Taxability of fuel expense reimbursement to employees -Part I
Organizations use “Fuel Expense Reimbursement” as a pay component for tax saving, particularly for members of middle and senior management. The typical payroll treatment for the head of pay is as follows:
- Pay a certain sum of money as remuneration under the head each month.
- Seek petrol/diesel purchase receipts from employees.
- Provide full tax exemption to the extent receipts are submitted.
- Tax the amount for which receipts are not submitted.
We find employees getting paid significant sums of money under the head and receiving 100% tax exemption to the extent fuel receipts are submitted.
Payroll managers would do well to note that there is no blanket 100% tax benefit on fuel expense reimbursement. In fact, there is no direct reference to petrol/fuel expense reimbursement in the income tax law. Rule 3 of the Income Tax Rules, which pertains to valuation of perquisites, provides guidelines on how to tax amounts paid to employees for the purpose of meeting “running and maintenance charges” of motor car and other vehicles. The term running and maintenance charges includes expenses incurred on petrol/diesel.
Factors that determine taxability of fuel expense reimbursement for car
According to Rule 3, the following factors determine the extent to which fuel expense reimbursement should be taxed.
- Car ownership – Provided by the employer or owned by the employee
- Car usage:
- For official purposes alone
- For personal purposes alone
- Partly for official and partly for personal purposes
- Cubic capacity of the car engine: Lesser than/equal to or more than 1.6 litres
The monthly perquisite values (the salary amount to be added to the taxable income) for fuel expense reimbursement under different circumstances are as follows.
Employer provides the car and reimburses the fuel expense amount to employee
The car could be owned or hired by the employer and provided to the employee. The car may be used by the employee or any member of the employee’s household. The monthly perquisite value is as follows.
i) The car is used wholly and exclusively for official duties.
When the car is used only for official purpose, the perquisite value for the purpose of taxation is Rs 0. This is irrespective of fuel and other car running and maintenance expense amount reimbursed to an employee. For example, if a company reimburses Rs 1 lakh per month for the purpose of fuel expenses to an employee, the entire Rs 1 lakh shall be tax free as long as the car is used solely for official purposes.
Please note that the following conditions should be met for the reimbursement to be tax free.
| – |
the employer should maintain complete details of journey undertaken for official purpose including date of journey, destination, mileage, and the amount of expenditure incurred. |
| – |
the employer should issue a certificate to the effect that the expenditure was incurred wholly and exclusively for the performance of official duties. |
From the above, it should be clear that the fuel expense reimbursement shall be fully non-taxable only if the car is wholly used for official purposes and the organization maintains details of journeys undertaken by the employee.
ii) The car is used exclusively for personal purposes of the employee or any member of his household.
When the car is used only for personal purpose, the total perquisite value for the purpose of taxation is the following.
Actual amount of expenditure incurred by the employer on the running and maintenance of motor car including driver salary, if any.
plus
Normal wear and tear of the car. The annual normal wear and tear value is calculated as 10% of the actual cost of the car. If the car expense reimbursement is for a period which is less than a year, the wear and tear value should be correspondingly adjusted for the period.
minus
Any amount charged from the employee for use of the car.
In summary, if a car provided by an employer is used entirely for personal purposes of an employee, the total running and maintenance expense incurred/reimbursed by the employer is taxable in the hands of employee.
iii) The car is used partly for official purposes and partly for personal purposes of the employee.
When the car is used for both official and personal purposes, the perquisite value for the purpose of taxation is as follows.
|
Running expenses |
Car engine cubic capacity does not exceed 1.6 litres |
Car engine cubic capacity exceeds 1.6 litres |
|---|---|---|
|
a) The expenses for maintenance and running are fully met or reimbursed by the employer. |
Rs 1,800 per month (plus Rs 900, if chauffeur is also provided to run the motor car) |
Rs 2,400 per month (plus Rs 900, if chauffeur is also provided to run the motor car) |
|
b) The expenses for running and maintenance for private or personal use are met by the employee. The employer reimburses expenses pertaining to official use. |
Rs 600 per month (plus Rs 900, if chauffeur is also provided to run the motor car) |
Rs 900 per month (plus Rs 900, if chauffeur is also provided to run the motor car) |
Note:
- If the car is used for both official and personal purposes, there is no need for the employer to maintain details of journeys made. The perquisite value is irrespective of the actual amount reimbursed.
