Income Tax Benefits of Leasing a Car in India

When it comes to discussing your pay, the most commonly referred to term is basic pay. The employer provides various other benefits and allowances in addition to the basic pay. The basic salary and the benefits and allowances together form the complete salary package. One such allowance is the car lease rental allowance. In this article, we will talk about the tax benefits of leasing a car for business.

Contents

• What is a Car Lease?
• What are the Terms and Conditions of Leasing a Car?
• What are the Features and Benefits of Leasing a Car?
• What are the Types of Car Lease?
• What are the Types of Car Lease Based on the Ownership of the Car?
• How can a Car Lease Help Save Taxes?
• FAQs

What is a Car Lease?

Car leasing involves an individual using a vehicle for a set time by paying regular rentals. During this period, the user doesn't own the vehicle. When the lease ends, the vehicle is returned to the owner, known as the lessor. Leasing can be a cost-effective option compared to purchasing a new car outright. By leasing, you pay only for the duration you use the vehicle, reducing maintenance and depreciation expenses.

Leasing allows you to get the new car hassle-free without needing to own it or make a down payment. Instead, you'll pay monthly installments for as long as you have the car. These installments cover the vehicle's cost, insurance, maintenance, and other ongoing expenses. Not just this, there are a number of tax benefits of leasing a car.

What are the Terms and Conditions of Leasing a Car?

Here's how leasing works in India:

• Leasing grants you the opportunity to possess a vehicle for a fixed duration without having to own it.
• You're required to make regular lease payments for the vehicle's usage throughout the lease term.
• Upon lease termination, the lessor may offer the option to purchase the vehicle at the prevailing market price, which can vary.
• Depending on your selected plan, all maintenance and accessory costs are typically covered within the lease installment.
• Apart from the lease amount charged by the lessor, there are no additional expenses for insurance and taxes.
• No down payment is necessary when leasing a car.
• The lease duration can range from two to five years, depending on the terms of your leasing contract.

What are the Features and Benefits of Leasing a Car?

Here are some notable features and benefits of leasing a car:

• Maintenance Benefits: Vehicle owners often face high maintenance costs. With car leasing, the company that owns the vehicle takes care of maintenance and repairs, saving you from additional expenses.
• Pay for Usage: Car leasing operates on a pay-for-usage model. You only pay for the duration you use the car, as agreed upon by both the lessor and lessee. After the agreed period, you can return the vehicle and cease payments.
• No Down Payment: Unlike vehicle loans, car leasing doesn't require a down payment. You can start using the vehicle without any initial payment, paying only monthly installments.
• Access to New Cars: Leasing allows you to drive a brand-new, well-maintained vehicle with optimal performance. This is ideal for those who prefer driving new cars and want to enjoy top value without committing to ownership.
• Hassle-Free Experience: Car leasing offers transparent terms and conditions laid out by the lessor upfront. Maintenance responsibilities are handled by the lessor, providing a stress-free driving experience.
• Comprehensive Insurance: Lease installments typically include insurance charges, providing coverage for repairs, accidents, theft, and more. This eliminates concerns about insurance renewal dates and extra expenses.
• Tax Benefits: Lease payments are eligible for tax relief, potentially saving up to 30% on taxes for both self-employed individuals and salaried professionals.

What are the Types of Car Lease?

While there are various car lease options available, the fundamental leasing concept remains consistent, even though specific contract details may vary.

1. Closed-End Lease: Standard leasing procedure with a fixed expiration date.
   1. Pros: Fixed cost of the car at lease end.
   2. Cons: Potential fines for returning the vehicle earlier or later than scheduled.
   1. Pros: Allows choice in returning the vehicle.
   2. Cons: Potential payment difference due to unpredictable car value at lease end.
   1. Pros: Reduction in lease costs.
   2. Cons: Typically requires a high credit score to qualify.
   1. Pros: Savings from eliminating interest on monthly payments.
   2. Cons: Requires a substantial lump-sum payment upfront.
   1. Pros: Lower monthly payments compared to new car leases.
   2. Cons: Potential repair costs may be associated with the vehicle no longer being under warranty.
   1. Pros: Long-term leases can keep monthly payments lower; short-term leases may offer affordability.
   2. Cons: Long-term leases may entail paying full vehicle value without ownership rights; short-term leases may have higher initial costs due to rapid depreciation.

   What are the Types of Car Lease Based on the Ownership of the Car?

   Based on who assumes ownership of the car, car leases are categorized into two types: operating lease and finance lease.

   Operating Lease:

   • The leasing company owns the car, and it's registered in their name.
   • At the lease end, the employee can choose to upgrade to a new vehicle or purchase the current one by paying the residual value.
   • Advantageous for companies as they don't need to include the car on their financial books.

   However, for employees, it may not be as beneficial due to the potentially high residual value payment required at the lease end.

   Finance Lease:

   • Involves a tri-party agreement among the leasing company, employer, and employee.
   • The employer becomes the lessee, and the employee becomes the co-lessee, with the car registered in the employee's name.
   • Ownership of the car transfers to the employee at the end of the lease term.
   • This option is advantageous for the employee, typically with a low residual value (5-10%).

   However, leasing rentals are generally higher in this arrangement.

   How can a Car Lease Help Save Taxes?

   The car lease rental can be considered part of the employee’s cost-to-company (CTC) structure. The employer directly pays this amount to the leasing company. Therefore, it is not considered a part of the taxable salary of the employee. The car lease rental can be claimed as a business expense. Other reimbursements given by the employers, like vehicle reimbursement, fuel expenses, and driver’s salary, can also be claimed as an expense and excluded from the taxable salary of the employee.

   Both the lease rental savings and tax savings on these reimbursements can have a huge impact on the taxable salary of an individual. Therefore, car leasing is a great way for individuals to own a car for a short period of time without actually owning it and bearing its maintenance costs, depreciation, etc.

   At the time when the lease ends, the employee can also buy the car by paying the residual value. Even after doing so, the total cost of the car turns out to be 80% of the original upfront cost.

   Also, if the employee has the car in his name and has a car lease policy with the new employer, then, the employee can continue the lease and keep enjoying the tax benefits.

   However, if the car is in the employer’s name, the employee can either surrender the car and take a new lease at the new company or buy the car by paying the residual amount after accounting for depreciation.

   If you don’t want to miss out on any kind of tax savings, you can consider taking the help of an expert CA to help you file your ITR and make sure that you claim all the possible deductions and exemptions. Hire an eCA Now!

   Frequently Asked Questions

   Q - How can I save tax on my car in India?

   Tax benefits are available on the interest paid on a car loan if the vehicle is purchased for business purposes, as per Section 80C of the Income Tax Act. In such cases, the interest paid can be claimed as an expense. However, if the car is bought for personal use, tax benefits cannot be claimed. This is because, according to Indian tax regulations, a car is considered a luxury item, and tax deductions are generally not available for expenses related to luxury items purchased for personal use.

   Q - Is TDS applicable on car lease rent?

   Tax Deducted at Source (TDS) on car hire charges is required to be deducted under section 194C of the Income Tax Act. When a business owner makes a payment to a contractor for a contract, including payments for car hire charges, they are obligated to deduct TDS from such payments. This ensures compliance with tax regulations and helps in the proper collection of taxes on such transactions.

   Q - Is lease amount taxable in India?

   The lease rentals can be claimed as an expense by the employee under the Income Tax Act 1961.