Let’s face it, employees can get really upset about tax deductions on their salaries. That’s why, the government has bestowed organisations with the authority to choose the best allowances and perks that can help employees save income tax.
As an HR professional, it’s your prerogative to choose the most relevant benefits that your employees find useful and can claim with ease. Some of the most common benefits include leave travel allowance, fuel allowance, mobile and internet allowance, gadget allowances, meal vouchers, gift vouchers and more.
In this blog, we’ll talk about one of the most popular and preferred employee tax benefits - fuel allowance. What is it? Why is it popular? What makes it a coveted employee benefit? Here’s just about everything you need to know about fuel benefits.
As per the first-ever Employee Benefits study in India, 72% employees prefer to opt for fuel allowances. This not only indicates the popularity of this benefit among employees, but also the relevance of offering it to them.
Fuel allowance, car allowance, fuel expense reimbursements, fuel benefits - call it what you want. The name of this tax benefit varies in different companies. In formal IT parlance, it’s a called the motor car allowance or perquisite. In simple words, this allowance is applicable for every employee who uses a company-owned or personal vehicle for official purposes.
Now, some fact-checks. As per the first-ever Employee Benefits study in India, 72% employees prefer to opt for fuel allowances. This not only indicates the popularity of this benefit among employees, but also the relevance of offering it to them. If your company is yet to offer this allowance, maybe now is the time to find out why you should introduce it. After all, it makes sense to offer a benefit that your employees would willingly prefer to opt for.
Organisations often offer fuel expense reimbursements as a pay component for tax saving, particularly for members of the middle and senior management. Here’s how the payroll treats this allowance:
The company pays a certain sum of money as remuneration under the head each month
Employees must submit receipts of petrol/diesel purchase to payroll
As per I-T rules, employees get full tax exemption to the extent receipts are submitted
Employees are taxed on the amount for which receipts are not submitted
The taxability of this perquisite depends on the ownership, engine capacity and purpose of usage of motor cars. There’s also driver’s salary and car maintenance expenses. Sounds complicated? It’s just a matter of time until you get familiarised with the concept. Consider this blog a ready reckoner that you can refer to whenever you need to and share it with your employees for them to understand this benefit.
1. Car is used exclusively for official purposes
When an employee uses a car exclusively in the performance of official duties, all of the amount spent on fuel, car maintenance and driver’s salary is fully tax-exempt. This happens irrespective of who owns the car, i.e. the employer or employee.
In order to establish that the car is used for official purposes only, the following documents are required:
Employer’s certificate is required on expense incurred stating that the expenditure was incurred wholly and exclusively for the performance of official duties
The employer has to maintain a log with the details of journey undertaken by the employee for official purposes
All fuel bills
2. Car is used for personal purposes
If the car is used for personal purposes by the employee - whether it’s owned by the company or personally, the expenses incurred against fuel, car maintenance and driver’s salary is fully taxable. Even when the amount is reimbursed to the employee towards the car owned by the employee used exclusively for personal use is fully taxable.
If the car is owned or hired by the employer, the value of perquisite is the sum total of:
Actual expenditure incurred by the employer on running and maintenance of car during the year
Salary paid to the driver
Amount representing normal wear and tear, calculated at 10% p.a. of the car’s value
From the sum total, any amount charged from the employee is required to be reduced to compute the value of perquisite
3. Car owned by the employer – used both for official as well as personal purposes
Now, let’s understand what happens when a car is owned by the employer and the expenses are borne by the employee. Also, the vehicle is used partly for official purposes and partly for personal purposes. The taxability is calculated at flat rates as given below.
a) If expenses on running and maintenance are met by employee:
b) If maintenance and running expenses are met by employer or reimbursed to employee:
4. Car owned by the employee – used both for official as well as personal purposes
If the car is owned by the employee but the maintenance and running expenses are met by the employer or reimbursed to the employee, the value of the allowance shall be determined as the difference between
(a) actual expenditure incurred by the employer, and
(b) the amount calculated at the rate given below:
Engine capacity above 1600cc - Rs 2,400 per month
Engine capacity above 1600cc - Rs 1,800 per month
Driver’s salary - Rs 900 per month
What if an employee uses a two-wheeler or a bike?
Employees are eligible to claim reimbursements against a two-wheeler/bike as well. If the bike is used:
Exclusively for official purpose – the entire running expenses is exempt from tax in the hands of employee
Exclusively for personal purpose – the entire reimbursements is taxable in the hands of the employee
Partly for official purpose and partly for personal purpose, reimbursement up to Rs.900 is tax free and the balance reimbursements, if any is taxable.
What happens if two cars are provided by the employer?
Sometimes, employers provide more than one car to the employee. The taxability in such cases are as follows:
One car should be considered as used for both official as well as personal purposes
The second car must be taken as if used for personal purpose and the employee has borne the running and maintenance expenses
The perquisite value for third, fourth, and other cars shall be calculated as though the cars are used fully for personal purposes.
For more FAQs, check out this article on car allowance and its tax benefits.
Digitised fuel reimbursements for employees: The way forward
The fundamental idea behind employee benefits is to decrease taxable income, and help employees save more every year. As mentioned earlier, fuel allowances are one of the most relevant and most commonly used benefits you can offer.
In this day and age where we’re supporting Digital India in its true sense, digitising employee benefits is the way forward. Gone are the days when employers would maintain logs of journeys undertaken by employees manually in a log book. As of now, all these processes can be digitised, including payments, digital record-keeping and storing soft copies of bills that can be saved in the cloud for as long as you like.
We already have fuel cards that are acceptable at select fuel stations. But is there a fuel benefits solution for employees that is universally accepted at all petrol pumps? Of course. Zeta is on a mission to digitise employee reimbursements and offer an end-to-end digital solution for HR professionals.
If you’d like to know more about how you can digitise your employee fuel reimbursements programme, share your details with us and we’ll get in touch with you shortly.