- Rule 3 does not explicitly state what the perquisite value is if an employee uses an employer provided car for partly official and partly personal purposes and foots the entire bill for car running expenses.
Illustration
A company provides a car (with 1.5 litres engine capacity) to an employee and reimburses Rs 20,000 per month towards fuel and other car maintenance expenses incurred for both official and personal journeys. The company does not reimburse driver salary. What is the monthly perquisite value?
Ans: Since the car’s engine capacity is less than Rs 1.6 litres and the car is used for both official and personal purposes, the perquisite value per month is Rs 1,800.
We find many organizations providing “Vehicle Maintenance Reimbursement” for employer-provided car as a head of pay to employees, given that the maximum perquisite value is only Rs 3,300 per month if the usage is declared as partly official and partly personal. While this is a legitimate tax saving idea, employers should ensure that the underlying transaction is genuine and the documentation is valid and complete. Let us explain this.
Some organizations create car lease agreements with employees’ friends and relatives (without a car actually being provided to the employee) in order to create an impression that there is a car lease transaction. In many cases organizations do not pay any car lease rent to the car owner. The idea behind such lease agreements is just to create a picture that cars are hired by the employer for the use of employees. The employees are then provided with vehicle expense reimbursements and the corresponding perquisite values are added to the taxable income of employees. From a compliance point of view, such employers argue that since they have created lease agreements, they are in compliance with Rule 3 of the Income Tax Rules.
Please note that compliance with income tax rules requires that any documentation created is for a genuine transaction. If a company creates agreements with individuals for the purpose of creating car lease documentation, the Income Tax Department could well check the following in order to establish the genuineness of the transaction.
- Does the organization pay car lease rentals to the owner of the car as per the agreement?
- Does the organization comply with the service tax rules pertaining to car lease transactions for employee use. In other words, if an organization needs to pay service tax for car lease charges under the reverse charge mechanism, does it pay the required service tax?
- If the car lease agreement is with individuals, does the agreement specify the details of the car? Does the organization maintain copies of documents such as the RC book in order to ensure that the car actually exists?
Payroll managers should ensure that car leases are genuine, and lease agreements do not exist just for the sake of seeking tax benefits.
What if an employer provides more than one car to an employee?
When an employer provides more than one motor car for the use of an employee or the members of the employee’s household, the perquisite value shall be calculated as follows.
- With regard to the car which is wholly and exclusively used for official purposes, the perquisite value shall be zero.
- The perquisite value for the second car shall be calculated as though the car is used partly for official and partly for personal purposes and the employee has borne the running and maintenance expenses (described earlier in this article).
- The perquisite value for third, fourth, etc. cars shall be calculated as though the cars are used fully for personal purposes (described earlier in this article).
The period of perquisite value
Please note that Rule 3 of the Income Tax Rules specifies perquisite amounts for a calendar month and hence it is important that employers record the months for which fuel reimbursements are made and the corresponding perquisite value is applicable, in payroll. Also, employers should receive receipts towards vehicle maintenance expenses in total from employees. For example, if the fuel expense reimbursement of Rs 15,000 is for the month of April, the employer should receive fuel receipts for the entire Rs 15,000 for the month of April.
In the next post, we will take a look at the basis of perquisite value calculation for fuel expense reimbursement for car owned by the employee.
Posted in: Blog
Leave a Comment (82) ↓
Hi,
How these reimbursement are reflected in Form16.
Nothing is mentioned in IT about it.
The vehicle expense reimbursement amount itself is not shown in Form 16 if the perquisite amount corresponding to the reimbursement is calculated as per Rule 3. The perquisite value pertaining to vehicle expense reimbursement head of pay is shown in Part B of Form 16 under “Gross Salary” >> “Value of perquisites u/s 17(2).” In addition, the perquisite value is shown in Form 12BA (Statement showing particulars of perquisites).
