Nowadays, with inflation on the rise and worsening economic conditions, we need financial relief. A little-known way to do so is via car insurance premiums if you use your car for specific commercial purposes or if you are self-employed.
By using a car insurance calculator, you can find the best and most affordable policy for your car. Later, you can get a tax exemption on the policy you purchase and save a significant amount. Let us learn a little more about tax exemption on car insurance!
Tax Exemption in Car Insurance
When you buy insurance for a car, you pay a premium. Car insurance premium is the amount you pay to the insurance company in return for all the financial protection and benefits the policy provides. This amount of money that you pay as a policy premium is deductible from your total taxable income.
From 1 April 2023, insurance policies with premiums less than or up to ₹5,00,000/p.a. are exempt from tax. So, you can avail of these tax benefits to save up a substantial amount on taxes. However, there are a few conditions applicable to this. Let us understand.
Applicability of Tax Exemption in Car Insurance
Four-Wheeler Insurance for a Personal Car
When a car is utilised for personal use, you do not receive any tax exemptions. This is true even if your employer has provided you with that car; that does not qualify for tax exemptions under any section.
The only exception is reimbursement amounts from insurance claims. Since you’re being compensated for a loss and are not making a profit, motor insurance claim amounts are not subject to tax – for both minor and major claims.
Four-Wheeler Insurance for a Commercial/Business Car
If you are paying the premium of a car that is utilised strictly for business purposes, you are eligible to avail of tax exemptions in commercial auto insurance. This includes the company cars provided to the employees, which are used for work-related tasks only.
The premium paid on this policy will deducted from the policyholder’s taxable income, reducing overall tax liability.
Four-Wheeler Insurance for a Car With Combined Purpose
Tax exemptions are applicable to commercial auto insurance policies that cover cars utilised for combined purposes, both personal and business. However, there are conditions to this exemption.
The car should be owned by the employer, and the exemption is calculated based on the car’s cubit capacity. It also demands careful evaluation to determine how much of the car’s capacity is utilised for business purposes and how much is utilised for personal use.
Four-Wheeler Insurance for Self-Employed Owner’s Car
For self-employed car owner-drivers where the car is being used for business purposes, tax exemptions are applicable.
Business owners, i.e., self-employed car owners, are allowed tax exemptions in proportion to the car’s utility for business. This tax exemption eligibility works somewhat like the combined commercial auto insurance.
Documents Required for Filing Tax Exemptions
- Four-wheeler insurance documents and receipts
- Four-wheeler original receipt
- Car registration fees
- Fuel costs receipts and bills
- Repair and maintenance records
- Employer’s reimbursement records
- Tax forms
Steps to Get Tax Exemption on Commercial Auto Insurance Policies
1. Tax Audit
In order to file for tax exemptions on a car insurance policy, you need to bring the audit reports of your business from a chartered accountant. Your company’s revenue must exceed ₹1,00,00,000.
2. Tax Filing
Once you have completed the audit and filed for tax payments, you can complete the tax filing on your own, but it is recommended that you consult with a professional. File your taxes along with the above-mentioned essential documents to avail of the tax exemptions.
3. Refund Procedure
Once the income tax department has confirmed, assessed and evaluated your documents, the refund process will start. Your tax exemption will only be approved if the tax department deems the documents genuine and verifies and authenticates the utility of the car.
Final Thoughts
Understanding tax exemptions and the implications of car insurance policies can lead to significant savings and benefits.
Cars used for business purposes and combined purposes, as well as cars owned by self-employed individuals, have different conditions and distinctive calculations related to tax exemptions. You can consult with a tax professional to ensure compliance with the latest tax rules and to optimise your tax strategy effectively.
Lastly, always ensure you buy car insurance from a reliable provider, like TATA AIG for better insurance services.
