[B103]

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Originally Posted by vasoo

Effective interest rate: ~8.9% per year (flat rate)

The entire EMI is tax free. This will result in an IT savings of about Rs 3.2 lakhs over 5 years.

EMI + maintenance charges + insurance is all tax free isn't?

Some companies have policy to lease your existing car. Catch is that, you will have to transfer ownership in the company's name. When lease period ends the ownership will have to be transferred back to your name again. Not so attractive.

I have seen organizations charging interest rates up to 14 or 15% for the leased car. Is there any particular reason for the interest rate to be high? Will this vary from vendor to vendor in case the company engages multiple vendors?

[vasoo]

Originally Posted by B103

EMI + maintenance charges + insurance is all tax free isn't?

Yes. But there will be perquisite charges / FBT as applicable. For example as per current rules cars with 1.6 cc or above have a limit of 3000 per month as maintenance charges. Anything above that will be considered as perquisite.

Originally Posted by B103

Some companies have policy to lease your existing car. Catch is that, you will have to transfer ownership in the company's name. When lease period ends the ownership will have to be transferred back to your name again. Not so attractive.

I have seen organizations charging interest rates up to 14 or 15% for the leased car. Is there any particular reason for the interest rate to be high? Will this vary from vendor to vendor in case the company engages multiple vendors?

Yes. An organization has to have the asset in its name to claim depreciation benefits. So it will need to be transferred to them. Typically interest rates I have seen are in the range of 10 to 12% and it does vary slightly across vendors. The higher rates is applicable to used cars.

[B103]

Originally Posted by vasoo

Yes. An organization has to have the asset in its name to claim depreciation benefits. So it will need to be transferred to them.

Looks like some organizations want to restrict the number of leased cars and lease is restricted to the upper echelons only. Reason is primarily attributed to the large accounting overhead involved.

The leased car is on the company's name. It is meant ideally to be utilized for executing the company's day-to-day operations. The amount involved is tagged as an expense involved for running operations and is also tax free because of that.

So, is it technically appropriate to allot the same resource internally to employees as a perk and write off all the associated expenses from his/her taxable income!!

[sandeepmohan]

As part of our revised salary structure, car lease is now offered as a tax saving option. The provider of the car lease is GE Capital and their rate of interest is 13.5%. The term is three years. Quite steep.

As an example we were provided, GE Capital will take care of the entire on road price. Lets say a Honda City costs 10lac, GE Capital cuts off 2.5lac from the on road and your EMI is on 7.5lac. The EMI is taken from your monthly pay and I believe this won't be reflected on your pay slip. Towards the end of the term, you have to pay up 2.5lac and the car is yours. Transfer of ownership is your headache. Maintenance costs and insurance renewals from your wallet.. The mileage cap for the term is 45000km. If you exceed this reading and plan on returning the car to GE, you will have to cough up some 2% more of something which I am not very clear about. The percentage value changes depending on how much higher you are on the mileage cap.

[Frontosa]

Originally Posted by sandeepmohan

As part of our revised salary structure, car lease is now offered as a tax saving option. The provider of the car lease is GE Capital and their rate of interest is 13.5%. The term is three years. Quite steep.

As an example we were provided, GE Capital will take care of the entire on road price. Lets say a Honda City costs 10lac, GE Capital cuts off 2.5lac from the on road and your EMI is on 7.5lac. The EMI is taken from your monthly pay and I believe this won't be reflected on your pay slip. Towards the end of the term, you have to pay up 2.5lac and the car is yours. Transfer of ownership is your headache. Maintenance costs and insurance renewals from your wallet.. The mileage cap for the term is 45000km. If you exceed this reading and plan on returning the car to GE, you will have to cough up some 2% more of something which I am not very clear about. The percentage value changes depending on how much higher you are on the mileage cap.

Which company you work for if I may ask? You work with GE ? I never saw GE capital providing loans/leases

[crazydave]

I'm never really sure about the IT "savings" that are posted in these "lease or buy" threads. First off, the amount of IT savings is dependent on the individual salary slabs + income tax-saving investments that the person makes + other deductions that are very individual-dependent. I know of many people who dont exhaust their 1.2 lakh taxfree investment limit and others who max it out, for example. The impact of a lease on these two different cases, will be very different

Secondly, this seems mostly a nominal saving! Just because I transfer the money from the taxman's pocket to the leasing company's pocket doesn't mean there is any personal savings for me, does it? This is why leasing companies charge 15-16% interest rates for their plans in comparison to a SBI at 10.45% and less. If someone can actually post the detailed calculations of how they've saved cash - aka money in their pocket, then that would be great education

[deep_bang]

Originally Posted by sandeepmohan

As part of our revised salary structure, car lease is now offered as a tax saving option. The provider of the car lease is GE Capital and their rate of interest is 13.5%. The term is three years. Quite steep.

