Giving Car To Employee As Means Of Retention And Tax Saving - CiteHR
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Dear All,
We run a small sized company. One of our senior staff members wants to buy a car in the company name and use it for his personal use.
He says that instead of taking an increment on which he will get taxed, he prefers to buy the car. The car will be chosen by him and will be exclusively used by him alone. Whatever financial costs are there, they will be deducted from his package.
After 3-4 years the company will "sell" the car at the depreciated value to the employee.
The company benefits in a small way that it can claim some depreciation for it. Also it has some retention value because the employee has a large asset which he has already paid for (in lieu of unclaimed salary) but it is still in the company name.
I wish to know
1. DO companies regularly do this ? What are the pros and cons of doing this ?
2. Is there any better way to do this ?
tks, prence
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It is called closed car scheme. Many organisations give this facility to their employees. The employees are tax exempted on the EMIs. It is one of the retention policies. Pon
Closed car scheme differs from company to company. cadre/designation wise the value is fixed. Company pays the full value or 90% of the value of Car and the Vehicle is registered in the name of company. The EMIs (with interest rate - subsidised) is recovered from the employees salary every month for the period of 4 or 5 yrs. At the end of 4 or 5 yrs, the Car is transferred to the employees. In case, the employee leave the company before the period, the Car will be sold to the employee at the Written Down Value.
The Company leased car scheme is very popular as a retention scheme. Usually, the Car is taken on lease from a Car rental/ Finance company and handed over to the employee for his official use. The EMI per month is deducted from his salary. He gets a benefit of approx 20% to 30% of the EMI by way of lesser tax. (Depending on his tax bracket).
Please do check on the type of lease administered. In the above case, the car is an asset in the books of the car leasing company, although the car is in your organisation's name in the RC book. Hence there is no perquisite tax when the lease ends and car is sold over to the employee at the WDV.
In case the car is an asset in your organisation's books, transfer of car upon end of lease will entail Perquisite tax on the depreciated value of the car. Please do get this clarified from a tax consultant.
One point also to be thought of is parking facility in your office. In case there is a severe shortage of parking, introducing this scheme will compound this problem. Employees would not be able to commute to office in their company leased car.
Dear Pon1965, could you please mention accounting entry/treatment for the monthly deduction from salary of employees the amount which employer pay (emi)to the financer.
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