What if your salary structure, not your salary hike, has the potential to decide how much tax you will pay? Yes! This is a growing trend, as elaborated by ClearTax and its CEO, Archit Gupta, in a tweet.
It suggests that a simple car lease structure can significantly reduce tax liability for salaried professionals under the new tax regime. The basic idea here is not about earning more, but about restructuring compensation smartly to boost take-home pay efficiency.
How will this be accomplished?
ClearTax explains that employers can redesign salary components to convert part of the cash salary into structured benefits, such as a leased car. This will help significantly reduce taxable income while keeping the overall Cost to Company (CTC) unchanged. Furthermore, in some configurations, it can even bring the total tax liability for employees with a CTC of ₹20 lakh close to zero.
The concept is gaining traction because it effectively allows employees to enjoy a meaningful increase in their take-home pay without increasing any costs for the employer. Still, it is critical to keep in mind that the concept works only when the salary components are carefully structured, thoughtfully designed, and applied with eligible exemptions.
Here is a simplified illustration as detailed in the tweet:
| Particulars |
Without Car Lease |
With Car Lease |
|---|---|---|
| Annual CTC | ₹20,00,000 | ₹20,00,000 |
| Basic Salary (50% of CTC) | ₹10,00,000 | ₹10,00,000 |
| Less: Meal Exemption ( ₹200 × 22 days × 2 meals × 12 months) | – ₹1,05,600 | – ₹1,05,600 |
| Less: Car Lease Exemption ( ₹8L/year, 2 years) | 0 | – ₹4,23,000 |
| Less: Employer PF Contribution (12% of Basic) | – ₹1,20,000 | – ₹1,20,000 |
| Less: Employer Pension (Sec 80CCD(2), 14% of Basic) | – ₹1,40,000 | – ₹1,40,000 |
| Net Salary | ₹16,34,400 | ₹12,11,400 |
| Standard Deduction | – ₹75,000 | – ₹75,000 |
| Taxable Income | ₹15,59,400 | ₹11,36,400 |
| Tax Liability | ₹1,18,466 | ₹0 |
As the above breakdown explains, a well-designed car lease structure can immensely reduce taxable income. This is done by converting part of the salary into non-taxable benefits. Further, this creates a strong case for salary optimisation and reorganisation in the new tax regime.
Still, be clear, this approach might not be generally applicable. This is because it depends on the employer’s terms, conditions, and policies. It also has a direct correlation with individual salary structures, usage requirements, and compliance procedures. It may also result in reduced monthly cash in hand, as part of the compensation is diverted to non-cash benefits, such as leasing.
In conclusion, it can be stated that car lease salary structuring can be a powerful and unique tax efficiency tool. Still, it cannot be taken as a one-size-fits-all solution. The idea discussed by ClearTax can help better understand the concepts.
Still, before proceeding with any such tax planning, arrangements or restructuring on your CTC, it is prudent to consult a certified tax planner or Chartered Accountant to ensure absolute peace of mind, compliance and clarity with your tax filing.
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