As an example we were provided, GE Capital will take care of the entire on road price. Lets say a Honda City costs 10lac, GE Capital cuts off 2.5lac from the on road and your EMI is on 7.5lac. The EMI is taken from your monthly pay and I believe this won't be reflected on your pay slip. Towards the end of the term, you have to pay up 2.5lac and the car is yours. Transfer of ownership is your headache. Maintenance costs and insurance renewals from your wallet.. The mileage cap for the term is 45000km. If you exceed this reading and plan on returning the car to GE, you will have to cough up some 2% more of something which I am not very clear about. The percentage value changes depending on how much higher you are on the mileage cap.

I have a company car and have analyzed the numbers quite a bit. I did not understand the "deduct 2.5L" part. Normally the EMI is for the full financed amount, and the 2.5L is basically the residual value of the car. This again, I cant comment on exactly how 2.5 L was arrived at, but would be glad to help if you PM me with more details.

Originally Posted by crazydave

I'm never really sure about the IT "savings" that are posted in these "lease or buy" threads. First off, the amount of IT savings is dependent on the individual salary slabs + income tax-saving investments that the person makes + other deductions that are very individual-dependent. I know of many people who dont exhaust their 1.2 lakh taxfree investment limit and others who max it out, for example. The impact of a lease on these two different cases, will be very different

Secondly, this seems mostly a nominal saving! Just because I transfer the money from the taxman's pocket to the leasing company's pocket doesn't mean there is any personal savings for me, does it? This is why leasing companies charge 15-16% interest rates for their plans in comparison to a SBI at 10.45% and less. If someone can actually post the detailed calculations of how they've saved cash - aka money in their pocket, then that would be great education

I agree to most things you say. And its true that people who consider company cars should evaluate their finances properly - and as you mentioned, there are people who are out to save their taxes by buying cars while their section 80c limit of 1L itself is not used up.

So, assuming one does due diligence in understanding the impact, it normally works out quite well. Let me give a calculation from my own example. I have not given full details, but just a gist.:

On road price of a car : 8.75L.
EMI for 3 yrs : 21k
buy back value after 3 yrs: 3.75L.

Note that the exact interest rate is not mentioned with this and maintenance fee etc, including VAT are included in the EMI.

So, in simple terms, if I am in the 30% tax bracket, I will be saving tax on the 21k EMI. For 36 months, it means, 30% of 7.56L which is about 2.26L. In some companies they can claim the fuel also as a tax exempt element - which may work to about 1L to 1.5L over 3 years.
Now, What's the catch? Several as below:
1. The interest rate is usually higher. (For me, I calculated it to be approximately 11%).
2. They also include other fees like fleet management services and add VAT on top of it - that's how the fleet management companies make money. This is if the company themselves do not want to manage the whole process but would let a 3rd party company like ALD manage it.
3. They have a mileage cap - so I see that the negative is that you would have to know the usage approximately . For me they said I can change it midway if required with a change in the EMI also (the change is quite nominal of about a few hundred rupees).
4. Insurance is borne by the fleet management company - however this depends on the company. For me, they have a 3rd party policy, while own damages are covered by the company through their own network of dealers. So you cannot take it to the nearest authorized workshop and get the damage repaired (for denting works for example). For other damages that can only be done in Auth. service station, they ask you to take it to the Auth service center only.
Note that, you don't get a NCB on this even after you buyback the car next year.

And of course, the final reason is that if you quit the company mid-way, it does not work that well. So, in a nutshell, I think these policies are good when:
1. You are quite sure to work for atleast 2 yrs in the same company.
2. You anyway are thinking of buying a new car.

[swiftnfurious]

Originally Posted by deep_bang

....So, in simple terms, if I am in the 30% tax bracket, I will be saving tax on the 21k EMI. For 36 months, it means, 30% of 7.56L which is about 2.26L...

But the max benefit we can obtain remains at 1L like under 80C? I come under the 20% bracket and I am told that the max tax concession I can avail is 1L. Even in case of a leased car, it's the same?

[deep_bang]

Originally Posted by swiftnfurious

But the max benefit we can obtain remains at 1L like under 80C? I come under the 20% bracket and I am told that the max tax concession I can avail is 1L. Even in case of a leased car, it's the same?

This is the first I have heard of the 1L limit. Is it per year, or for the whole term?
Each company may impose limits of what the maximum purchase price of the car is. Even then, 1L per year (if that's true) is a good amount - if you are buying any car less than say about 10 to 12L. For example, for a 10L car, your Lease EMI for 3 years may be around 25k (just quoting approximate values - don't decide anything by this), which means, annually, your EMI is 300k. 20% of this is 60k and 30% is 90k, both of which are less than 1L.

