ARTICLE: Lease OR Loan? Which EMI is better for you

[GTO]

Chances are; you hadn’t even have considered the lease option on your next car (until you finish reading this article). Lease plans basically exploit tax loop holes to make owning a car much cheaper for you. It’s a win – win situation for you and the leasing organization as you enjoy lower monthly payments, and they (the leasing company) receive the depreciation benefits! How would you like it if we showed you a way to own the same car for a lower annual cost or a better car for the same annual cost? What’s more, you can have sole priority to buy the car at the end of the lease tenure!

On a typical 5 lac rupee sedan, a 90% loan of 36 months would entail a Rs. 1,00,000 down payment (10% of ex-showroom price + Registration + Insurance + 1 EMI) and a monthly payment of about Rs. 16,800. Compare that to a lease option on the same car where there would be no down payment and a monthly installment of about Rs. 17,400. You can have the car transferred to your name at the end of 36 months for Rs. 50,000 (10% residual value). Simple math would show you that the total payments in the loan option came up to Rs. 6,88,000 while in the lease they were Rs. 6,76,400. Factor in the opportunity cost of the Rs. 1,00,000 down payment and the fact that the entire lease EMI is tax deductible (versus only the interest part of your loan EMI) and you can gauge why lease offers a mouth-watering proposition. It is worth a mention at this stage that most benefits of lease plans are applicable to companies and self-employed individuals.

Lease plans could be either “Finance leases” or “Operating Leases”. Finance Leases are plain funding for acquiring a car, which would transfer the ownership of the asset to the lessee at the end of the lease term. Operating leases by name state that they are of an operating nature i.e. the lessor would grant usage rights of the car to the lessee and at the end of the lease term take the car back. If it is to be transferred, then the Lessee has to pay the Market price of the car prevailing at the end of the lease term.

Scheduled maintenance, accidental repairs, insurance management, fuel management and chauffeur services can be included in both types of leases.

Lease Advantages

• You can claim the entire lease rental as an operating expense in the Profit & Loss Account, thereby enjoying a Tax benefit @ 33.67% which is higher then Depreciation @ 15% for Motor Vehicles. This benefit would apply if you enter into an Operating Lease agreement.

• There is no down payment in a lease. Therefore, it is freed up capital which you could otherwise use for investing in your business interests.

• Most popular lease organizations provide you with the option of transferring the car to your name at the end of the lease tenure. This is typically carried out at a pre-decided rate OR Market rate of the car (whichever you decide at the beginning of the lease term).

• If your organization has a fleet of vehicles, lease companies offer complete solutions that cover insurance management, regular services, maintenance and accident repair. This can make the task of fleet management considerably simpler.

Lease Disadvantages:

• Modifications to the vehicle are not generally permitted. You can, however, add accessories at the start of the lease tenure.

• In the case of an operating lease, limitations are imposed on the annual mileage.

• The car is not registered in your name. Not at least until you buy it at the end of the lease period.



Most popular Lease Organisations in India:

Orix India

Lease Plan

[deepakhon]

Hi GTO,

Thanks for this article. I too am considering lease option for my next car. But I see two disadvantages here:
1. The car is not registered on my name. If I purchase it at the end of my lease period, it will be considered as a used car. If I have to sell it, then there is a lot of explanation I need to do.
2. I should check if the same lease company exists if I change my company. Otherwise, I will have to analyze the clause in the agreement which will make my exit better.

[GTO]

True Deepakhon, when the car is transferred to your name at the end of the lease tenure...you will be the second owner on paper.

On your second point, TSK1979 would know better. I have PMed him to reply.

[tsk1979]

Originally Posted by deepakhon

Hi GTO,

Thanks for this article. I too am considering lease option for my next car. But I see two disadvantages here:
1. The car is not registered on my name. If I purchase it at the end of my lease period, it will be considered as a used car. If I have to sell it, then there is a lot of explanation I need to do.
2. I should check if the same lease company exists if I change my company. Otherwise, I will have to analyze the clause in the agreement which will make my exit better.

