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Old 22nd May 2012, 10:47   #16
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

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Originally Posted by iTNerd View Post
So, paying outright or taking a loan, I will end up paying the same amount technically.
No,

Paying outright
1. Pay full tax (-)

Take Loan
1. Interest you pay to bank gets adjusted against the income (Nullified)
2. Interest from the remaining amount invested elsewhere (+)

I am not taking other factors into account, like depreciation or coming in the eyes of IT department so as they come and check
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Old 22nd May 2012, 11:39   #17
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

From a purely financial point of view, an used SUV for Rs. 15 Lacs will always be less expensive than a new SUV for Rs. 25 Lacs on 80% finance - especially when you include the resale value of the SUV into your calculations.

Simple Logic -> A car worth Rs. 15 Lacs will depreciate less in absolute rupee terms when compared to car worth Rs. 25 Lacs, over a period of, say, 5 years.

Take out an XL sheet and do the following calculations -

USED SUV FOR RS. 15 LACS:

Initial Cost: Rs. 15 Lacs
Extra cash outflow over a new car: Rs. 10 Lacs
Loss of Interest for Rs. 10 Lacs over a period of 5 years, assuming a bank FD interest rate of 8% per annum: Rs. _______
Net sum of Depreciation of 15% per annum (as allowed by tax laws) on Rs. 15 Lacs = Rs. _______
Tax savings because of depreciation claim: Rs. ________
Approximate resale value after 5 years: Rs. _____
Amount Lost due to depreciation: Rs. ________

Total financial cost of buying Rs. 15 Lacs used SUV: Rs. ___________-


NEW SUV FOR Rs. 25 LACS

Initial downpayment: Rs. 5 Lacs
Assuming Loan taken for Rs. 20 Lacs for 5 years, interest costs = Rs. ________
Tax savings on interest expenses: Rs. _____________
Net interest cost: Rs. _________
Net sum of Depreciation of 15% per annum as allowed by tax laws: Rs. ___________
Tax savings on depreciation: Rs. __________
Approximate resale value after 5 years: __________
Amount lost due to depreciation: Rs. _________

Total financial cost of buying new Rs. 25 Lacs SUV: Rs. ____________

My guess is - Even if you consider the slightly higher maintenance expenses (tax deductible!) of used SUV, you will still save around Rs. 5 Lacs over a period of 5 years.
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Old 22nd May 2012, 16:05   #18
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Default Re: Self-employed Professionals / Businessmen - Buy on finance or outright?

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Originally Posted by iTNerd View Post
I have been contemplating purchasing a used SUV for the last few months.
When it comes to USED cars, ALWAYS buy it outright. Loan rates on used cars are prohibitively high.

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The reasoning is, first of all, I can claim tax exemption on the interest paid towards the monthly EMI.
Would you spend 100 rupees to say 30 rupees (assuming you are in the 30% tax slab)? This is pretty much the simplest explanation for your line of thought.

On the other hand, yes, I do recommend businessmen take a loan on NEW cars. Reason:

1. Reasonable rates of interest (compared to that of used cars)
2. You can use the liquidity elsewhere (business expansion etc.)
3. If you invest that same money sensibly, you can easily make more $$$ than the interest you are paying to the financing bank
4. Buying a 20 lakh - 1 crore vehicle outright will have the IT officer at your doorstep. Anything cheaper is okay.

Quote:
I can claim depreciation benefits to the tune of 20% and more
I find it amusing when anyone talks of buying a new car for depreciation. Again, it's like spending a 100 bucks to save 30 (that too, over a long period of time for the depreciation benefit).

