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Draft Income-tax Rules deal a tax blow on CTC Car leases

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– Chirag Agarwal, Assistant Manager | finserv@vinodkothari.com

Draft Income-tax Rules, 2026 (“Draft Rules”), intended to be applicable from 1st April, 2026, have increased the perquisite value for cars used for a mix of personal and official use, by Rs 3200 per month  and Rs 4600 per month (where the expenses for running and maintenance are borne by the employer) and by Rs 1400 per month and Rs 2100 per month (where the expenses for running and maintenance are borne by the employee), respectively for upto 1.6 litre engine cars and above 1.6 litre engine cars. This, in our reading, will be applicable even for existing car lease transactions, increasing employees’ tax burden by Rs 5,040 to Rs 16,560 per car per annum. In addition, going forward, the tax attraction of CTC car leases comes down.

The Income Tax Department has issued the Draft Rules pursuant to the already-enacted rewrite of income tax law in form of Income Tax Act, 2025, replacing the 1961 Act. Accordingly, the 1962 Rules are to be replaced by Draft Rules, to apply from 1st April, 2026. The Draft Rules are mostly the same as the extant rules; however, monetary value of perquisites, covered by Rule 15 [corresponding to Rule 3(2) of existing Rules] is proposed to be enhanced significantly. Thus, there is a significant change in the valuation of perquisites relating to motor cars. 

As per the Income-tax Act, the value of perquisites provided by an employer (such as the use of a motor car provided by the employer) is added to the employee’s taxable income under the head “Salaries”. The Draft Rules propose an increase in the perquisite value attributable to the use of a motor car.

The proposed increase in perquisite valuation would result in a higher taxable perquisite value in the hands of employees, thereby increasing their taxable income. The CTC-based car leasing model, which is a distinctive feature of the Indian tax framework and has been widely used for several decades, derives its attractiveness from the favourable rules governing the valuation of perquisites, which reduce the employee’s taxable income. Any upward revision in such perquisite valuation is therefore likely to reduce the tax benefits associated with this structure and may adversely impact the overall attractiveness of CTC-based car leasing arrangements.

CTC leasing of passenger cars alone is nearly Rs 9000 crores annual volume business in India, constituting roughly 1.5% of passenger vehicles sold in the country. If the Draft Rules are notified in their current form, the revised valuation norms will take effect from April 1, 2026 and will apply not only to new arrangements but also to all existing CTC car leasing arrangements. Based on a broad estimate, this change could result in an additional tax outflow of approximately ₹36 crores to ₹81 crores annually for employees under the existing CTC leasing arrangements. 

This article explains the proposed changes and what they could mean for CTC-leasing going forward.

Taxability benefit under the CTC leasing structure

The tax benefit under the CTC car leasing structure arises from the differential treatment between 

  1. the lease rentals forming part of the employee’s CTC, and
  2. the valuation of the perquisite in respect of the use of the motor car under the Income-tax Rules. 

While the employer pays the lease rentals to the lessor as part of the employee’s CTC, the employee is not taxed on the actual lease rental amount. Instead, the employee is taxed only on the prescribed perquisite value of the car as determined under Rule 3(2) of the Income-tax Rules, 1962. This prescribed value is typically lower than the actual lease rentals, resulting in a reduction in the employee’s taxable income.

To illustrate: Assume an employee’s agreed CTC is ₹1,00,000 per month. The employer arranges a car on lease and pays lease rentals of ₹25,000 per month to the lessor, which forms part of the employee’s CTC. Accordingly, the employee’s cash salary reduces to ₹75,000 per month. For tax purposes, however, the employee is not taxed on the full ₹25,000. Instead, only the notional perquisite value of the car (as prescribed under Rule 3(2)) is added to his taxable income. The difference between the actual lease rentals and the lower perquisite valuation results in a tax arbitrage, which forms the economic rationale for the popularity of the CTC car leasing model.

