Want to Pay Less for an SUV? Leasing Through Your Employer

Leasing a car through your employer provides a relatively lesser-known tax sop available to salaried individuals or even owners of businesses. For employees, this approach can result in tax savings of 20-40% of the car’s value.

Car leasing allows a person to use a vehicle for a specified period of time by paying regular rent. The tenure of the lease varies from three to five years depending on the rules of the employer company. The rental amount for a lease is similar to the EMI for a car loan. Only, it is not a vehicle loan. At the end of the lease, the lessee (an employee in this case) has the option of purchasing the car or upgrading to a larger car by paying the balance amount.

The lease can either be based on the ex-showroom price of the car (called a dry lease) or cover everything from on-road taxes to insurance, accessories and maintenance (called a wet lease).

how does leasing work

Car leases are of two types depending on who takes ownership of the car between the lessor company and the employee: operating lease and finance lease.

Under an operating lease, the car is registered in the name of the leasing company and at the end of the leasing period, the employee can either upgrade to a new vehicle or buy it after paying the residual value.

This is considered beneficial from the point of view of companies as they do not have to worry about the car being in their books. However, from an employee’s point of view, this may not be beneficial as one needs to pay the residual value of the car, which may be quite high at the end of the lease term under this option.

In a finance lease, the lessor, the employer and the employee enter into a tripartite agreement. The employer is the lessee of the car and the employee is its co-lessee. The car is registered in the employee’s name, and at the end of the lease term, ownership is transferred to the employee. This finance lease option is beneficial to the employee as the residual value is usually in the range of 5-10%. However, the leasing rentals are higher in this option.

While the option of finance lease is considered more favorable to the employees, it is currently preferred to operating lease. The majority – approximately 60% – are operating leases and the remainder are finance leases. One of the major reasons for this paradox is that finance leases are available only to the top paid executives in a company as they command a large monthly lease rental, and hence the total number of employees eligible for this option is small. .

How does it save tax

The car lease becomes part of the employee’s salary under the Rental Cost to Company (CTC) framework. Since the employer pays this amount directly to the leasing company, it does not form part of the employee’s taxable salary. Employer can claim car lease rental as a business expense. Many companies also offer vehicle maintenance, driver salary and fuel expenses as part of the car lease policy. Nitesh Buddhadev, founder, Nimit Consultancy, said such expenses are reimbursed and excluded from an employee’s taxable salary.

Lease rental payments, combined with these reimbursements, can result in large tax savings. Compared to buying a car, the savings in terms of taxes bring down the total cost of ownership significantly. Mint did some number crunching to analyze this.

Suppose Mr. X, who is working in a company whose basis is CTC Hires a car worth Rs.25 lakhs 16 lakhs for 48 months. monthly lease rental yield 43,800 (as per data provided by car leasing companies), total 5.25 lakhs in a year.

Taxable salary as per lease rental deduction and standard deduction comes close to 50,000 19.24 lakhs and the tax liability on this income is 3.14 lakhs. On the other hand, if someone buys the same car earlier, the tax liability would be 4.72 lakhs. By leasing, the employee is saving 1.57 lakh every year in taxes. Note that some employers provide reimbursement for fuel as well as driver’s wages and claiming them will increase your tax savings by an additional 10-15%. However, this tax sop is not only for the leasing route and can also be claimed by the car owner by submitting invoices for the actual expenses incurred on driver’s salary and fuel to avail the deduction.

When the lease ends, the employee has the option of purchasing the car by paying the residual value, which in the above example is approximately 5% or 80,000. Even after paying the residual value, the total cost of the car forms around 80% of the original upfront cost.

But, does leasing a car through an employer tie you to the same company till the end of the lease term? No, the employee has few options.

If the car is in the employee’s name and their new company has a leasing policy, the lease can be continued and they can continue to enjoy tax benefits.

When the car is in the name of the company, the employee has the option to either surrender the car and take a new lease to the new firm he has joined or pay the balance amount and transfer fee. Buy the car by paying and get the NOC. (NOC) to enjoy tax benefits. The lease can also be transferred to a colleague from the existing company before changing jobs, if they agree to pay the remaining EMIs and take over the car.

Should you go for a car lease if this option is offered by your employer? Financially, it makes sense to own a car through this option. Leasing also gives you the flexibility of not having to commit to the car after the lease term is over. This would mean that you own the car for a shorter period, but do not have to bear the brunt of depreciation that comes with full ownership.

With inputs from Nitesh Buddhadev, Founder, Nimit Consultancy.