It is MUCH cheaper to buy used, or continue using your existing car. No tax benefits of interest expenses, or depreciation benefits, beat the savings in pre-worshipped cars.
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Old 22nd May 2012, 16:18   #19
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

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Originally Posted by Samurai View Post
Don't forget it is all computerized now, the red flag will be raised by the software. I wanted to buy the i10 by down payment since the company had cash, after all 6L is hardly a big deal considering the cashflow of a company. But my company accountant and company auditor fought me tooth and nail. They said it triggers automatic audit since car dealers are supposed to report all full down payment purchases to the IT department.
So, if I choose to take a loan and preclose it in say, 3 months, would it still raise a red flag at the IT dept?
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Old 22nd May 2012, 16:23   #20
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

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Originally Posted by fash_1 View Post
So, if I choose to take a loan and preclose it in say, 3 months, would it still raise a red flag at the IT dept?
You bet, anytime you make a payment of a decent sum the IT dept gets alerted. I have closed quiet a few loans in past and in 6 months to 1 year i get a letter from Kormangala Commissioner of Income tax to disclose the source of income. All i do is go there and attach Form 16 and IT returns of last year and all goes quiet.

This has happened twice in the past with me, while i am not sure of the amount when this gets triggered but my guess is anything above 3L would trigger it. Although i have myself had an experience of it triggering at ~1.5L (but that was way back in 2005).
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Old 22nd May 2012, 16:28   #21
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Default Re: Self-employed Professionals / Businessmen - Buy on finance or outright?

I guess its all on comfort level of individual. If you dont have a problem with used car and can afford to pay 15 lakh upfront and pick up a vehicle, you should go ahead with it. The financial offset for new car would not turnout to be very high even if you get interest claim back because of the way banks structure their products. Plus you will end up paying other bank charges as well like their commission, one time charges etc.
Secondly, in a business, cashflow might become a problem sometimes and then having a high EMI on your roll sometimes give jitters. So therefore it will mostly depend on your comfort level and what kind of stress you wanna take up

You can claim depreciation even if you buy it second hand, new, on loan or outright. It does not matter. Depreciation rate for all is also the same. Hope this helps
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Old 22nd May 2012, 16:43   #22
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Default Re: Self-employed Professionals / Businessmen - Buy on finance or outright?

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Originally Posted by GTO View Post
On the other hand, yes, I do recommend businessmen take a loan on NEW cars. Reason:

2. You can use the liquidity elsewhere (business expansion etc.)
3. If you invest that same money sensibly, you can easily make more $$$ than the interest you are paying to the financing bank
There is a tiny flaw in these arguments -

- Rest assured, his business does not need the extra liquidity. If it did, he would be considering a Rs. 6 Lac SUV (Premier Rio) rather than a Rs. 25 Lac SUV

- If one takes a loan on a new car, money can be invested in either Fixed deposits or equities - lumpsum. But taking a Rs. 20 Lacs loan involves committing future cash flows (in excess of Rs. 30,000 per month) towards EMI payments. Why not buy a pre-owned SUV with full payment, and then invest Rs. 30 or 40k per month in equities/other asset classes? Returns might be even be higher, when one invests every month rather than in one go.

Plus, for a self-employed professional/businessman, it helps to have no liabilities because of all the uncertainties associated with running a business. My vote (from a financial point of view) goes to buying a pre-owned SUV.
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Old 24th May 2012, 18:08   #23
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Default Re: Self-employed Professionals / Businessmen - Buy on finance or outright?

We need to also remember one more thing.

The money you save from not paying the full payment, gets invested back into business and returning you more at the end. Obviously it is assumed here that your annual rate of return from business is higher than the rate of loan banks are taking.

Typically businessmen should and in general do take loans while buying cars.
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Old 24th May 2012, 19:48   #24
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Default Re: Self-employed Professionals / Businessmen - Buy on finance or outright?

Here is a classic case, I am very impressed by this friend of mine who did this while buying his 2008 Honda City. What he does with his savings is that he has a certain friend who invests it with small builders (it could be any business for that matter), but what he does is basically lends money for some x interest, but this friend of mine who has actually lent money to this 'investor' is also getting x interest on that amount.

