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Old 22nd May 2012, 01:01   #1
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Default Self-employed Professionals / Businessmen - Buy on finance or outright?

I have been contemplating purchasing a used SUV for the last few months. However, recently after referring to my CA on the tax implication, he suggested me some interesting pointers, especially from the perspective of a self-employed professional or businessman, whose income are in the higher slabs of taxation.

Instead of paying full down payment on a new or used car, he suggested to go for a maximum finance option. The reasoning is, first of all, I can claim tax exemption on the interest paid towards the monthly EMI. Secondly, after every year, I can claim depreciation benefits to the tune of 20% and more, against the ex-showroom price. Of course, assuming this car will be utilized in some form in my business.

So, here is the dilemma:
1. Spend 15 lacs outright on a used SUV.
2. Spend 5 lacs as downpayment and go for a new SUV costing 25 lacs ex-showroom, with 80% finance, and claim tax exemption on the interest paid.

Which is a better option? In both cases, depreciation claim can be at the tune of 10 to 20% per year.

Your views and suggestions are very much appreciated.
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Old 22nd May 2012, 01:39   #2
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

I would suggest you crunch the numbers and see what you come up with but there are a few points to remember.

The interest you pay on EMI's really does add up, though it helps spread the payment out over time.
Consider the cost of the 10L with the interest lost on it.

A back of the envelope calculation indicates to me that the used option makes more sense in the long term cost wise.
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Old 22nd May 2012, 08:11   #3
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

For self employed its better to take loan, here is why

1. Outgo in terms of interest can be adjusted against income
2. The remaining corpus can be invested elsewhere which would fetch some returns

In comparison if you would buy on a full cash down then you anyway have to pay Tax on business income (With no adjustment against interest) and you loose the interest that you gain if the corpus had been invested elsewhere. So its like loss twice over.

Hope i was clear, and made sense. Needless to say this does not apply for a salaried professional.
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Old 22nd May 2012, 08:29   #4
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

Quote:
Originally Posted by iTNerd View Post
So, here is the dilemma:
1. Spend 15 lacs outright on a used SUV.
2. Spend 5 lacs as downpayment and go for a new SUV costing 25 lacs ex-showroom, with 80% finance, and claim tax exemption on the interest paid.

Which is a better option? In both cases, depreciation claim can be at the tune of 10 to 20% per year.

Your views and suggestions are very much appreciated.
Depreciation for used car is based on insurance value rather market value. It will always be much less and you will get max benefit if you buy a new SUV. Also apart from depreciation the you can claim the repair and running maintenance too.
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Old 22nd May 2012, 08:37   #5
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

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.
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Old 22nd May 2012, 09:30   #6
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

As a self employed professional, it is generally better to buy cars and such on loan because one can take advantage of the interest payments as "expense" as well as depreciation benefits.
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Old 22nd May 2012, 09:45   #7
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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
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.
Even a 10 lakhs car ,they are going to track ? . How are they even going to track it with millions of ppl buying car daily ?

Just curious ,even if they manage to track ,they are going to send a notice?
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Old 22nd May 2012, 10:00   #8
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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 mayankjha1806 View Post
In comparison if you would buy on a full cash down then you anyway have to pay Tax on business income (With no adjustment against interest) and you loose the interest that you gain if the corpus had been invested elsewhere. So its like loss twice over.

Hope i was clear, and made sense.
So, paying outright or taking a loan, I will end up paying the same amount technically. Interesting! This means, I can opt for a loan of 5 to 7 years tenure and reduce the EMI amount and still avoid the pinch of higher interest?

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Originally Posted by v&v View Post
Depreciation for used car is based on insurance value rather market value. It will always be much less and you will get max benefit if you buy a new SUV. Also apart from depreciation the you can claim the repair and running maintenance too.
I see! What about depreciation on new car? Is it based on ex-showroom or the IDV value? Is yearly depreciation same for used and new car?

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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.
Does that matter if we are dealing with white money?

Last edited by iTNerd : 22nd May 2012 at 10:02.
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Old 22nd May 2012, 10:04   #9
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

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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.
Interesting.

What I was given to understand by a couple of "tax consultants" is that anyone with a salary of 20L/25L and above is anyways in the top 5% of tax payers and has their papers scrutinized, with random manual checks done at the level of the commissioner office level.

So for someone who can afford to buy such a SUV (which means he earns easily 30-40L if not more), why should he worry about an audit when he's already under their scanner.
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Old 22nd May 2012, 10:07   #10
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

Get a loan from an Urban Cooperative Bank or Grameen Banks if they are present in your area. They have some of the cheapest loan rates and would be more than happy to give you a loan. And you would also like to note that in case of Urban Cooperative bank, their systems are not yet computerized. So anyone checking up on their loan accounts like tax officials etc would have to do so manually.

i.e. Not happening.

