Car Lease: Myths, Pros, Cons

So, as with many software engineers, word "car lease" seems to be a very lucrative option. Though many hidden thoughts, clauses stroke people taking up this option. Here is an attempt to spread whatever the knowledge/research that I've got from couple of weeks. I dont want to write theories on what is all about. A simple "Google" would do it for you. 

After discussing with my brother, realized that first question to be answered before continuing further: "WHY car lease?" - Its upto individual to answer it. For some, car is a luxury and for some, its a need and for some its a happiness. So, I would leave it to you to answer this. 

Here are some of the thoughts which I had in my mind before answering "WHY":

What car means to me? Where do I place myself in next 3/5 years in terms of my career? Am I looking for changing company? Am I planning to go abroad - If yes, short or long term?  Do I get enough income after carving out EMI for the car? Do I still get exemption of 30% tax exemption or get down to 20% bracket after paying home loan?

From my perspective, its more of retention policy for the company offering leasing option. And of course, its an add-on benefit. 

Before reading further...Make sure you read this...

One thumb rule or straight forward calculation: "You definitely end up spending more to save a bit IN TERMS OF MONEY". So, here is why I highlighted: "IN TERMS OF MONEY" --> Actually, lets assume, you are in 30% bracket of tax and you want to save tax money by choosing car lease option. Now, if you buy a 9L car for a period of 3 years, you end up paying back 3L which is tax exempted there by giving a returs of 1L. But, indeed, you would end up spending 2L more  to get this 1L as a reality. Does this mean: Would pay 6L for a 9L car? "NO" is the simple answer and here is why:

In simple terms, here is how it works:

1. You need to check your eligibility on what is the max EMI that you are allowed to take up when opting for Lease with your employer. It is usually grade dependent. Some companies even offer employee can purchase more than his eligibility, but, excess amout is not tax exempted. 

2. Based on (1), select a car of your choice which is of price, lets say 9L. (assuming you are eligible to pay ~26,000 a month for a period of 35 months / 3 years) and enter a tri-party agreement - Between You, Employer and Leasing company. Hold on: Its not that simple. Many companies have a catch here which will be explained below. 

3. At the end of 3 years (time at which twists and turns start!), you either return car back to leasing company or negotiate a buy back.

So, what is more important or the decisive factor is: "Buy back policy":

When we are talking about following options, I'm excluding additional benefits such as maintanance allowance and fuel allowance on which additional tax benefits can be availed. Please check the sample calculation at the end of this article. 

Option 1:

Pay an interest of eg: 13% or 14% every month along with EMI and residual value of 1% to get the car registered in your name. 

Car value: 9,00,000
At 14% interest, you'll pay: 11,07,355  and pay ~11,000 to get it registered. 

Lets assume, we calculate 30% tax which you save as returns - 2,70,000, effectively you pay: 8,37,355. 

Option 2:

Fixed percentage of the invoice value will have to be paid at the end of tenure along with appropriate VAT on this value. Eg: 25% of the invoice value and 14.5% VAT on this value is agreed at the time of agreement. 

Car Value:  9,00,000 25% of invoice value: 2,25,000 14.5% on 2,25,000: 32,625 Total: 11,57,625Lets assume, we calculate 30% tax which you save as returns - 2,70,000, effectively you pay: 8,87,000

Option 3:

This is the trickiest and ofcourse, you are under the mercy of the leasing company - Repayment based on the residual value of the car. For Eg: if you have bought a 9L car and used it for 3 years. After 3 years, what is the net evaluation of the car, lets assume, based on usage of approx 50,000 km, it would be evaluated at 6L. Now, you would basically be asked to pay 3L + 5% addition by leasing company and 14.5% VAT on this amount = 3,58,500. 

So, you effectively end up paying: 9L + 3,58,500 = 13,58,500 as a net value of the car. 

@30% tax returns: 13,58,000 - 2,70,000 = 10,88,000




If you dont have a car or dont have a loan on existing car, then except option (3), If you are paying a home loan and you still end up staying in 30% bracket, then definitely you are on a positive side. 

Here is a sample calculation with option (2) for a period of 35 months on a 30% bracket. 

Car Value: 9,00,000
Fixed residual value to be paid to leasing company: 2,57,625

Total: 11,57,625

EMI per month for 9,00,000: 25,715

Tax savings on 9,00,000: 2,70,000/35 = 7,715
Avg fuel usage per month and 30% tax savings: 3,000: 900
Car maintainance allowance (After taking out 30% tax for 6,000): 4,200 

Effective EMI: 25715-7715-900-4200 = 12,900

Overall: 11,57,625-3,00,000-31,500-147,000 = 679,125

But, most of the companies pay fuel allowance and car maintanance allowance on quarterly basis. So, effectively, cash inflow per month is reduced (Savings on other hand :) )

Now, lets assume, you get the car on loan outside your company:

Downpayment: 1,00,000
Interest: 11%
At the end of 3 years: 10,42,875
With this, you dont save tax and would end up paying ~1.5L extra on your car value.

As far as I understood, home loan tax exemption is calculated after deduction of car lease EMI. Please check with your employer on this. 

Hope this information helps each one of you looking for a car lease.