Are you a salaried employee eyeing an upgrade to a sleek SUV but hesitant due to the high ownership costs? If the thought of a large down payment and hefty car loan EMIs is deterring you, consider this alternative. Unlike a home loan, a car loan doesn’t offer any tax benefits, making it less appealing. So, why not lease an SUV through your employer instead? By choosing to lease, you can enjoy the benefits of driving a new vehicle without the financial strain. At the end of the lease term, you can own the SUV while also saving several lakhs in taxes along the way!

In general, there is a common perception that corporates save taxes primarily by claiming business expenses. However, individuals with a deeper understanding of taxation rules can also significantly reduce their tax liability in a legal manner. There are several strategies available for tax optimization, and one such method is utilizing tax savings through a car lease.

Leasing a car through your employer unlocks a lesser-known tax benefit available to salaried professionals and business owners alike. For employees, opting for this strategy can lead to tax savings ranging from 20% to 40% of the car’s value, making it a smart financial move.

How Car Leasing works?

Car leases can be classified into two types based on the ownership of the vehicle between the leasing company and the employee: operating lease and finance lease.

Operating Lease

In an operating lease, the car is registered in the leasing company’s name, allowing employees to either upgrade or purchase it by paying the residual value at the lease’s end. This benefits companies as the car doesn’t appear on their balance sheets, offering asset management flexibility. For employees, though, the substantial residual payment can be a drawback. While leasing offers tax savings and lower EMIs, the final payment might diminish those benefits if they choose to buy the car.

Finance Lease

In contrast, under a finance lease, the leasing company, employer, and employee enter into a tri-party agreement. Here, the employer acts as the lessee, and the employee becomes a co-lessee. The car is registered in the employee’s name, and ownership is transferred to them at the end of the lease period. The key advantage of a finance lease for employees is that the residual value they need to pay is generally lower, typically around 5-10% of the vehicle’s original price. However, the downside is that the lease rentals in a finance lease are significantly higher compared to an operating lease.

Although a finance lease is more favourable to employees due to lower residual payments and eventual ownership transfer, it remains less popular in practice. Around 60% of car leases are operating leases, with finance leases comprising the remaining 40%. This preference for operating leases is primarily driven by the fact that finance leases are generally offered only to high-earning executives, given the steep monthly lease rentals. Consequently, the pool of employees eligible for finance leases is limited.

How Does Corporate Car Leasing Benefit Employees?

1. No Down Payment Required For Employees

The car you acquire through a lease is funded by the leasing company, which means you don’t need to make a down payment as a lessee. This makes the leasing company the primary owner of the vehicle. All costs related to the car—such as accessories, on-road expenses, and insurance—are included in the lease payment, and the leasing company takes care of them.

2. All Vehicles Experience Increased Maintenance & Repair Expenses

Vehicles naturally experience wear and tear over time, leading to increased maintenance and repair costs. In a wet lease, the leasing company assumes responsibility for these maintenance expenses, ensuring the lessee is not burdened with additional costs. However, in a dry lease, the lessee is responsible for covering all maintenance and repair costs during the lease term.

In an operating lease, the leasing company typically bears the risk of depreciation and vehicle maintenance. In a finance lease, while the employee enjoys lower residual costs, they may bear some maintenance responsibilities, particularly if the car is registered in their name.

3. Easy Car Replacement

Through a car lease or auto lease agreement, individuals are afforded the flexibility to substitute or upgrade their vehicles at the time of lease renewal. This option enables businesses to provide their employees with enhanced comfort and safety, ensuring a more efficient and secure driving experience throughout the lease term.

Operating leases offer flexibility for employees who wish to upgrade their vehicle regularly, with no concerns about ownership transfer. In contrast, finance leases are ideal for those planning to own the car at the end of the term.

4. Savings on Taxes

Opting for a car lease can reduce taxable vehicle expenses by up to 30-40%. To qualify, the employee must demonstrate consistent, business-related use of the vehicle. This eligibility opens the door to various tax benefits, including savings on the lease, fuel reimbursements, and potential adjustments to the driver’s salary. Note: The full benefits of this advantage will be outlined later in the article, showcasing how it can lead to significant savings.

In both types of leases, employees benefit from tax savings as the lease rentals are deducted from their pre-tax salary. However, the higher monthly rentals in a finance lease may slightly offset these tax savings.

5. Easier Approval Compared to Auto Loans

Car loan approvals can take several days, but with a car lease, you can secure approval within 24 hours, all without the need for extensive paperwork.

6. Insurance Coverage For a Car Lease

When you choose a car lease, your monthly installment includes comprehensive insurance coverage, which encompasses repair and maintenance costs, theft, and accident protection. The lessee is not responsible for insurance renewals, providing peace of mind throughout the lease term.