Proposed Changes and Impact

The Draft Rules prescribe a higher perquisite value for the use of a motor car owned by an employer to be included in the taxable income of employees where it is used partly in the performance of duties and partly for private or personal purposes of the employees or their household members. The proposed revisions are summarised in the table below:

Expenses on maintenance and running met byCubic capacity of engine does not exceed 1.6 litresCubic capacity of engine exceeds 1.6 litres
ExistingProposedExistingProposed
Case I
Employer		₹1,800 + ₹900*₹5,000 + ₹3,000*₹2,400 + ₹900*₹7,000 + ₹3,000*
Case II
Employee		₹600 + ₹900*₹2,000 + ₹3,000*₹900 + ₹900*₹3,000 + ₹3,000*

*In case chauffeur is provided to run the motor car by the employer.

The proposed increase in the perquisite valuation of motor cars under the Draft Rules is likely to have a direct impact on the economics of the CTC car leasing model.

From the employee’s perspective, the proposed increase would result in a higher taxable perquisite being added to taxable income. The tax arbitrage that makes CTC car leasing attractive, i.e., the gap between the actual lease rentals and the lower notional perquisite value, is expected to narrow. As a result, the net tax savings available to employees under this model will be reduced. Below we have presented the likely impact with the help of two examples:

Example 1: 

  • Lease rental: ₹25,000 per month
  • Engine capacity: 1.7 litres
  • Mixed use
  • Expenses on maintenance and running are met/ reimbursed by the employer
  • Tenure: 1 year
ParticularsExisting RulesDraft RulesImpact (Increase)
Annual CTC₹12,00,000₹12,00,000–
Lease Rental (part of CTC)₹3,00,000₹3,00,000–
Cash Salary Paid₹9,00,000₹9,00,000–
Perquisite Value Taxable₹28,800₹84,000₹55,200
Total Taxable Income ₹9,28,800₹9,84,000₹55,200
Tax @ 30% slab (excluding cess)₹2,78,640₹2,95,200₹16,560

Example 2: 

  • Lease rental: ₹25,000 per month
  • Engine capacity: 1.5 litres
  • Mixed use
  • Expenses on maintenance and running are met/ reimbursed by the employee
  • Tenure: 1 year
ParticularsExisting RulesDraft RulesImpact (Increase)
Annual CTC₹12,00,000₹12,00,000–
Lease Rental (part of CTC)₹3,00,000₹3,00,000–
Cash Salary Paid₹9,00,000₹9,00,000–
Perquisite Value Taxable₹7,200₹24,000₹16,800
Total Taxable Income ₹9,07,200₹9,24,000₹16,800
Tax @ 30% slab (excluding cess)₹2,72,160₹2,77,200₹5,040

It shall be noted that employers would not incur any additional tax cost on account of the proposed changes, as the CTC paid to employees, including the lease rentals, would continue to be allowable as a deductible business expense. 

Conclusion

The Draft Rules materially raise the perquisite valuation of employer-provided cars, pushing up the tax outflow for employees opting for CTC-based car leasing. Since the revised valuation (if notified) will apply even to existing leases from 1 April 2026, the tax efficiency of the CTC car lease model would stand materially reduced, impacting both the attractiveness and economics of such arrangements going forward.
 

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GST changes: Double dhamaka for car lessees; lessors to have elongated input tax recovery

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– Vinod Kothari & Jigisha Aggarwal | finserv@vinodkothari.com

GST changes announced vide 56th meeting of the GST Council dated Sept 03, 2025 have brought cheers to the entire country; however, for lessees of motor vehicles where rates of GST have been reduced (the extent of reduction being from 5% to 10% in most of the cases – reduction of rate from 28% to 18%, and the doing-away of the compensatory cess in others), the lessees of motor vehicles have unusual reasons to be cheered. At the same time, lessors who have existing leases of motor vehicles will have some present value losses. This article explains.

Futuristically, this reduction in GST rates on automobiles can benefit both lessor and lessees, as hopefully, the demand for motor vehicles will increase, and so will opportunities of leasing. However, there is a surprise bumper for the lessees who have currently on-the-run leases of vehicles – their rates of GST, going forward, will come down, even though the vehicle may have been acquired prior to the 22th September, 2025. Thus, while for the rest of the country, one has to buy a car to enjoy the rate reduction, lessees of existing motor vehicles also stand benefitted. Our article explains how.

On the other hand, for lessors, there will be a present value loss. With reduced GST rates, the initial outlay for the lessor, paid at the time of acquisition of the vehicles, will take longer to be recovered in the form of lease rentals – hence, the lessors will suffer a present value loss.

