If you’re looking for a new ride, the decision between leasing and buying a car can be a tough one. It all boils down to finding the right balance between short-term affordability and long-term financial considerations.
How does leasing work?
This gives you the convenience of taking home a new car without any hassle or making a downpayment. You will have to pay monthly installments till the time you keep the car. The installments cover the cost of the vehicle, insurance, maintenance and other recurring costs.
At the end of the lease term, the lessor may allow the user to purchase the vehicle at the prevailing market price. This position may vary across markets. There is no additional cost for insurance and taxes apart from the lease amount charged by the lessor.
When you lease a vehicle, the vehicle is maintained by the company that owns the vehicle. You will not have to spend anything extra on regular vehicle maintenance and repairs.
pay for use model
Car leasing follows the payment for usage model where you pay only for the period during which you use the car. Here, the period of use is pre-determined and is agreed upon by the lessor and the lessee. Once the usage period is over, you can hand over the vehicle to the owner and stop paying your instalments. Insurance charges are also included in the installment amount that you pay to rent a car. You can get comprehensive insurance coverage against all types of repairs, accidents, theft etc. The minimum lock-in period is 2 years and the maximum is 5 years.
Monthly rent usually includes the following:
This varies from company-to-company, but most comprehensive corporate plans cover the following:
Lifelong Repairs and Maintenance
Pick up and drop facility
replacement car facility
full term insurance
Two types of leasing model:
There are two types of leasing models – finance lease and operating lease. Corporates generally follow the operating lease model where you either return the car to the lessor or buy it at the prevailing market price at the end of the lease term. The finance lease model transfers the ownership of the car to your name at the end of the tenure.
Tax Benefit: The lease amount you pay for the vehicle is eligible for tax relief. Hiring a vehicle can help you save up to 30% on your taxes. This is applicable for self-employed as well as salaried professionals.
If the lease rental of the car is part of your salary package, it means that the lease amount will be deducted from your salary before paying tax, thereby reducing your taxable income and giving you a substantial tax benefit compared to someone who Will get who has not done this. Opted for this benefit. For example, your salary package is Rs.25,00,000 per annum. Out of this, Rs 4,80,000 is your car lease amount, and another Rs 39,600 is allocated towards car maintenance, insurance, fuel and driver allowance. So in total Rs 5,19,600 will be deducted from your taxable income and you will have to pay tax only on Rs 20,59,600.
From a purely mathematical point of view, unlike home loans, car loans do not offer tax deductions. However, for salaried employees, renting a car can save 20-40% tax on the value of the car.
For example, if your CTC is Rs 30 lakh per annum, and your car rent is Rs 5 lakh, assuming no other deductions, your gross salary for taxation purposes is Rs 25 lakh. After including the standard deduction of Rs 50,000, your taxable income is Rs 24.50 lakh. Since you are in the 30% tax slab, your tax liability will be Rs 7.35 lakh. Instead, if you had bought the same car, you would not have got any tax deduction. Your gross salary to taxation will be Rs 30 lakh. After standard deduction, your taxable income will be Rs 29.50 lakh, and your total tax liability is Rs 8.85 lakh. So, by leasing, you save Rs 1.5 lakh in income tax,” said Ajinkya Kulkarni, co-founder and CEO of Vint Wealth.
Typically, the car lease agreement is between 3-5 years depending on the policies of the employer. During this time the employee pays the pre-determined lease rent instead of the car loan EMI. When the lease expires, the employee can buy the car by paying the balance amount or can also opt for another car. Hence, there is additional flexibility which you do not get while buying a car.
You have the flexibility to upgrade your model and once the lease plan ends, you can return the car to the company and get another car of your choice.
Let us now find out your monthly expenses, if you rent a car and if you buy a car by taking a loan
How much will it cost you to rent a car whose on-road price is Rs 13 lakh?
Note: The table is provided by Bankbazaar.
The lease rental value shown in the table is an approximate average value calculated from the websites of various car lease rental companies allowing a total car run of up to 15000 kms per year. It is assumed that the car owner falls in the highest tax bracket and the deduction from the lease amount reduces his taxable income.
How much will it cost you per month if you buy a car through loan?
Note: 1st year free service, Maintenance cost for 4 years + Miscellaneous cost per year = Rs.15000; Battery cost = Rs 5000; The costs like insurance, repairs, servicing charges etc. shown in the table are approximate prices and may vary depending on the type of car, brand, city, car run, driving conditions and many other factors.
Depreciation on the car is assumed at 20% per annum. The calculations shown in the table are for example only. It is assumed that the car has not suffered any kind of damage or accident during the ownership period.
When Leasing a Car Doesn’t Make Sense
If you like road trips etc, then leasing is not a good option as there is a limit on the number of kilometers you can drive. For example, if your monthly range is 666 km, that works out to about 22 km per day. And if you exceed this quota, you will have to pay Rs 7.2/km as an additional charge.
Furthermore, you must first notify the company and obtain email approval in order to install any accessories. Also, if the car is damaged due to the installation of accessories, then you may have to bear the cost of the same.
Car leasing is also expensive as many companies charge a penalty fee in case you leave the company midway or end the lease before the end of the lease term.
“Leasing offers low initial payments and monthly instalments, making it a viable option for those who cannot afford the upfront payments. This means you can access higher-end vehicles that would normally be out of reach. However, it is important to keep in mind that mileage limits and additional charges can add up to costs in the long run and you may not own the car, said Adhil Shetty, CEO, BankBazaar.
On the other hand, buying a car requires a higher initial down payment and monthly instalments. But with ownership comes the freedom to customize the car to your liking and lifestyle. However, you will also be responsible for bearing all maintenance and repair costs after the warranty expires, and you bear the risk of depreciation affecting the resale value.
“If you value long-term stability and ownership, then buying a car can be a better option financially,” Shetty said.