Quick answer
Is car allowance taxable in India?
Yes. A fixed car allowance paid every month, without linking it to actual official use, is fully taxable as salary. An allowance given to meet conveyance costs in the performance of duties is exempt only to the extent actually spent on official work. A company car used for private trips is taxed as a perquisite at set monthly values.
- Fixed car allowance with no bills: fully taxable salary
- Official conveyance spend: exempt up to the amount actually spent
- Company car, mixed use, FY 2025-26: ₹1,800 or ₹2,400 a month
- Tax year 2026-27: reported ₹5,000 or ₹7,000 a month
Is car allowance taxable? The three ways employers pay for a car
Whether car money in your salary is taxed depends on how your employer pays it. A fixed monthly car allowance is taxable salary, a reimbursement of documented official car costs is largely tax free, and a company car is taxed as a perquisite at a fixed value per month.
Payslips use many labels: car allowance, conveyance allowance, vehicle maintenance, fuel reimbursement, driver salary. The label does not decide the tax. What matters is who owns the car, who pays the running costs, whether the car is used for official work, private trips or both, and whether the employer keeps the records the rules ask for.
The table below shows the usual arrangements and how each is treated for FY 2025-26 under the Income-tax Act, 1961.
| Arrangement | How it is taxed |
|---|---|
| Fixed car allowance, no link to official use | Fully taxable as salary |
| Allowance to meet conveyance costs in performance of duties | Exempt to the extent actually spent on official work (section 10(14)(i), Rule 2BB) |
| Company car used only for official work, records kept | No taxable perquisite |
| Company car used for official and private trips | Perquisite at ₹1,800 or ₹2,400 a month, plus ₹900 for a chauffeur |
| Own car, employer reimburses running costs, mixed use | Reimbursement taxable after reducing ₹1,800 or ₹2,400 a month (plus ₹900 for a chauffeur) |
| Company car used only for private trips | Taxed at the employer's actual cost under the valuation rule; payroll computes it |
Sources: Rule 3 of the Income-tax Rules, 1962 (incometaxindia.gov.in) and Rule 2BB (incometaxindia.gov.in), checked October 2026 through search extracts because the site blocked direct access. Confirm the current text on the department's website.
Car allowance exemption: when can it be tax free?
A car or conveyance allowance is tax free only when it is granted to meet expenses on conveyance in the performance of your duties, and only up to the amount you actually spend on that official travel. Any part of the allowance you do not spend on official travel is taxable.
This exemption comes from section 10(14)(i) of the Income-tax Act, 1961, read with Rule 2BB(1)(c) of the Income-tax Rules, 1962. Travel between home and your usual office is generally treated as your own commuting, not travel in the performance of duties, so a fixed allowance for the daily commute does not qualify.
Older articles still mention a flat ₹1,600 a month transport allowance exemption. That flat exemption was withdrawn from FY 2018-19, as reported by tax publishers, so do not plan around it.
In practice, the exemption needs proof. Employers usually ask for a trip log or claim form and fuel or taxi bills, and they exempt only the amount supported. If you get a fixed sum and never submit anything, expect it to be taxed in full through TDS on salary.
Does it work in the new tax regime?
Yes. Notification 38/2020 dated 26 June 2020 kept the Rule 2BB exemptions for travel on tour or transfer, daily charges on tour and conveyance in the performance of duties for employees in the section 115BAC regime, as summarised by tax publishers (the official text is on incometaxindia.gov.in). Most other allowance exemptions are lost there, so a documented official reimbursement beats a fixed allowance by a wider margin. The company car perquisite applies in both regimes; only the slab rates differ.
Need help with car allowance and reimbursement tax? Talk to a chartered accountant in Delhi today. First call is free.
How is a company car taxed as a perquisite in FY 2025-26?
For FY 2025-26, a company car used for both official and private trips is taxed at ₹1,800 a month for an engine up to 1.6 litres or ₹2,400 a month above 1.6 litres, plus ₹900 a month if the employer also provides a chauffeur, when the employer pays the running costs.
