The draft Income Tax Rules, 2026, propose a major change in how company-provided cars are taxed.
If approved, employees who receive a car from their employer may have to pay more income tax.
The change affects how the “perquisite value” of the car is calculated — and that value gets added to your salary for tax purposes.
Importantly, this rule will apply under both the old and new tax regimes.
What Is Changing in Car Perquisite Tax?
At present, if an employer provides a car that is used for both official and personal purposes, a fixed monthly value is added to the employee’s taxable salary.
Under the draft rules, this value is being increased significantly.
For example:
If the employee bears fuel and maintenance costs, and the car has an engine capacity below 1.6 litres:
Earlier taxable value: Rs 600 per month
Proposed taxable value: Rs 2,000 per month
That’s more than a threefold increase.
Cars like the Hyundai Creta (1.5 litre engine) or certain variants of the Volkswagen Virtus (1.0 and 1.5 litre engines) would fall under this category.
The structure of classification remains similar to the old Rule 3(2) of the Income-tax Rules, 1962.
However, the new draft Rule 15(3) sharply revises the valuation amounts to reflect current economic conditions.
Why This Matters for Your Salary
When the perquisite value increases, your taxable income increases.
This means:
Higher income tax
Lower take-home pay
Reduced tax advantage from company car benefits
The biggest impact will be on employees using the CTC-based car leasing model.
Earlier, this model was attractive because the notional taxable value was much lower than the actual lease rental.
That difference created tax savings.
Now, with higher perquisite values, that gap will shrink.
As a result, the overall tax savings from leasing a car through your CTC package may reduce significantly.
Impact on CTC-Based Car Leasing: Two Examples
Let’s look at two situations.
Example 1
Lease rental: Rs 25,000 per month
Engine capacity: 1.7 litres
Usage: Official and personal
Maintenance paid by employer
Tenure: 1 year
Example 2
Lease rental: Rs 25,000 per month
Engine capacity: 1.5 litres
Usage: Official and personal
Maintenance paid by employee
Tenure: 1 year
In both cases, the revised higher perquisite value will increase the employee’s taxable income.
However, employers will not face additional tax burden.
The CTC paid, including lease rentals, will continue to qualify as a business expense deduction.
What Happens Next?
If the draft rules are officially notified, the new valuation system will apply from April 1, 2026.
This could even impact existing car leases.
Overall, the proposed rules significantly increase the taxable value of employer-provided cars.
That means higher tax liability for employees and reduced financial attractiveness of the CTC car leasing model.
Employees and employers may need to review salary structures and car leasing arrangements well before the new rules come into effect.
