Perquisites - motor car - Income Tax

Please answer to the following questions,

Can a director (and an employee) buy a new car and lease that to company for his office and private use and charge reasonable lease rent (to cover deprecation, Insurance and car loan interest) to company? Director include hire/lease income in his tax return and claim Deprecation, insurance and loan interest against it.

Is above arrangement permissible under the Income Tax Act?

If the answer to above is yes (as the car is hired by the company from director and also he is the owner), to value the perquisite under Income Tax Act, which of the following category this case fit-

car owned or hired by the employer OR (whether car need to be hired/leased from third party, other than employee to fit into this category?)
owned by the employee

is it a) or b) above? If it is treated as car owned by the employee (b), then the perquisite should be actual amount of expenses incurred by the employer minus Rs. 1,800 per month. Should actual expenses include the lease rent paid by the employer to director.

thanks in advance.

Hey Ramesh! Your questions on motor car perquisites and leasing arrangement are quite interesting. Here's a detailed response:

1. Can a director/employee buy a car and lease it to the company charging reasonable lease rent (covering depreciation, insurance, loan interest)?

Yes, a director or employee can purchase a car and lease it to the company. The lease rent charged should be reasonable and documented properly.
The director/employee will include this lease rent as income under "Income from Other Sources" (or business income if applicable) in their tax return.
They can claim depreciation, insurance, and loan interest expenses against this income as per Income Tax rules.

2. Is this arrangement permissible under the Income Tax Act?

There is no explicit prohibition under the Income Tax Act against such leasing arrangements between the employee/director and the company.
However, the arrangement must be commercially genuine — i.e., lease rent should be at arm's length (reasonable), supported by agreements, and the company should actually use the vehicle.
The tax authorities may scrutinize if the lease rent seems inflated or the arrangement is a method of tax avoidance.

3. How to value the perquisite on motor car in this case?

This is the critical part:

Normally, motor car perquisite valuation depends on who owns the car and who provides it to the employee.
Two main categories:

a) Car owned or hired by the employer:
Perquisite value = Flat rates (e.g., Rs 1,800/month for a petrol car, Rs 900/month for diesel, if car used for private purpose).

b) Car owned by the employee:
Perquisite value = Actual expenses incurred by the employer (company) on the car minus Rs 1,800 per month (for petrol car), i.e., net of contributions by employee.

In your case:

The company is hiring/leasing the car from the director/employee (owner), not owning it directly.
So, this situation falls under category (b) — car owned by the employee.
The company is paying lease rent to the director; those lease payments are actual expenses.
Perquisite value to the director is the actual expenses borne by the company minus the lease rent paid by the company to the director — but since the company is paying lease rent, the "actual expenses" for perquisite calculation essentially translate to the lease rent itself.

Summary:

The director/employee will report lease rent received as income.
The company will treat lease rent as an expense.
For perquisite valuation, since the car is owned by employee and hired by employer, the perquisite is the value of expenses incurred by employer (lease rent) minus Rs 1,800/month if private use allowed.
Practically, since company is paying lease rent to director, perquisite value equals lease rent less Rs 1,800 (or applicable amount).

Important points:

Ensure a written lease agreement specifying terms.
The lease rent should be reasonable and comparable to market rates.
Maintain all supporting documents for audit.
The director cannot claim depreciation again on this car as it's their personal asset; they can only claim expenses proportionate to income from leasing.
Company must treat lease rent as business expense; no depreciation claim by company on this car.