In the draft Income Tax Rules, 2026, they have proposed significant changes to the way the taxable value of motor vehicles is calculated.
How Did This Happen?
So far, they have introduced several revisions in the valuation of perquisites where an employer provides a car to an employee.
Moving ahead, these changes are approved by Parliament, they will apply under both the old and new tax regimes, since they relate to the valuation of salary-related perks irrespective of the regime opted for.
It is mainly affecting the categories where the perquisite value has been increased. The employees will end up paying higher income tax, as the revised value of the perk will be added to their salary income and taxed accordingly.
For understanding this, let’s consider an example of an employer providing a car for both official and personal use and the employee bears the fuel and maintenance costs, the taxable perquisite value has been sharply revised.
Here, for a car with an engine capacity of less than 1.6 litres, the taxable value was Rs 600 per month earlier but this has been increased to Rs 2,000 per month under the draft rules.
This changes according to the capacity, for reference, the Hyundai Creta’s naturally aspirated MPi petrol engine has a capacity of 1.5 litres (1,497 cc).
Similarly, Volkswagen Virtus comes with turbo petrol engine options of 1 litre (999 cc) and 1.5 litres (1,498 cc), depending on the variant.
Changes Expected Under Draft Income Tax Rules, 2026
While talking about the old rule which is Rule 3(2) of the Income-tax Rules, 1962, Rao explained that while the draft new Rule – Rule 15(3) of the Draft Rules, 2026 retain this structural classification, they substantially revise the valuation amounts to reflect current economic realities.
This is important as this revision has important implications for salary structuring and take-home pay hence making it essential for both employers and employees to review arrangements in advance.
As per the 2026 Draft Rules, it has prescribed a higher perquisite value for motor cars owned by employers and used partly for official duties and partly for personal purposes by employees or their household members.
They are expecting that these proposed changes may directly affect the cost structure of the CTC-based car leasing model.
It appears that the higher perquisite value will increase taxable income, thereby raising the tax outgo according to an employee’s perspective.
Considering these changes, the tax arbitrage that previously made the CTC car leasing model attractive — the difference between actual lease rentals and the lower notional perquisite value — is likely to narrow.
As an impact, the net tax savings under this model will decline. Let’s understand the likely impact through the following examples.
Example 1:
Lease rental: Rs 25,000 per month
Engine capacity: 1.7 litres
Usage: Mixed (official and personal)
Maintenance and running expenses borne/reimbursed by employer
Tenure: 1 year
Example 2:
Lease rental: Rs 25,000 per month
Engine capacity: 1.5 litres
Usage: Mixed (official and personal)
Maintenance and running expenses borne/reimbursed by employee
Tenure: 1 year
Here it is noteworthy that employers will not face any additional tax burden due to the proposed revisions.
In this case, the CTC paid to employees — including lease rentals — will continue to qualify as a deductible business expense.
All in all, the latest draft Rules significantly increase the perquisite valuation of employer-provided cars, resulting in higher tax liability for employees opting for CTC-based car leasing.
Once it is notified, the revised valuation will apply even to existing leases from April 1, 2026.
This way, the tax efficiency of the CTC car leasing model will be materially reduced and will result in affecting both its attractiveness and overall financial viability going forward.
