If my company gives me a car, how much is added to my taxable salary?

What does the law say?

Section 12(2)(b) of the Income Tax Ordinance, 2001 counts “any perquisite, whether convertible to money or not” as salary. A car your employer lets you use privately is such a perquisite. Section 13 then says how to value perquisites, and section 13(3) deals with cars: where a motor vehicle is provided “wholly or partly for the private use of the employee”, your salary for the year includes “an amount computed as may be prescribed”.

The prescribed amount is in the Income Tax Rules, 2002. Rule 3 says perquisites are included in salary in accordance with rules 4 to 7. Rule 5, headed “Valuation of conveyance”, sets the figure:

How the car is used	Amount added to salary	Base
Partly personal and partly official	5%	Cost to the employer of acquiring the car, or its fair market value at the start of the lease if leased
Personal use only	10%	Same base

Rule 6 adds that “employee” includes a director of a company for this Part, and rule 7 says these rules apply to salary income received after 30 June 2006.

How does it work in practice?

The amount is added to your taxable salary for the year, not to your cash pay. Your employer includes it in your estimated salary when it calculates the monthly deduction, so your take-home pay falls by the extra tax even though no extra money reaches you.

Three points follow from the text:

• The base is the car’s cost, not its current value. Rule 5 uses the cost to the employer of acquiring the vehicle. It does not reduce the base for age or depreciation.
• Leased cars use the market value at the start of the lease. If the company leases the car, the base is the fair market value when the lease began.
• Only private use triggers section 13(3). A pool vehicle used strictly for official work is not provided “for the private use of the employee”.

Worked example (illustrative figures)

Imran is a manager at a pharmaceutical company in Islamabad. Salary is his only income. For tax year 2027 (1 July 2026 to 30 June 2027) his cash salary is Rs. 3,000,000. His company bought a car for Rs. 6,000,000 and gives it to him for office and family use for the whole year.

Step 1: value the car. Mixed use, so 5% of cost: Rs. 6,000,000 x 5% = Rs. 300,000.

Step 2: taxable salary. Rs. 3,000,000 + Rs. 300,000 = Rs. 3,300,000.

Step 3: tax. Salary is more than 75% of taxable income, so clause (2) of Division I of Part I of the First Schedule applies. Between Rs. 3,200,000 and Rs. 4,100,000 the tax is Rs. 316,000 + 25% of the amount above Rs. 3,200,000:

Rs. 316,000 + 25% x Rs. 100,000 = Rs. 316,000 + Rs. 25,000 = Rs. 341,000.

Without the car, on Rs. 3,000,000 the tax is Rs. 116,000 + 20% x Rs. 800,000 = Rs. 276,000. The car costs Imran Rs. 65,000 in extra tax for the year.

If the car were for personal use only, the value would be 10% x Rs. 6,000,000 = Rs. 600,000, taxable salary Rs. 3,600,000, and tax Rs. 316,000 + 25% x Rs. 400,000 = Rs. 416,000.

What if I pay part of the running costs, or have the car for only part of the year?

Rule 5 as printed in the Rules we hold gives only the two percentages and the cost base. It does not mention a reduction for money the employee pays towards the car, and it does not say how to handle a car provided for part of the year. The earlier formula in section 13(3), replaced by the Finance Ordinance, 2002, did subtract employee payments, but that formula is no longer the law. Where your situation depends on either point, the text we hold is silent.

What if the company also gives me a driver or pays for fuel?

Section 13(5) separately adds the salary of a driver or other domestic assistant the employer provides, reduced by anything you pay the employer for those services. Rule 5 does not say whether fuel and maintenance are covered by the 5% or 10% figure. If you receive a separate fuel allowance instead, that is an allowance under section 12(2)(c), not part of the car valuation.

Common mistakes

• Using today’s resale value. Rule 5 uses the employer’s acquisition cost, or market value at the start of a lease.
• Assuming a car is tax free because it is registered to the company. Section 13(3) turns on private use, not ownership.
• Applying 10% to a car used for work as well. The 10% rate is for personal use only. Mixed use is 5%.
• Relying on old rates. The 15% and 7.5% figures in the pre-2002 section 13(3) formula were replaced.

What to check in the official text

• Section 13(3) and (5) of the Ordinance, as amended to 30 June 2026.
• Rules 3, 5, 6 and 7 of the Income Tax Rules, 2002. The consolidated Rules we hold run only to 24 November 2023, and rule 5 ends with the word “and” with nothing following. Check the official PDF and any later notification in case text is missing or has been amended.
• Your employer’s car policy, which decides whether the car is for mixed use or personal use only.