When it comes to taxes, things can get slightly complicated. In the end however, we all want to pay the utmost minimum of taxes.
One of the top reasons why car leasing is becoming the brand-new method to ‘own’ cars is due to its added benefit of tax deduction. However, there may be some terms and conditions to it, slightly. For this, you need to understand how tax, car leasing and car owning works.
Remember that tax is deductible only because you are not purchasing the car.
So, how does leasing work and how is it tax deductible?
Let’s understand the difference between purchasing, loaning and leasing a car.
When you purchase a car upfront, you are paying the full on-road price of the car that you have chosen. In India, there are tax variations on cars below 10 lakh and those above 10 lakh. According to CBIC (Central Board of Direct Taxes), customers are required to pay GST on both invoice value in addition to tax collected at source under income tax rules.
Now, for whatever that may be, for the layman, it incurs extra charges that are not directly applied on the value of the car.
The same applies when you loan a car as well. Except here, you own the vehicle but the finance company or bank that you seek the loan from, will claim the vehicle till you pay off your loan and interest that is owed to the financer/bank.
In both these cases, since you are directly dealing with dealerships and directly owning a vehicle, you are eligible to pay sale taxes and even road taxes. Now if you’ve purchased a vehicle before, you know very well how expensive these taxes can get.
On the other hand, leasing means that you are not paying a single penny towards the dealership, government or towards the ownership of your car.
The only payment that you make is towards the privilege of driving a car as a daily User. You are only paying for a service that enables you to have a car for a fixed period of time. Therefore, essentially, you are paying for the cost of depreciation, some other charges, fees to the leasing company and some taxes of the service.
Also remember that, usually, you will have an option to purchase your car at the end of your lease agreement.
I hope that this clears your opinion on how leasing helps save tax. Also note that there are several benefits to leasing apart from saving on tax. You do not have to worry about maintenance or insurance charges because this will be a part of your monthly lease amount.
If you are a salaried individual, there are provisions in the law that can allow you to achieve a tax benefit of upto 30% if you can file documents to claim the entire rent as an expense. This will allow you to save much more money throughout the ownership of your car. For example, if you want to lease a car worth 10 lakh for four years, then on average you will shell out 20-25k per month as a lease payment. Note that this includes maintenance, insurance and other expenses. The same car on EMI means that you shell about 25-30k plus interest (9.5%). This amounts to about 11 lakh. And this is just including interest. The same for a lease, you would be spending less than that plus a 30% tax benefit from your application.