These are the fixed values in Table II of Rule 3 of the Income-tax Rules, 1962. Your employer adds the value to your salary in Form 16 and deducts TDS on it. If you pay the running costs of your private use yourself, the values are lower.
| Situation (car owned or hired by employer, mixed use) | Engine up to 1.6 litres | Engine above 1.6 litres | Chauffeur provided |
|---|---|---|---|
| Employer meets running and maintenance costs | ₹1,800 | ₹2,400 | + ₹900 |
| Employee meets running costs of private use | ₹600 | ₹900 | + ₹900 |
| Car used only for official duties, records kept | Nil | Nil | Nil |
Source: Rule 3 Table II, Income-tax Rules 1962 on incometaxindia.gov.in, values confirmed against KPMG Flash Alert 2026-081, checked October 2026.
What changes for car perquisites from tax year 2026-27?
From 1 April 2026 the Income-tax Act, 2025 and the Income-tax Rules, 2026 apply, and the reported car perquisite values rise to ₹5,000 a month (engine up to 1.6 litres or an electric vehicle) and ₹7,000 a month (above 1.6 litres), plus ₹3,000 a month for a chauffeur.
The Rules were notified on 20 March 2026. Published commentaries say the car valuation now sits in Rule 15 of the 2026 Rules instead of Rule 3, and that electric vehicles are valued like small cars. Treat the figures below as reported until you check the notified text yourself; your FY 2025-26 return still uses the 1961 Act values above.
| Situation (mixed official and private use) | Up to 1.6 litres or EV | Above 1.6 litres | Chauffeur |
|---|---|---|---|
| Employer car, employer meets running costs | ₹5,000 | ₹7,000 | + ₹3,000 |
| Employer car, employee meets private running costs | ₹2,000 | ₹3,000 | + ₹3,000 |
| Own car, employer meets or reimburses running costs (amount reduced from reimbursement) | ₹5,000 | ₹7,000 | + ₹3,000 |
Source: KPMG GMS Flash Alert 2026-081, 30 March 2026 (secondary summary of the Income-tax Rules 2026), checked October 2026. Confirm against the notified Rules on incometaxindia.gov.in before relying on them.
Vehicle reimbursement for your own car: how is it taxed?
If you use your own car and your employer reimburses fuel, servicing and driver costs, the reimbursement is not taxable when the car is used wholly for official work and the employer keeps the journey records and certificate. For mixed use, the reimbursement is taxable after reducing a fixed monthly amount.
For FY 2025-26 that fixed amount is ₹1,800 a month (engine up to 1.6 litres) or ₹2,400 a month (above 1.6 litres), plus ₹900 if a chauffeur is paid for. For tax year 2026-27 the reported amounts are ₹5,000 or ₹7,000, plus ₹3,000. The higher new amounts mean more of a mixed-use car reimbursement escapes tax from tax year 2026-27, if the records are in place.
Two-wheelers and other vehicles have their own, smaller values in the same rule. Ask your payroll team which row they apply, and keep the bills you submit. Reimbursement without bills is simply a disguised allowance and is taxed as salary.
Is driver allowance or a chauffeur taxable?
A chauffeur provided by the employer for a company car used privately adds ₹900 a month to the perquisite for FY 2025-26, and a reported ₹3,000 a month from tax year 2026-27. A fixed cash driver allowance paid to you, without proof of a driver used for official work, is taxable salary.
Where the car and driver are used only for official duties and the records are kept, the chauffeur adds nothing to taxable income. Where you hire a driver for your own car and the employer reimburses the driver's salary against proof, the driver cost is part of the reimbursement and gets the same mixed-use reduction described above.
Worked examples (hypothetical numbers)
The three examples below use made-up figures to show how the rules work. They are not advice for your salary; payroll and your own return should follow your actual facts.
- Fixed car allowance. Riya gets ₹10,000 a month as "car allowance" and submits no bills. All ₹1,20,000 for the year is taxable salary in both regimes.
- Company car with chauffeur. Arjun's employer gives him a 1.5 litre car with a driver for office and family use and pays all costs. For FY 2025-26 the perquisite is (₹1,800 + ₹900) x 12 = ₹32,400. Using the reported 2026 values, tax year 2026-27 gives (₹5,000 + ₹3,000) x 12 = ₹96,000.
- Own car, reimbursed. Meera uses her own 2.0 litre car for client visits and personal trips, and her employer reimburses ₹15,000 a month against bills, with a trip log kept. For FY 2025-26 the taxable part is (₹15,000 minus ₹2,400) x 12 = ₹1,51,200. With the reported 2026 value of ₹7,000, tax year 2026-27 gives (₹15,000 minus ₹7,000) x 12 = ₹96,000.