Hello Sir,
I wanted to know if the car is owned by employee and car is used for private (personal) purpose . Whatever the reimbursement (petrol bills, Maintenance & driver salary) is paid to employee is taxable o non taxable.
Fully taxable.
Thanks for the reply.
For a car lease/hire purpose, is it necessary that the employer has multiple office locations in the city to justify providing car?
There is no such condition.
Can i claim this amount (Fuel & Vehicle Maintenance) while filing income tax return by producing original bills as i joined in mid of the financial year and employer didn’t consider for the bills ?
You can make the claim when you file your return. But there is a chance that it may get rejected since there is no way the department can get to know the exact vehicle maintenance amount made to you and the vehicle expenses made by you. You may have to produce the supporting documents in case there is a query from the department.
In case the employer fails to record all fuel details, is there a way that the employee can claim the tax deducted while filing ITR?
You can make the claim when you file your return. But there is a chance that it may get rejected since there is no way the department can get to know the exact vehicle maintenance amount made to you and the vehicle expenses made by you. You may have to produce the supporting documents in case there is a query from the department.
For example, my spouse drives me to the office.Can I pay her the driver’s salary ?
Yes, you can. But please ensure that there is proof of payment and you can prove that the transaction is genuine and not a sham. The Income Tax Department is typically suspicious of arrangements like what you have suggested.
Hi,
Would like to know if other vehicles means a two wheeler too? Especially a bike?
Yes, it includes two wheelers.
I am informed by HrBerry / Ascent that only Car / 4 wheeler petrol refill is reimbursable valid and that I cannot claim for a 2 wheeler petrol refill. Please guide me to a Government website or any document that informs that two wheels are also covered.
Rule 3 of the Income Tax Rules (https://www.incometaxindia.gov.in/)allows perquisite calculation on fuel reimbursement for “any other automotive conveyance” which includes two-wheelers.
Can I take Car petrol allowance of Rs.1800 and Bike petrol Allowance Rs 900 both at same time .
Thanks
Yes, if your employer is willing to do so.
Hi Sir,
There is no car lease facility provided by my company. I am opting for personal car lease.
Is there any exemption available under income tax.
No exemption is available for income from salary if you have taken a car on lease.
Hi,
I have Fuel & Maintenance eligibility of Rs. 20000 Per Year.
I have a 2 Wheeler. As per the policy, Rs. 10800 alone I can produce bills for reimbursement.
Does this include Maintenance Bills too? If so, the balance Rs. 7200 is taxable?
I hope, there is no use in providing such benefit if this Rs. 7200 is taxable. Can’t this Rs. 7200 be paid as reimbursement for Maintenance (Service) Bills?
Regards,
Sevarkodiyon K
This is a matter pertaining to your organization’s policy. Kindly check with your organization in this regard.
Dear sir,
My monthly salary component includes car petrol allowance & driver salary.
I OWN the car and PAY driver’s salary.Also please note it is 100% used for coming to and fro office ONLY.
Kindly note my employer has included this as part of salary and deducted tax fully. Can I claim IT refund on this amount. Are there any chances of questions from IT since this amount comes to Rs 3.49 L and hence tax refund would be around Rs 1 L
Thanks
Best,
Gajanan
You may not be able to claim refund on this. The employer should have given the benefit on the basis of the supporting documents provided by you.
Thanks for your reply sir
hello! I have the same query. I have my own car and my salary includes the drivers salary and petrol component (12000+8000)p.m. Nothing is reimbursed by the employer and car is used for going and coming back from office.I have submitted all the supportings in my oice.Am i eligible to claim full expenditure of Rs. 20000 pm while filing ITR?
1. Why did your employer seek supporting documents? Did they calculate any perquisite value on the basis of the supporting documents?
2. Did your employer tax the driver salary and petrol component fully?
hi, i am medical professional i want to claim tax exemption for fuel under partial usage under which section sold i fill it it in its form IV kindly help
You have to claim it through your employer.
