Already popular in the corporate world, personal car leasing has become much more popular in India for self-employed individuals and professionals who run their own practice to lease a car; and there are plenty of benefits to it.
What is leasing?
A lease gives you the right to use a vehicle for a pre-determined tenor and/or distance against payment of monthly fixed lease rentals. Typically, a lease is for two-five years. There are two kinds of leasing contracts. In operational leasing, all you have to do is buy the fuel; the other details - maintenance, insurance, repairs, and more - are taken care of by the leasing company. Another option is that of financial leasing - where you can look at buying the car from the leasing company at the end of the lease period.
How does it work?
The lease will have to be taken in the name of your company. Though there is no down-payment and security deposit, you do have to submit a few documents of your company - financial statements, Article of Association, Memorandum of Association, address proof, and so on.
Lease rental is calculated based on residual value-based funding. Residual value is the estimated (estimate is based on multiple factors - car model, city of registration, tenor, kilometers, etc.) percentage of the on-road cost of the car at the end of the lease term. Residual value is deducted from the total cost of the lease. At the end of the lease term, you will have the option to purchase the car at the estimated residual value.
Factors determining the monthly lease rentals - tenure of the lease and the annual usage. The higher the tenure and distance travelled in a year, the higher will be the lease rental and vice versa.
Benefits of leasing
How leasing scores over an outright purchase is that you do not have to shell out a down-payment. Buying a car means you have to deal with down-payment as an auto loan takes care of only 80-85% of the value of the car. Also, in a lease plan, leasing companies give you the option to cover for maintenance of the car at a nominal fee (which is added to the monthly lease rentals).
For self-employed and professionals, there is a tax advantage to leasing. When your business take a care on lease, the entire money paid as rental can be claimed as deduction.
The bottom line
Leasing offers convenience, but the financial benefits to it will not be the same for everyone. Taxation should not alone be the reason to opt for a lease. Make sure you do the math and weigh the financial benefits of leasing versus an outright purchase.