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Should I go for car leasing option offered by my company or buy my own car?

Car Lease

Car leasing is becoming popular among employees who are planning to buy their car through bank loan. Company provides option to employees to buy car- any make any model as per employee eligibility accordingly to company car lease policy depending upon employee’s grade. Best thing is that employee needs not to pay any down payment. Employee simply starts paying lease amount on monthly basis. It is becoming a prominent option in compensation structure of high paid employees. This is offered to employee as an option and it is employee wish to choose or not to choose.

Now question is “Car leasing is a good option for employees? Lets understand first, what is this car leasing plan all about?

Employer ties up with a car leasing company which provides cars on lease and design a company policy for car leasing. If an employee who is eligible for car leasing option can express his willingness and mention model and make of car to buy. Leasing company will buy the car for employee and give it to employee for use – both official and personal. Car will be in name of leasing company. Employee will pay monthly lease amount to leasing company which is normally lower than EMI, if employee goes with bank loan option. Car lease period normally range from 3 to 5 years. After lease period is over employee can either choose to buy the car by paying agreed residual price (20% to 45% of car purchase value) depending upon company policy or let the leasing company keep it. Employee can go for another lease or buy a new one.

What are the benefits to employee?

No down payment is required

Employee need not to make any down payment to lease the car. This is a clear cut saving and employee can use this amount anywhere else. Employee can also make a fixed deposit of this down payment amount and can get good interest rate. Employee enjoys his new car from day one without being worrying arrangement for down payment.

Lower monthly lease amount as compared to Bank EMI

Lease amount paid to lease company is always lower than Bank EMI. Lease amount is calculated after reducing projected sale value of car after lease period wherein Bank EMI is on full value of Car.

Employee need not to worry about car maintenance, service and insurance etc

Employee need not to worry about any paper work, car maintenance, regular service, insurance etc. Leasing company take cares of the same and it is including in monthly lease amount payable by employee. There are options available to not to take maintenance option where monthly lease amount will further reduce but employee need to take care of maintenance of vehicle. Lease companies do also provide break down assistance, replacement car in case car service take more than 24 hours, Chauffeurs etc.

It saves a lot of time of employee.

Tax saving on lease amount paid by employee

In case an employee pay Rs 20,000/- per month as car lease and employee falls in 30% tax bracket then employee clearly saves Rs 6,000/- per month on tax (30% of Rs 20,000). Hence it is clear that car leasing is more beneficial to employees who fall under higher tax bracket. Employee who falls in lower tax bracket like 10% will not be that much beneficial.

Wherein if an employee takes bank loan and pay EMI of Rs 20,000/-, then employee will not get any tax benefits as employer will deduct tax on Rs 20,000.

Further, employee can also take fuel expenses and driver salary from company if an employee use the car for official purpose and this will be non taxable money. Hence further tax saving. Commuting from Office to home and vice versa will not be considered as an official travel and fuel expense can not be claimed against the same.

Benefits are more if employee stays with company for longer period

Return on Car lease option is higher if employee stays with company for longer period and do not change the job again and again.

What are the cons for employee in car leasing?

Car is not owned by employee even after lease tenure is over

Even after your car lease tenure is over car do not belongs to you. It is still company’s property. After lease period is over employee can either choose to buy the car by paying agreed residual price (20% to 45% of car sales value) depending upon company policy or let the leasing company keep it. Employee can go for another lease and buy a new one where in case of Bank Loan, Car is owned by person after loan period is over.

Interest rate is higher in leasing as compared to Bank Loan

Interest rate is higher in leasing as compared to Bank Loan. Monthly Leasing amount is lower because it is calculated on car value after reducing projected sale value of car after lease tenure wherein Bank Loan EMI is calculated on 100% car sale value from day one. That’s the reason lease amount is lower wherein lease interest rate is higher.

Example : If Car sale value is Rs 10,00,000 and lease tenure is 5 years and projected sale value of car @ 20% i.e. Rs 2,00,000 at end of 5 years then lease amount will be calculated on Rs 8,00,000 ( Rs 10,00,000- Rs 2,00,000).

Employee still needs to pay some tax

As per tax laws, when you use a company car, the employee has to pay a perquisite tax. For a car which is less than 1.6cc, the perquisite value is .Rs 1,800 per month; while for cars more than 1.6cc, the perquisite value is .Rs 2,400 per month. This means for a car greater than 1.6cc the employee will pay a tax of Rs 741.6 per month.

Employee cannot take tax benefit on conveyance allowance

If an employee chooses for car lease option then conveyance allowance paid to employee automatically becomes taxable. Rs 800 per month conveyance allowance paid to employee to travel between office to work and vice versa is non taxable but becomes taxable if an employee choose car lease option.

Car leasing is costlier deal if you leave the company in between or want to terminate the lease before lease tenure completion

Although, there is option available to employee to terminate the lease in between but It is always costlier affair. If an employee leaves the company then employee is left with following options:

  1. Employee need to pay amount asked by leasing company if employee want to buy the car

  2. Employee can transfer the lease to some other employee provided some other employee is willing to take that car.

  3. Employee leave the car for leasing company

Some companies do also keep penalty charges in case of mid termination of car leasing.

You become second owner if you choose to purchase your leased car

As mentioned earlier that car you choose to lease is in name of the leasing company however you have purchase option after lease period is over but in that case car will be registered in your name again and you will become second owner. For many people, this does not matter but for some it does.

Car leasing can be a good option depending upon in which tax bracket you fall into, what are your plans to be with same company for longer period or do you have money for down payment etc. It can be good deal or bad deal depending upon your case. Hope above information will help you to take your decision. Please write back to me in case you have any query.

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