Hi
The company has not provided the car to me and my fuel reimbursement is 9000 per month . I have 1200 cc car. The company gives me exemptions in tax @ 1800 PM but demands the bill of 9000 per month as mentioned in my salary component.
Is this correct ??? I doubt????
Your company is correct in insisting on bills for Rs 9,000 per month. As per the tax rules, your company needs to seek proof of expenditure of Rs 9,000 in order to give you the tax benefit.
Hi
Can using a personal car only from Home to office be eligible be taken as using car for official purpose? Can the company reimburse petrol /driver salary and give tax exemption to the employee
No, the Income Tax Department may object to this.
Hii sir, if the veichle is in my wifes name can we submit bills against that car?
No
Is it necessary to have bills from the same state where we are working?
Please check with your organization in this regard.
Hi,
I’m using two wheeler. I would like to show all my fuel allowance at end of Financial year. Actually in my organization, senior level people can opt for Fuel allowance and Driver allowance reimbursement. But we are not allowed for the same. Still I have collected all my fuel allowance bills. How to make these records to reflect in my Form 16 at the end?
Is it possible to deduct those my allowance during e-filing even if it is not reflecting in my Form 16? However I am keeping the bills as backup.
You need to be paid vehicle maintenance expense reimbursement by your employer in order to claim tax benefit.
Hi
The company has provided the car to me and I am Paying Driver Salary 15000 and Maintenance & Fuel will Paid by Me. I am Getting Car Reimbursement Rs.20000 from my Company. whether it can be Exempted.
Yes, subject to Rule 3 (provision of motor car sub section) of the Income Tax Rules.
Sir,
One of our employee given is given fuel allow of Rs 7000 and driver allowance of Rs 14000 as part of salary. employee use car his own car for official and personal use. Also he submit fuel bill and driversalary voucher. so what will be the exemption amount for Driver salary and fuel. or what willbe taxable amount.
The tax benefit shall be Rs 1,800 (for the car expense) and Rs 900 (for the driver allowance). I presume the car’s engine capacity is less than 1.6 litres.
with regard to above article Taxability of fuel expenses reimbursement to employees, my query is :
to claim the expenses as non taxable can the vehicle be in the name of spouse or it is compulsorily be required to be in the name of the employee (although all expenses are incurred by employee)
The vehicle should be in the name of the employee.
Hi Team:
I am owning a Car and use it for my official and personal purposes. I want to suggest a Fuel Reimbursement Component in my Salary to my Employer. How much will I be able to get that and what as an employee and employer has to maintain as per compliance documents.
Regards
1. Your organization can decide on an amount to be paid as vehicle maintenance expense reimbursement amount each month. There is no restriction in law on this.
2. You need to submit the copy of bills (vehicle maintenance expense) and a copy of the RC to your employer.
3. The tax benefit is restricted to Rs 1,800 for car expenses each month, assuming that your car’s engine capacity is less than 1.6 litres. For example, if your organization pays you Rs 5,000 per month, you need to submit bills for Rs 5,000 and you will get a tax benefit of Rs 1,800. In other words, Rs 3,200 will be fully taxable.
Above scenario applies to me as well. I want to propose Fuel Reimbursement Component to my employer.
So in the above example of Rs5000 bill, do employer has to keep the record of all travel?
If the car is used for both official and personal purposes, there is no need for the employer to maintain travel records. However, the employer needs to collect bills for the entire amount paid to you.
hi,
why does the employee submit the bill for full 5000 when the exemtion is given only on 1800.
The bills are meant to be the proof of expenditure. As per Income Tax Rules, the exemption cannot be provided for the entire reimbursement amount and has to be restricted to Rs 1,800.
In income tax point of view
Employee A is a sales person and opts for a company leased vehicle and company pays for lease rentals, maintenance, and fuel card Rs.7000/-pm
Same employee Als claims monthly mileage on sales calls at a flat rate of e.g. 20000/- per month for use of car
Is dis expenditure allowed???
Note: what is the scenario if the car is used only for official purpose and no bills are maintained?
