Given the choice to opt, a salaried individual always have a dilemma whether to Buy or Lease a car offered from company. Of course, it is quite common for individuals to state that having a car purely a ‘status’ symbol and does not count as an investment, because the very logic for this thought is straight simple i.e. Car is a Depreciating Asset. But I didn’t deny it is also a necessary asset for some.
Before getting into what to do or not to do, let us first understand the technicality of a Company Car Lease Policy.
Normally company car lease is treated as benefits to certain eligible employees who have completed some 2-3 years in the organisation or have at least met some criteria laid by the employer. Employer gets into a tri-party contract with leasing company/bank to provide vehicles to their staff, and employee for tenures between three and five years. Company only provides the guarantee while interest and actual amount must be paid by the applicant. There is a minimum tenure to be served for this lease agreement.
In case employee leaves the organisation whether after servicing complete lease tenure or before, the employer will not release the employee end of service benefits until the employee brings the clearance from the leasing company (as company has provided the guarantee). Even in case of on termination it will be on bank/leasing company either demand the remaining amount from the employee or continue the leasing service or ask for any other guarantee.
What you may find in Car Lease over Buying a Car
No worry of Maintenance, Service and Insurance: Employee no need to break his/her head for all paper work and servicing the vehicle which will be taken care by Leasing Company. Employer will cover such expenses, but it is up-to the employer’s car policy whether such benefits are given throughout the life of the lease or just first year or first few years. Later it may be treated as a reimbursement under vehicle maintenance.
Lower Monthly Outflow compare to Car Loan EMI: Monthly lease amount is always lower than the Bank EMI because lease amount is calculated after reducing residual value of car wherein Bank EMI is calculated on full amount of car. In general terms, the higher the residual value the lower the monthly payments.
Car Lease Tenure Completion: once lease tenure is over you left with option of either buy car or take any other car on revised lease. If you opt to buy the same car from company you need to pay residual amount of car which is generally between 25%-45% basis on company policy.
Why shouldn’t you opt Company’s Car Lease:
- If you are among those many, who do not wish to be attached to the job for long term and keep switching from time to time, then don’t opt for such plans. Because you might end up paying penalties, interest in addition to outstanding principal. Unfortunately, if your lease doesn’t get transferred to new employer, you have to pay whatever amount the leasing company demands.
- Sometimes, on resignation, the employee who has availed car under this policy will have to buy the same at the residual value. In case the employee is not able to buy the car, then the employer might do some arrangement to sale it to a third party, and any losses on such sale gets recovered from the full & final settlement payment of the employee. If you are not ok with this, then car lease policy is not ok for you.
- If you are under lower tax bracket, say 10% then this is not beneficial for you.
Taxation attached to Car Lease: When you own a car there is no tax benefit available, but if you take car on lease from company and using for both official and personal purpose, you may avail following tax benefits;
- The EMI paid by your employer to the leasing company is deducted from your monthly salary resulting in reduction in your taxable income.
- Further, reimbursement of expenses associated with the car (such as driver’s salary, fuel, repairs and maintenance) are also considered as non-taxable.
- Perquisite value of such facility is added to your taxable income. Perquisite value is equal to Rs 1,800 per month if the cubic capacity of car is up to 1,600. For more than 1600 cubit capacity, the perquisite value is Rs 2,400 per month. Further, Rs 900 per month is added if a driver facility is also provided.
- Conveyance allowance exemption will be not be available for person using this facility.
Taxation attached with own car: If the employee is using his own car for both official and personal purposes, the taxation goes up significantly. In this case, the deduction allowed will be only Rs 1,800 or Rs 2,400 (as explained in above point).
What should you do? Buy or Lease
Well! It all depends on the cost value analysis between actual offers/terms available under these two options along with personal circumstances. As experiences shared by different readers, sometime car policy worked out to be the best deal and for some it was a big loss because after completion of lease tenure the car resale value gets reduced and on sale you incur huge loss (even factoring all benefits taken earlier).
The general rule of thumb is that if you are a consumer that changes vehicles every two, three or four years, leasing is a highly attractive option in most cases, though not all. The longer you keep your vehicle the more attractive loans (if you are buying) become.