Want to pay less for an SUV? Lease through your employer

Are you a salaried employee looking to upgrade your car to, perhaps, a sports utility vehicle (SUV) but worried about the prohibitive costs of owning one? Well, here is what you need not worry about: a hefty down payment, and a costly car loan leading to higher equated monthly instalments (EMIs). And do note that, unlike a home loan, a car loan offers no tax breaks. So, here is a simpler solution. Just lease an SUV through your employer. After the lease period ends, you can be the proud owner of a SUV. And, to boot, you get to save several lakhs of rupees in taxes.

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

Car leasing allows an individual to use a vehicle for a specified duration by paying rentals regularly. The lease period ranges from three to five years depending on the employer company’s rules. The rental amount for the lease is similar to an EMI for a car loan. Only, this is not a vehicle loan. At the end of the lease, the lessee (an employee, in this case) has the option to buy the car by paying the remaining amount or upgrade to a bigger car.

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

How leasing works

On the basis of who undertakes the ownership of the car between the leasing company and the employee, car leases are of two types: operating lease and finance lease.

Under 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.

It is considered beneficial from the point of view of companies as they don’t have to worry about the car being on their books. However, from the point of view of an employee, it may not be beneficial because one needs to pay the residual value of the car, which can be quite high under this option, at the end of the leasing tenure.

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

While the finance lease option is considered to be more favourable for employees, it is the operating leases that is preferred currently. A majority— about 60%— of the leases are operating ones and the remaining is finance leases. One of the major reasons for this paradox is that the finance leases are available only to top paid executives at a company as they command a big monthly lease rental, and so the total number of employees eligible for this option are small.

How it saves tax

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

Lease rental payments, combined with these reimbursements, can result in major tax savings. When 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 analyse this.

Say, Mr X, who works at a company with a base CTC of ₹25 lakh, leases a car worth ₹16 lakh for 48 months. The monthly lease rental works out to ₹43,800 (as per data provided by car leasing companies), totalling ₹5.25 lakh over one year.

The taxable salary after accounting for lease rental deduction and the standard deduction of ₹50,000 comes to about ₹19.24 lakh and the tax liability on this income is ₹3.14 lakh. On the other hand, if one buys the same car upfront, the tax liability be ₹4.72 lakh. By leasing, the employee is saving about ₹1.57 lakh in taxes every year. Note that some employers provide reimbursement for fuel as well as driver’s salary and claiming them would increase your tax savings by ay an additional 10-15%. However, this tax sop is not exclusive to the leasing route and can be claimed by even a car owner by submitting invoices for actual expenses incurred on driver salary and fuel to avail deductions.

When the lease ends, the employee has the option to buy the car by paying the residual value, which, in the above example, is about 5% or ₹80,000. Even after paying the residual value, the total cost of the car works out to about 80% of the original upfront cost .

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

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

When the car is in the company’s name, the employee has the option to either surrender the car and take a new lease at the new firm he has joined or buy out the car by paying the remaining amount plus transfer charges and get a No Objection Certificate (NOC) to enjoy the tax benefits. One can also transfer the lease to a co-worker in the current company before switching 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 to not commit to the car after the lease tenure has ended This would mean that you own a car for a short period but don’t have to bear the depreciation drawback that comes with full ownership.

With inputs from Nitesh Buddhadev, founder, Nimit Consultancy.