One example is here; Rs. 5,00,000 given on loan @ 2% interest per month to the investor, he in turn lends it for more that 2% interest and the margin is his income. Now lets say my friend has taken a loan of Rs. 5 lakhs and is paying a EMI of 2250x5, ie. Rs. 11,250 per month and he gets rs. 10,000 on his investment, he still pays rs. 1,250 more every month but that includes actual and interest. At the end of 5 yr term he can withdraw his investment of Rs. 5 lakhs, whereas if he had taken a loan he would have had nothing.

I hope I could explain it well with this example, its again the same thing which many here have said, if your investments have greater returns, take the loan.

Last edited by GTO : 29th May 2012 at 13:52. Reason: Correcting some typos
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Old 24th May 2012, 22:06   #25
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Default Re: Self-employed Professionals / Businessmen - Buy on finance or outright?

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Originally Posted by Samurai View Post
There is another thing. Buying a car with full down payment raises a red flag at the IT department. You will get audited by them.
We gifted a Maruti Alto to our sister in 2008 (full down payment) and the showroom guy told us that this showroom (DD Motors, Peeragarghi,Delhi) is not audited by IT department. We didn't faced any problem as the payment (By Cheque) was made by my dad from his salary account.

Or may be Alto is not a big deal?

Last edited by bluevolt : 24th May 2012 at 22:09.
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Old 25th May 2012, 11:44   #26
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Post Re: Self-employed Professionals / Businessmen - Buy on finance or outright?

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Originally Posted by bluevolt View Post
We gifted a Maruti Alto to our sister in 2008 (full down payment) and the showroom guy told us that this showroom (DD Motors, Peeragarghi,Delhi) is not audited by IT department. We didn't faced any problem as the payment (By Cheque) was made by my dad from his salary account.

Or may be Alto is not a big deal?
I guess small cars are not a big deal. Even my uncle recently bought a Ritz on complete down payment and no issues were faced.

But how is it that a Car showroom is not audited by IT dept.? IT dept. will audit even the smallest of companies if required. How are they claiming that they are exempted!
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Old 25th May 2012, 12:03   #27
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Default Re: Self-employed Professionals / Businessmen - Buy on finance or outright?

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Originally Posted by prashant316 View Post
But how is it that a Car showroom is not audited by IT dept.? IT dept. will audit even the smallest of companies if required. How are they claiming that they are exempted!
Really don't know!

The sales person told us that people even buy Grand Vitara/SX4 on full cash and yet there is no issue from this specific showroom?
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Old 25th May 2012, 12:06   #28
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Default Re: Self-employed Professionals / Businessmen - Buy on finance or outright?

@prashant316 - its not actually audit, it a sort of reporting which the dealer will be providing to IT deptt or HO about the cash deals or high value purchase. This is not only valid at Automobile showrooms, now valid at Jewelers, Property purchase and many more...

IT tracking or audit are resulted when a large sum ie cash payment in excess of 5L or Cheque payment of 10L and above from an Individual or 20 to 25L for companies towards payment Automobiles, C/c transactions, Property, Foreign visits etc. These are triggers against a PAN. So when this mismatches with your income declared you get visitors

Last edited by v&v : 25th May 2012 at 12:08.
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Old 27th May 2012, 08:27   #29
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Default Re: Self-employed Professionals / Businessmen - Buy on finance or outright?

I am self employed, and I always go for Car Loans. I always buy them new. Thing is I take a three year loan and more or less sell the car at the end of three years and buy a new one. I have found three year loans get you the lowest interest rates. And more over, Car Loans are kind of the cheapest loans you can get and you can always pump it into your business.( The money that you get from selling the car). Comparatively the EMI that you have would have, take care of itself and you really dont have to bother about it, if your business is doing well, which is in your case true.

But buying it outright is better if you have any low income yielding investments. Lower than the rate of interest of the car loan
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Old 27th May 2012, 10:00   #30
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Default Re: Self-employed Professionals / Businessmen - Buy on finance or outright?

One point no one has raised but may be important is Insurance for a 15 lakh used vehicle, will be much lower than a new SUV worth 25 lakhs, what happens to this in terms of taxes, is it pure expenses in the books of self-employed?

Last edited by musicmanaman : 27th May 2012 at 10:11.
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