Fuel and maintenance reimbursements to employees remain one of the most debated perquisites under the Income-tax Act. Employers often struggle with whether such reimbursements are exempt, partly taxable, or fully taxable — and tax officers scrutinise them closely in assessments.
This post provides a 360° professional guidance note with law, rules, judicial interpretation, and practical illustrations — tailored for Assessment Year (AY) 2025–26 and AY 2026–27.
Law Framework
Section 17(2), Income-tax Act, 1961
“Perquisite” includes the value of any benefit or amenity granted or provided free of cost or at concessional rate by an employer to an employee.” [Sec. 17(2)(iii)]
Thus, reimbursement of fuel and car expenses is a perquisite, unless exempt or valued at Nil under Rule 3(2).
Rule 3(2), Income-tax Rules, 1962
This Rule prescribes the valuation method of car perquisites.
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Official use only → Nil value (if logbook + certificate maintained).
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Personal use only → Actual expenses + 10% of car cost (wear & tear) – recovery → fully taxable.
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Mixed use (official + personal) → Prescribed fixed value:
| Engine capacity | Taxable perquisite (p.m.) | Driver reimbursement (addl.) |
|---|---|---|
| ≤ 1.6 litres | ₹1,800 | +₹900 |
| > 1.6 litres | ₹2,400 | +₹900 |
These slabs remain unchanged for AY 2025–26 and AY 2026–27.
Scenario-wise Tax Treatment with Examples
(A) Employee’s Own Car
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Wholly official duty
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Law: Rule 3(2)(a).
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Treatment: Nil perquisite, not taxable.
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Condition: Employer must maintain logbook + give certificate.
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Example: Employee drives to client sites, bills reimbursed. Since logbook exists, reimbursement not taxable.
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Mixed use (official + personal incl. home–office commute)
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Law: Rule 3(2)(c)(i).
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Treatment: Fixed value taxable:
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Engine ≤ 1.6L → ₹1,800 p.m.
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Engine > 1.6L → ₹2,400 p.m.
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Add ₹900 if driver reimbursed.
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Example: Car > 1.6L, no driver, ₹60,000 reimbursed in FY.
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Taxable perquisite = ₹2,400 × 12 = ₹28,800 (not full reimbursement).
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Personal use only
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Law: Rule 3(2)(b).
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Treatment: Entire reimbursement taxable.
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Example: Employer reimburses petrol for home–office travel = fully taxable.
(B) Employer’s Car Provided
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Wholly official duty
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Law: Rule 3(2)(a).
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Treatment: Nil perquisite, not taxable.
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Condition: Logbook + employer certificate mandatory.
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Mixed use
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Law: Rule 3(2)(c)(i).
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Treatment: Fixed value taxable (₹1,800/₹2,400 + driver).
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Example: Company car (engine > 1.6L) partly for official, partly personal use.
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Taxable perquisite = ₹2,400 × 12 = ₹28,800.
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Personal use only
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Law: Rule 3(2)(b).
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Treatment:
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Actual expenditure by employer + 10% of car cost (wear & tear) – recovery from employee.
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Example: Employer spends ₹1,20,000 (fuel, driver, maintenance). Car cost ₹10,00,000.
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Taxable perquisite = ₹1,20,000 + ₹1,00,000 = ₹2,20,000.
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Judicial Guidance
Courts and tribunals have consistently reinforced strict evidentiary compliance:
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CIT v. Lala Shri Dhar (1972) 84 ITR 192 (Del.) – Conveyance reimbursement without proof treated as taxable.
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DIT (IT) v. SmithKline Beecham (Delhi ITAT, 2005) – With logbook + employer certificate, reimbursements for official use not taxable.
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CIT v. Raza Buland Sugar Co. (1980) 122 ITR 817 (All.) – Perquisite valuation must follow Rule 3; AO cannot apply arbitrary estimates.
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CIT v. Murlidhar Bhagwan Das (1964) 52 ITR 335 (SC) – Reimbursements are not automatically exempt; nexus with official duty must be proved.
Compliance Checklist for Employers
- Maintain journey logbook – date, kms, purpose, place, expenses.
- Issue certificate under Rule 3(2)(B) confirming official use.
- Preserve fuel/maintenance bills.
- Frame HR policy disallowing commuting reimbursement as official.
- Retain records for minimum 6 years for assessment defence.
New vs. Old Tax Regime
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From AY 2024–25, the new regime (Sec. 115BAC) is default.
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Rule 3(2) valuation applies identically under both regimes.
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No change in slabs or treatment for AY 2025–26 or AY 2026–27.
Key Points
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Official duty only + evidence → Nil perquisite, not taxable.
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Mixed use → Flat taxable value (₹1,800/₹2,400 + driver).
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Personal use (incl. home–office) → Fully taxable.
Evidence matters – Without logbook & certificate, exemption is lost.
Conclusion
For AY 2025–26 and AY 2026–27, the rules remain unchanged. The slabs of ₹1,800/₹2,400 (+₹900 driver) continue.
The onus is on the employer to maintain logbooks and issue certificates; otherwise, the entire reimbursement may be taxed as a perquisite.