1. The amount of Rs 20,000 will be fully taxable in the hands of the employee.
2. If the car is used only for official purposes, the company should maintain all the supporting documents – log book detailing the trips made and purpose and receipts for all the expenses.
will the amount of RS.20000/- be admissible for the company ?
Yes, it will be admissible as salary expense.
I have petrol reimbursement component in my salary. Can I use this for tax exemption for my 2 wheeler
Yes, you can.
My company giving petrol reimbursement to manager category, to and fro to their home. Is it taxable or exempt. From FY 2018-19 there is no conveyance exemption it is merger as standard deduction
Kindly clarify
Petrol reimbursement is exempt depending on the underlying conditions.
I would like to provide RS 200,000 to employees for diver fuel and maintenance.
The car is owned by the employee and will be partly used for official and partly for personal purpose. Upto what extent will this be tax exempted? some employers are giving large sums that are being re-reimbursed but Rule 3 says it will be 1800 or 2400. Is the difference isn re-imbursing large sums is that we take bills from employees which is in away keeping a record of their travel. Could you clarify under which rule or income tax i can provide tax re-imsursement higher than the 1800 or 2400
The exemption can be provided only as per Rule 3. Hence, no exemption greater than Rs 1,800 or Rs 2,400 can be provided for an employee owned car which is used for both personal and official purposes.
If the car is used only for official purpose (Rule 3), the exemption shall be to the extent of the actual reimbursement. For this, the company needs to be maintain travel logs along with the supporting bills.
My company is providing company leased car. I will be using the same for fully personal purpose. the company doesn’t have any domestic business and i don’t need to use my car for any official work. If my company provides 10K for fuel and 15K for driver salary, will i get tax exemption if i provide fuel bills and driver salary paid details (Bank payment)?
There can be no tax exemption on the fuel and driver salary reimbursement, if the car is used only for personal purposes. In other words, the entire amount paid to you (for fuel and driver salary) will be taxable even if you submit bills.
Wow. Great work done here.
My question.
I have car lease component in pay structure and also fuel and maintenance component.
I used the car lease by getting a car under company name
Under fuel and maintenance, can I claim driver salary?
I use it for official purpose to office daily.
Can I pay the same salary to my spouse?
Expecting a positive response. Thanks and much appreciated
Q1: Under fuel and maintenance, can I claim driver salary?
A1: Yes, you can.
Q2: Can I pay the same salary to my spouse?
A2: Not sure what you mean by this. Can you please elaborate?
Hi Gautam,
I am eligible for Rs1800 p.m. non-taxable component in my pay for fuel and running charges for my car. My question is this:
a) I have one car in my name registered in Hyderabad. I am a resident of Chennai. I transported the car to Chennai in 2010 and paid full road tax of Rs 53K for Chennai on advise of RTO, Chennai. I didn’t take NOC from Hyderabad RTO for this. So effectively I have paid road tax in both Hyderabad and in Chennai. The RC book is still in my name. Can I claim the fuel expenses tax benefit for the car in this case? My organization is interpreting the law as NOC compulsorily required. If it is proof that I own the car, won’t RC book in my name and dual tax paid challans not be sufficient?
b) I have another car owned by my wife. Can I show that car for the reimbursement as it is in the same family. Earlier I used to be able to submit a marriage certificate and get the allowance, but now my organization is refusing to consider this.
Please advise. Thanks in anticipation.
a. The question to ask is – are you allowed to use your car in Chennai without the NOC/re-registration as per the RTO rules? If no, then your organization is within its right to deny you the tax exemption claim. The income tax act does not say anything about NOC. Your RC is a proof of ownership. However, if you are supposed to get an NOC/re-registration done for you to be able to use the car in Chennai and you have not done the same, your organization can say that without the NOC/re-registration, there is no proof that you have been using your car in Chennai. For example, what if your car is still in Hyderabad and you are trying to claim that you are using it in Chennai simply for the purpose of tax benefit?
b. The car should be in your name for it be considered as an employee-owned car. Hence, the car in your wife’s name cannot be considered.
Thanks Gautham.