Last edited by lurker : 22nd May 2012 at 10:08.
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Old 22nd May 2012, 10:30   #11
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

Quote:
Originally Posted by iTNerd View Post
I see! What about depreciation on new car? Is it based on ex-showroom or the IDV value? Is yearly depreciation same for used and new car?
IMO IDV when its a used car and Invoice value when its a new car. Depreciation is 15%.


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Originally Posted by lurker View Post
Get a loan from an Urban Cooperative Bank or Grameen Banks if they are present in your area. They have some of the cheapest loan rates and would be more than happy to give you a loan. And you would also like to note that in case of Urban Cooperative bank, their systems are not yet computerized. So anyone checking up on their loan accounts like tax officials etc would have to do so manually.

i.e. Not happening.
Now this has changed. All cooperative bank has the report transaction to RBI . These reports can be online or offline.
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Old 22nd May 2012, 10:30   #12
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

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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.
If you have your papers in order I do not see any issue with an IT audit. Typically (answering another question) IT will send you a notice, based on your returns filed, or call you for summons based on monitoring your transactions.

I have been served both and I can say that if you have your papers in order and have made proper claims you have no reason to worry.

IT audit is done only in few cases where the Dept is not satisfied with your books of account and want to send their appointed auditor. This is not done often and certainly not done in cases where they do not see large revenue for the IT Dept.

Quote:
Originally Posted by iTNerd View Post
So, paying outright or taking a loan, I will end up paying the same amount technically. Interesting! This means, I can opt for a loan of 5 to 7 years tenure and reduce the EMI amount and still avoid the pinch of higher interest?
Does that matter if we are dealing with white money?
If I understand you have to choose between a) full payment and b) loan. The amount that you claim as depreciation will not change irrespective of the option you choose. What you will save on are the interest charges. So for instance if you go for an EMI where the annual interest component is say Rs 100, then you would claim that as a tax deductible expense, thus reducing you tax liability by about Rs 35 ( which is 35% on Rs 100 that would pay less assuming you have profits to cover that). So you effectively reduce your interest rate by 35%. Thus a 10% original rate now becomes 6.5% effectively. So if your effective rate (6.5% in this example) is less than the rate that you will get on a post tax basis by putting that amount that you now have because you did not make the down payment in another money generating asset, on a like to like risk basis, then it makes sense.

However please note that IT has certain conditions that you need to meet for claiming such deductions. Do ensure that you personally see that you meet them. Usually we leave it to our auditors who are keen to provide us with tax breaks. But when the time for responding to an IT notice comes, some would start talks of a "settlement". Apologies if I have any hurt any forum members. Ultimately you bear the risk of any such advice

On your query does it matter if its white? The question is not that but whether any deduction is permissible. IT will not doubt that your money is white (i.e, accounted for while computing taxes) but whether you have made the right calculation of your tax liability.

Cheers,

Last edited by diffsoft : 22nd May 2012 at 10:35. Reason: Adding another point
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Old 22nd May 2012, 10:35   #13
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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 black12rr View Post
Even a 10 lakhs car ,they are going to track ? . How are they even going to track it with millions of ppl buying car daily ?
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. Even though our records are straight, nobody really wants an audit. Once they descend on your office, they will find some obscure problem to make their visit worthwhile.

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Originally Posted by iTNerd View Post
Does that matter if we are dealing with white money?
Yeah, it was corporate white money in my case.

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Originally Posted by phamilyman View Post
So for someone who can afford to buy such a SUV (which means he earns easily 30-40L if not more), why should he worry about an audit when he's already under their scanner.
What you are talking is common sense. But here we are dealing with government. Every time I try to use common sense in my dealings with the government, I lose.
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Old 22nd May 2012, 10:40   #14
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

Actually, it does not make much difference whether you take a loan or not.

Yes, loan interest is tax deductible. Hence if your loan rate is, say, 12% and your income tax rate is 35%, you are actually paying 8% interest on post-tax basis. The money that you would have otherwise invested in the car can now be invested elsewhere, e.g. in a FMP where you will get about 8% return post-tax. So net net you are zero. Hence you might as well use your own money to buy the car.
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Old 22nd May 2012, 10:42   #15
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Default Re: Self-employed Professional/businessman - Finance the car or pay full down payment

Quote:
Now this has changed. All cooperative bank has the report transaction to RBI . These reports can be online or offline.
Core banking systems not yet computerized in Urban Cooperative bank. They need to report to RBI, but can take upto 6 months to do so.
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