Maximizing Tax Savings: How Car Leasing through Employer Works

Many companies provide employees with the flexibility to adjust their salary structure to optimize tax savings. Employees, particularly those in the highest income tax bracket, can benefit from opting for a car lease through their employer instead of securing a traditional auto loan. This option offers significant tax advantages.

Under this arrangement, the employer leases the vehicle on behalf of the employee and deducts the lease rental amount from the employee’s salary. The employer makes the lease payments directly to the leasing company, and these payments typically form part of the employee’s Cost to Company (CTC). However, as these payments are made directly by the employer, they are not considered taxable income for the employee. Consequently, employees can achieve substantial tax savings on the lease rental component.

In addition, some employers may cover costs such as fuel, maintenance, and insurance as part of the lease arrangement, further enhancing the employee’s savings.

Note: To fully understand the calculations, it is crucial to first familiarize yourself with the relevant income tax provisions before proceeding to the example.

Income Tax Provisions

When the car provided by the employer is used for both personal and official purposes, the associated expenditure is assessed under Rule 3(2)(A) and Table II of the Income Tax Act, which outlines the valuation of perquisites. The table below provides further details on how such benefits are taxed.

Section 115BAC of the Income Tax Act has been applied to calculate tax on income.

Let’s take example,

An individual with an income of ₹25 lakhs is considering purchasing a car valued at approximately ₹10 lakhs (with an engine cubic capacity of less than 1.6 litres). The yearly car lease and the running and maintenance cost is assumed to be ₹4.2L and ₹4.8L respectively. This assumption is based on an analysis of lease policy data from various companies. The lease period typically ranges from 3 to 5 years. For the purpose of this example, we have assumed a 3-year term.

The two available options are:

1. Direct Purchase: In this option, the individual would purchase the car outright using their post-tax disposable income. The individual would also bear all running and maintenance expenses, which in this case are estimated at ₹4,80,000 (including driver expenses) over a period of three years.

2. Lease Option: Alternatively, the individual can choose to lease the car for a period of three years under terms set by their employer. Under this arrangement, the employer reimburses the running and maintenance expenses (₹4,80,000 in total). The employee’s salary is reduced by the lease rental payments, while the running and maintenance costs are covered.

1. Under direct Purchase option

Year 01

Year 02 & 03

Total Disposable Income of 3 years = 5,52,000+ (15,52,000*2) = Rs. 36,56,000

2. Under lease option through employer

CTC structure under lease option

In the case of the lease option, the car lease is considered a perquisite, and the value of the perquisite is assessed under Rule 3(2)(A) and Table II of the Income Tax Act, as previously discussed.

The calculation of the taxable value of the perquisite for a car used for both personal and official purposes is as follows ( For better understanding Refer Income tax provision which is mentioned above )

Value of Taxable Perquisite
= (₹1,800 + ₹900) * 12 months
= ₹32,400

Now, the total taxable income, considering the basic pay and the perquisite value, will be:

Total Taxable Income
= Basic Pay + Value of Perquisite
= ₹16,00,000 + ₹32,400
= ₹16,32,400

Year 01 & 02

Year 03

In the 3^rd year employee takes the car by paying residual value which vary 5% to 10% of original price of the car. We assume that the residual value is 10% of original price of the car.

Total Disposable Income of 3 years = (14,35,100*2) + 13,35,100 = Rs. 42,05,300

Saving via Lease route = Rs. 42,05,300 – Rs. 36,56,000 = Rs. 5,49,300

Note: Readers interested in this option should familiarize themselves with their company’s policy regarding the program. There are limits on vehicle value, maintenance, reimbursements, and other related expenses, which may vary based on the employee’s position. Below is the car lease policy for employees of Mahindra company (Just for knowledge purpose).

Read the car lease Policy of Mahindra.

Conclusion

In both scenarios, whether through direct purchase or the lease option, the car is eventually owned by the employee. However, by opting for the car lease program, the employee can realize significant savings. In this example, the employee would save ₹5,49,300 by choosing the lease option.

This substantial saving arises due to the tax benefits associated with the lease arrangement, where the lease payments are deducted from the employee’s salary and the value of the car is treated as a perquisite, leading to a reduced taxable income.

At the end of the lease, employees have the option to purchase the car for a nominal amount—just 10% in this case. Some choose to take ownership, then sell the car, often at a high resale value, especially if it’s a luxury model. The benefits stack up: you’ve saved on taxes, earned additional income from the sale, and now you’re ready to enjoy the experience of driving a brand-new car. It’s a win-win that maximizes both your financial gains and driving pleasure.

Therefore, it is highly recommended to opt for the car lease program if offered by the employer, as it provides both tax efficiency and financial savings over the traditional method of direct car purchase.

No system is without its flaws—every one has its loopholes. The key is to leverage these gaps to your advantage. Always remember, money saved is money earned. To truly succeed, we need to be strategic and smart in managing our finances, turning every opportunity into a step toward financial growth and security.