I was caught by an RTO Inspector in Chennai for driving an AP registration car way back in 2010. However, when I expressed my inability to go back to Hyderabad to get the NOC, he asked me to pay the road tax for Chennai instead(around Rs 53000) and use the car in Chennai. I have done this. And whenever a cop catches me in Chennai for out-station number plates, if i show the receipt for this Rs 53000 road tax, they let me go.
I do have the traffic challan written out by the Inspector when he initially caught me, but it is illegible. I have the receipt for the road tax paid. I don’t know if there is any explicit written down rule. I can produce Chennai fuel bills which have my car registration number to prove that i am using it in Chennai.
Does this suffice? Thanks
If the road tax receipt contains your car number, I do not see why your tax benefit claim should be denied. All that your employer should do is to satisfy themselves about the genuineness of your claim. In my view, the proof you have on hand is sufficient enough to establish that your claim is valid.
I am using a car which is Registered on my father’s name, can I continue using that car for fuel and maintenance reimbursement in income tax.
Or it is necessary to have car registration on one’s name for being eligible for F&M reimbursement.
Please reply.
Yes, the car should be in your name.
Dear sir,
We have provided to employee 23000 car allowance and 10,000 driver salary. is this correct ? and agst this which document we require from employee ?
We have provided to employee 23000 car allowance and 10,000 driver salary. is this correct ?
Ans: There is no restriction in law on how much of car allowance you have can pay an employee.
and agst this which document we require from employee ?
Ans: If the car is an employee owned car and the usage is declared as “partly official and partly personal” you need to collect the RC of the car and bills for car maintenance expenses from the employee. Please ensure that you apply tax exemption as per Rule 3 of the Income Tax Rules.
My CTC includes Car/Petrol reimbursement.
I have a personal car which I use for going to office.
My understanding is that I can claim exemption on 1800 + 900(driver) = 2700 per month.
Is this correct?
And in which section do I apply for this exemption while filing the income tax in saral-1 : Sec 10(14)(i) or Sec 10(14)(ii) ?
My understanding is that I can claim exemption on 1800 + 900(driver) = 2700 per month.
Is this correct?
The taxable reimbursement shall be the actual reimbursement amount you receive minus Rs 2,700. For example, you receive RS 10,000 per month towards driver and petrol reimbursement, Rs 7,300 (Rs 10,000 – Rs 2,700) shall be taxable.
And in which section do I apply for this exemption while filing the income tax in saral-1 : Sec 10(14)(i) or Sec 10(14)(ii) ?
Rule 3 (perquisite valuation) of the Income Tax Act.
Can you specify what option in the dropdown to select ?
https://ibb.co/5x9xQ1V
“Other” probably comes closest. The department may not accept your request for tax benefit. For you to be able to claim this, you should have been paid under the head “petrol/driver reimbursement” and your organization should have calculated the perquisite value on the basis of the bills you submit.
in my salary i am paid conveyance allowance equivalent to 300 liters of fuel. I am paying tax on the whole amount.
Do i need to have vehicle to claim this amount ?
Currently i am travelling to office in public transport. Just for info , i plan to buy vehicle in next two to three mths.
Thanks & best regards.
Yes, you need to own a vehicle to claim the tax benefit.
Hi,
This is quite informative article, i had two questions,
1) How much Petrol and Driver Reimbursement component is allowed under income tax, can an company give 50% of salary as Petrol and Driver Reimbursement component so that employee saves on Tax?
2)If an employee submits all bills of Rs 50,000 pertaining to Petrol (30,000) and Driver Reimbursement (20,000) can he claim full tax benefits.
Thanks.
1) How much Petrol and Driver Reimbursement component is allowed under income tax, can an company give 50% of salary as Petrol and Driver Reimbursement component so that employee saves on Tax?
Ans: There is nothing in law which restricts the extent of reimbursement for petrol and driver expenses.
2)If an employee submits all bills of Rs 50,000 pertaining to Petrol (30,000) and Driver Reimbursement (20,000) can he claim full tax benefits.
Ans: Not sure what you mean by “full” tax benefits. The tax benefit should be determined as per Rule 3 of the Income Tax Rules.