Example 3 shows why the paperwork matters: without the log and certificate, the full ₹1,80,000 would be taxed.
What records should employers keep for car reimbursement?
To treat car costs as official, the employer must keep complete details of each official journey and give a certificate that the expense was incurred wholly and exclusively for official duties. Without these, the default perquisite values apply and reimbursements are taxed.
A simple, defensible set of records for a Delhi employer looks like this:
- A trip log per car or employee: date, from and to, purpose, kilometres.
- Fuel, servicing, toll and parking bills matched to the claims.
- A signed certificate from the employer at year end.
- A written car policy stating who owns the car, who pays which costs and how private use is treated.
- Payroll entries that show the perquisite value or taxable reimbursement in Form 16.
Employers who run payroll in-house often get this wrong in the TDS working. Our pages on TDS return filing and accounting and payroll services in Delhi explain how the salary TDS and records fit together.
How do you show car allowance in your income tax return?
You show car allowance in the salary schedule of your ITR exactly as Form 16 reports it: the taxable part inside gross salary, any exempt conveyance amount under the section 10 exemptions, and any car perquisite as a perquisite. You cannot claim a fresh exemption in the return without bills.
If your employer taxed a reimbursement in full but you have the trip log and bills, ask payroll to correct Form 16 before you file. Claiming an exemption that Form 16 does not show often leads to a mismatch notice. For FY 2025-26 (AY 2026-27) the 1961 Act forms apply; our ITR filing page covers due dates and documents, and a CA from our list of CA firms in Delhi can review a salary structure before the year starts.
Common mistakes we see:
- Calling a fixed sum a "reimbursement" with no bills.
- Ignoring the chauffeur add-on for a company car.
- Using the 2026 values for a FY 2025-26 return.
- Assuming every allowance is lost in the new regime: official conveyance is not.
Frequently asked questions
Is car allowance taxable in the new tax regime?
A fixed car allowance is taxable in both regimes. What survives in the new regime is the exemption for an allowance granted to meet conveyance costs in the performance of duties, to the extent actually spent, as kept by Notification 38/2020. You need bills or a trip log to support it, and payroll must reflect it in Form 16.
Under which section is car allowance exempt?
For FY 2025-26, the exemption for conveyance in the performance of duties is in section 10(14)(i) of the Income-tax Act, 1961, read with Rule 2BB(1)(c). Company cars are valued under Rule 3. From tax year 2026-27 the Income-tax Act, 2025 and Rules 2026 apply; commentaries place car valuation in Rule 15, so check the notified text.
Is fuel reimbursement taxable?
Fuel reimbursement for a car used wholly for official work is not taxable if the employer keeps journey records and a certificate. For a car used for official and private trips, the reimbursement is taxable after reducing ₹1,800 or ₹2,400 a month for FY 2025-26. Fuel paid as a fixed sum without bills is taxable salary.
Can car allowance be tax free?
Only the part spent on official travel, with proof, can be tax free. If your employer pays a fixed sum each month and asks for nothing, it is taxed in full. Changing the structure to a reimbursement against bills, or a company car with logged official use, is how employers reduce tax lawfully.
What is the perquisite value of a company car above 1.6 litres?
For FY 2025-26 it is ₹2,400 a month, plus ₹900 if a chauffeur is provided, when the employer pays the running costs and the car is used for both official and private trips. From tax year 2026-27 the reported value is ₹7,000 a month plus ₹3,000 for a chauffeur.
How are electric cars given by employers taxed from 2026?
Commentaries on the Income-tax Rules, 2026, including KPMG's March 2026 alert, report that an electric vehicle is valued in the same band as a car with an engine up to 1.6 litres: ₹5,000 a month for mixed use, plus ₹3,000 for a chauffeur. Confirm with the notified Rules before you plan around it.
Does the employer deduct TDS on car perquisites?
Yes. The perquisite value and any taxable car allowance are part of salary, so the employer includes them when it computes TDS on salary and reports them in Form 16. If the perquisite is missing from Form 16 but you had a company car for private use, raise it with payroll before filing.
Is the old ₹1,600 conveyance allowance exemption still available?
No. The flat ₹1,600 a month transport allowance exemption was withdrawn from FY 2018-19, according to published tax summaries. Only the exemption for actual official conveyance costs and the transport allowance for certain employees with disabilities remain. Ignore older calculators that still deduct ₹1,600 automatically.