Hi,
I have been through this situation. I changed jobs in between the lease.
Frankly speaking you stand to lose in this equation if you change jobs in beginning. Since I did this when only one year was remaining, I did not lose much. Morover the fuel and insurance was being paid by company, so in effect I did not lose anything.

At the end of the lease period it depends on company to company. For most companies its simple.
At the end of the lease you pay 10% of the cost of the car and the car is in your name,
Now lets say your car was for 5Lac. At the end of 4 years you would pay 50,000 and the car will be in your name. But lets say the depreciated value of car was 2L, so 1,5L is your benefit and you have to pay tax on that, so another 50,000 gone. So at the end of lease period 1L will go out of your pocket.

Most lease agreements are made with the policy that an employee which stays for the entire lease period will reap huge benefits, but people who leave before that will pay penalty. This is the basic structure and so you cant do much about it. But then you can take a 3 year lease if you are sure of sticking around.

If you are moving from one big company to another, then there is another benefit, your lease can get transferred and you dont stand to lose anything. Most HR departments arrange for that if the company has such a policy.

Regarding your resale, you have to explain, since your one owner car would appear as if its a two owner car. but most sensible buyers understand this and know that it was a company lease which got transferred to the employees name.

[giri]

Does anyone know if FBT (fringe benefit tax) is applicable to leased cars?
If it is, then your company may pass that on to you, or count it as a part of CTC (cost to company).
In that case, the savings may not be much.

[shuvc]

FBT is not being charged in my case. I was told that the organisation would levy it if required. It's been a year and has not been charged yet.
However, per my calculations when I bought the car, even with FBT factored in, one wins overall.

Colleagues that did not take company lease cars gave the following reasons
- Car would be second hand
- Not ready to give 3/4 year commitment to the organisation
- Planning to take partial loan only, say 50-50 of the price of the car
- Not all models are offered under the scheme

[tsk1979]

The tax used to be 1200/month, not sure about latest rules as am not on a leased car now.

[ownerofazkaban]

Here, all cars are available. If you are planning to take car on loan and spend 50k on fuel and another 10k on maintenance it would save you definitetely at the end of lease period you would have the car say at 1-2% loan which is fantabulous.

Heavy VAT is applicable on the EMI and hence the tax benefits has drastically come down... instead of earlier 33% one saved now it's come down to almost 20%.

[GTO]

Just an additional note to add that leasing companies are reluctant to cover cars with terrible resale value (Fiat Petra, Palio etc.).

Now lets say your car was for 5Lac. At the end of 4 years you would pay 50,000 and the car will be in your name. But lets say the depreciated value of car was 2L, so 1,5L is your benefit and you have to pay tax on that, so another 50,000 gone. So at the end of lease period 1L will go out of your pocket.

What tax would that be?

[tsk1979]

Income Tax. That amount will be added to your income. There is some formula for how much amount gets added. This is true for corporate leases where after end of lease after paying a nominal amount the car goes in employees name. Since nominal amount is much lesser than depreciated value of car(15% every year) the balance amount is taken as gift to employee by company.

[ownerofazkaban]

I have got an offer for company car lease for 3 yrs with 1 % residual value EMI of 3245/- per lac for 36 months.

Is it worth going for it ? there is some 7% vat/tax on EMI, so is it true that i save approx 25% of EMI as TAX ?

swift vxi-abs EMI comes to approx 16.5k for 36 months with 43k residual amount. Is it good taking overall cost into account rather than buying on self loan ?

Also I get to save tax on fuel.

[rajanrajesh]

Well - this is my first post and I am going to get new wheels using the lease option - I can add only one more thing of value here - you guys have covered every bit of detail on pros and cons - there is another leasing company out there - Hertz Leasing. The things that I liked with them was easier exit options from the lease agreement.

[desmondhaynes]

Originally Posted by GTO

Most popular Lease Organisations in India:

Orix India

Lease Plan

Thanks for the very informative article.

Has anyone done any comparison with these 2 lease orgs? My co has a tie up with Lease Plan, but I think Orix is a bit more aggressive on pricing.
Features look appealing from Lease Plan.

Please help me with some comparison, and any experience that you may have had with "Lease Plan".

[GTO]

I have heard only good things about either of them, desmond, though Orix was rated better for service quality.