Of late, many companies have been offering a lease option to employees as a perquisite. This is advantageous to the employee since it offers tax benefits to them. However, often, when they are in the highest tax slab, there are doubts as to whether this is a better option than a loan. We have analysed this by assuming three scenarios;
1) Where the employee purchases the car outright.
2) Where the employee takes a loan to purchase the car.
3) Where the employee uses a lease option Leases can be of two types;
A) operating lease where the asset reverts back to the lessor at the end of the period and
B) financial lease where the lessee has the option to purchase the asset at the terminal value at the end of the lease period.
A point to note is that lease rentals may be lower than EMI charges for the same asset( since the ownership rests with the lease firm). Lease rental is calculated based on a residual value-based funding that differs based on city, usage of car, model and brand etc
There are three major advantages in favour of leasing:
1) There are no down payments to be made. This saves the initial amount and while comparing the options, we must also consider the opportunity cost of this down payment.
2) There are no maintenance costs incurred on the asset.
3) The lease rentals will be taken as a part of salary and consequently there can be tax savings on the amount. Interest paid on car loans however do not qualify for tax rebates.
Let us take the cost of the car ( high end luxury model) as Rs 20 Lakh. The loan duration and lease period is assumed as 3 years (36 months) and the interest rate is 10%
Lease amount taken based on lease offerings for Mercedes cars of same price.
Tax rate is taken at highest income tax slab.
Maintenance costs are assumed @ 25000 annually.
As we can see, opting for lease results in the lowest cash outflows for the employee. In case the person opts to purchase the car through outright purchase they will spend almost Rs 8 lakh more. If they go for a car loan, they would spend Rs 6.5 Lakh more than a lease.
However, the big advantage of purchase options is that the person will continue to own the car at the end of the period and enjoy its residual value. So If the person intends to continue using the same car after three years, or has the funds for it, over the long term, a purchase option may be preferred.
Some leases allow the person to purchase the vehicle after the lease period at the residual value. This can be an option for a person to purchase the vehicle without the hassles of the initial down-payment or maintenance expenses.
Tax Implications for Salaried or self employed
The taxability of a car lease paid by employer has three scenarios:
1) Where the car is for personal purposes – the lease amount as well as maintenance costs will be considered as a part of salary and be taxable as such.
2) Where the car is only for official purposes – The lease amount will not be considered for taxation.
3) If the car is partly used for private and partly for official purposes – in such scenarios,
a) If the maintenance costs are borne by employer, an amount ranging from 1800-3300 (depending on cubic capacity of car and provision of driver) will be deducted as perquisite.
b) If employee bears the maintenance expenses, an amount ranging from Rs 600-1800 ( based on car’s cubic capacity and provision of driver) will be taken as a perquisite.