The government has proposed major changes in the Draft Income Tax Rules, 2026 — and if approved, they could make company-provided cars more expensive for employees.
The focus is on how the taxable value of employer-provided cars is calculated. And the new numbers are significantly higher.
If these rules are cleared by Parliament, they will apply under both the old and new tax regimes.
What Exactly Is Changing?
When an employer provides a car to an employee for both official and personal use, it is treated as a “perquisite” — meaning a taxable benefit.
Until now, the taxable value of this perk was relatively low.
For example:
If an employee used a car with an engine capacity below 1.6 litres and paid for fuel and maintenance, the taxable value was just Rs 600 per month.
Under the draft 2026 rules, this amount will increase sharply to Rs 2,000 per month.
That means a larger portion will be added to the employee’s salary income — and taxed accordingly.
The bigger the engine capacity, the higher the taxable value.
This change directly increases taxable income and reduces take-home pay.
Why This Matters for Car Leasing Through CTC
Many employees opt for CTC-based car leasing because it offered tax advantages.
Earlier, there was a gap between:
The actual lease rental paid
The lower notional taxable value assigned to the car
This gap created tax savings.
But under the draft rules, that advantage may shrink significantly.
The government has revised Rule 3(2) of the old Income-tax Rules, 1962, and replaced it with Rule 15(3) under the Draft Rules, 2026.
While the structure remains similar, the valuation amounts have been updated to reflect current economic conditions.
In simple terms, the tax benefit of leasing a car through salary could reduce.
How the New Rules Could Impact You
Let’s understand with examples.
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 perquisite value will increase the taxable income of the employee.
As a result:
Income tax outgo will increase
Net tax savings under car leasing will decline
Overall financial benefit of the model will reduce
What About Employers?
Employers will not face additional tax burden.
The CTC paid to employees, including lease rentals, will still qualify as a business expense deduction.
The impact is mainly on employees who choose the CTC-based car leasing option.
When Will This Apply?
If notified, the new valuation rules will come into effect from April 1, 2026.
Importantly, the revised valuation may also apply to existing leases from that date.
This means even ongoing car leases could become less tax-efficient.
The Bigger Picture
The draft rules significantly increase the taxable value of employer-provided cars.
This could reduce the appeal of the popular CTC car leasing model and force employees to rethink salary structuring decisions.
If you are currently leasing a car through your salary package, it may be wise to review your tax calculations before April 2026.
