directly.

Why it is discussed in the context of the new regime

The new tax regime focuses on lower tax rates with minimal exemptions. As a result, tax planning has shifted from claiming deductions to structuring compensation components within the rules.

An explainer by Moneycontrol outlines that individuals evaluating the new regime often compare how different salary components—rather than deductions—affect their final tax liability. Car leasing fits into this framework because it is treated as part of employer-provided benefits.

Employer and cost considerations

From an employer’s perspective, leasing converts a large upfront capital expense into predictable monthly outflows and avoids holding a depreciating asset on the balance sheet. Employees, in turn, get access to a vehicle without making a down payment or managing resale.

According to Aman Naagar, Managing Director, Avis India, corporate leasing programmes typically include end-to-end management,from procurement and registration to maintenance and insurance, making them structured and compliant mobility solutions within compensation frameworks.

What to evaluate before opting for it

Car leasing does not automatically result in tax savings for everyone. Its effectiveness depends on:

• Whether the employer offers a leasing structure
• The employee’s tax bracket and salary composition
• Official versus personal usage of the vehicle
• Lease tenure, exit terms, and overall cost compared to ownership

A structured approach, not a deduction

Car leasing operates within the existing tax framework as a way of structuring salary and benefits. Under the new regime, where traditional deductions are limited, such arrangements are evaluated for how they influence taxable income rather than for providing direct exemptions.

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