[shivasuma]

Originally Posted by swiftnfurious

But the max benefit we can obtain remains at 1L like under 80C? I come under the 20% bracket and I am told that the max tax concession I can avail is 1L. Even in case of a leased car, it's the same?

There is no limit as such on CLC I think. I am in the 30% bracket and I have bought a car through CLC. They put some limitations on what kind of car you can buy though. Max engine size is 2.5L and no 4x4 or AWD and BS4 compliant. CLC is a good option if you do not want to put a down payment on the car. In the end you save a little (I had done some calculation before), but it also has its drawbacks. You cannot quit without pre-closing the loan (which will turn out to be costlier depending on how long you are into your EMIs). You have to pay a residual value (usually 20% after 4 years) after the lease tenure to get the car transferred in your name and you will be the second owner (first owner is the company you work for).

[swiftnfurious]

Originally Posted by deep_bang

This is the first I have heard of the 1L limit. Is it per year, or for the whole term?...

Originally Posted by shivasuma

There is no limit as such on CLC I think. I am in the 30% bracket and I have bought a car through CLC...

I guess I should have been clearer. The 1L limit is NOT on the vehicle lease, but normal tax concession. We can invest into Insurances and Mutual funds and all to avail this 1L concession.

My question is the concession on taxes on the car lease is different from this 1L ?

[ethanhunt123]

Originally Posted by swiftnfurious

I guess I should have been clearer. The 1L limit is NOT on the vehicle lease, but normal tax concession. We can invest into Insurances and Mutual funds and all to avail this 1L concession.

My question is the concession on taxes on the car lease is different from this 1L ?

The 1L limit has nothing to do with car lease. How you save tax on car lease is this.

Taxable Income (after all deductions) = Rs X
Tax Paid = y% of X

If you take a car lease with a yearly EMI of A-

New Taxable Income = X-A
Tax Paid = y% of (X-A)

So you effectively save y% of A as tax every year. Even after considering the higher interest charged by leasing companies & VAT payable on the rent (its monthly rent not EMI for the taxman); the lease turns out to be much cheaper than owning the car.

I dont know with the current numbers, but when i bought my car on lease 4 years back - a 3yr lease meant u were effectively getting the car interest free and a 4yr lease meant u paid something of the tune of 4-5% of car value as interest over 4 years.

The disadvantage of car lease ? - The car is not in your name - if you want to transfer the car later - you show up as a second owner. May affect resale value a little if selling to the dealer though most individual buyers understand. Also, in some states like MH - corp owned cars have to pay higher registration fee. And you are stuck with the company for the car lease years - if you quit then you have to pay the remaining lease value in one shot.

[deep_bang]

Originally Posted by swiftnfurious

I guess I should have been clearer. The 1L limit is NOT on the vehicle lease, but normal tax concession. We can invest into Insurances and Mutual funds and all to avail this 1L concession.

My question is the concession on taxes on the car lease is different from this 1L ?

It is definitely different. In fact, the 1L consession you get is called section 80c. For the car, the car is not even in your name - as far as IT is concerned - where is the question of tax???

What I am trying to say is, 80c exemption of 1L is totally non-connected to car lease.

[sandeepmohan]

Originally Posted by deep_bang

I have a company car and have analyzed the numbers quite a bit. I did not understand the "deduct 2.5L" part. Normally the EMI is for the full financed amount, and the 2.5L is basically the residual value of the car. This again, I cant comment on exactly how 2.5 L was arrived at, but would be glad to help if you PM me with more details.

Based on the example GE Capital showed us which is a car with an on road price of 10lac, the EMI is indeed for the financed amount which is 7.5lac. The 2.5lac that is deducted at the beginning needs to be paid at the end of the 3 year term if you are going to keep the car. Not otherwise.

[swiftnfurious]

Originally Posted by ethanhunt123

....
If you take a car lease with a yearly EMI of A-

New Taxable Income = X-A
Tax Paid = y% of (X-A)

So you effectively save y% of A as tax every year. Even after considering the higher interest charged by leasing companies & VAT payable on the rent (its monthly rent not EMI for the taxman); the lease turns out to be much cheaper than owning the car.

That's a neat explanation! Thank you! Now,

1. Is there a minimum salary requirement to avail a car lease? Or is it based on the policies of the organization where people above a certain designation get this benefit irrespective of their CTC?

2. Is there a max cap on "A" that's to be paid every year ??

3. Are the policies (interest %, EMI & buy back terms) the same for every vendor?

4. What if I leave the company before the EMI period ends and I don't want the car?

5. Can I buy (even) a Nano with the car lease, clear all payment in one year and buy another car the next year under the same scheme?