On an estimate, roughly Rs 6000 crores to Rs 8000 crores of car leases are done by lessors in the country; the outstanding volume of leases may be almost Rs 20000 crores. 

Post-22 Sept benefit for others; lessees of existing leases also stand benefited

For anyone else to take the benefit of the rate drop, you need to buy a vehicle on and from 22 Sept. 2025. However, for lessess of  existing lease transactions, the reduction in GST rates from 28% to 18% translates into a financial benefit and they clearly stand benefitted from the reduced GST rates. Lease rentals billed on/ after Sept 22nd, will attract lower GST rates which implies total periodic payment by the lessee reduces. 

Wondering why is it so? This is because while a lease is regarded as a “supply of service”, however, the rate of GST on leases of goods are aligned with the rate of tax on the sale of the respective goods. Hence, if the GST on cars is currently 28%, the rate of tax on lease of the car is also 28%, payable periodically as the rentals accrue. Thus, irrespective of the original purchase date of the vehicle, post 22nd September, the GST on existing leases will drop down, giving an unequalled bounty to the existing lessees.

Present value loss for lessors

When a lessor purchases a vehicle, he pays GST upfront at the time of purchase, on the entire purchase price of the vehicle. This GST paid becomes input tax credit for the lessor. On each periodic lease rental, he collects GST from the lessee. Lessor offsets this output GST collected from the lessor against the input tax credit. In case of lease transactions entered into before Sept 22, 2025, reduction in rates of GST would mean that lessor will need longer time to recover his input tax from the lessor. 

The reason being the vehicle was purchased at the higher GST rate (for instance 28%) and the lessor could avail ITC accordingly. However, Sept 22, 2025 onwards, the output GST collected periodically would reduce, for instance, would be collected at the reduced rate of 18%.

Therefore, the lessor will now take longer to fully recover the input tax credit by offsetting it against a lower input tax.

The same can be understood with the help of below mentioned illustration. Let us assume that the lessor had purchased a vehicle before Sept 22, 2025 and paid GST @28%.

ParticularsLease arrangement before Sept 22, 2025Lease arrangement on/ after Sept 22, 2025Impact
Cost of vehicle11,40,00011,40,000No change
GST= 1140000*28% = 319200= 1140000*18% = 205200Reduced by 1,14,000
Monthly lease rental30,00030,000No change
Monthly GST collected8,400 (28%)5,400 (18%)Reduced by 10%
Total GST collected in 12 months1,00,80064,800Reduced by 36,000
Total lease revenue (incl GST)4,60,8004,24,800Reduced by 36,000
Number of months taken to recover ITC319200/8400= 38 months205200/5400 = 38 months

In case of lease arrangement before Sept 22, the lessor was able to recover input tax of Rs 319200 in 38 months. Under the revised rates, the rate of GST on the existing leases will come down and will be Rs 5400 per month. Therefore, it will take almost 59 months to recover the ITC originally paid. Therefore, there will be a present value loss for existing leases, which would not have been priced by the lessors at the time of the original contract.

Changes under the automobile sector at a Glance

The supply of services involving the leasing, renting, or transfer of the right to use goods is liable to attract the same rate of GST and compensation cess (which is now removed) as applicable to the supply of similar goods involving transfer of title, i.e., a supply of goods. This provision forms the basis for applying goods-equivalent tax rates to leasing transactions, despite their classification as services under GST. For a detailed understanding of GST implications on lease transactions, you may refer to our article here.

Since it has been decided to end the compensation cess levy, the compensation cess rate is being merged with the GST so as to maintain tax incidence.

As per FAQ No. 35 of the FAQs on the decisions of the 56th GST Council held in New Delhi issued by the Ministry of Finance, currently mid-size and big cars attract 28% GST and compensation cess ranging from 17-22% which makes the overall tax incidence ranging from 45-50%. Since the new GST rate on mid-size and big cars will be 40% with no compensation cess, the overall tax incidence has reduced by 5%-10%.

S. No.DescriptionEarlier rateNew rate
Rates reduced
1.
Petrol, LPG or CNG driven motor vehicles of engine capacity not exceeding 1200cc and of length not exceeding 4000 mm.28%18%
2.Diesel driven motor vehicles of engine capacity not exceeding 1500 cc and of length not exceeding 4000 mm.28%18%
3.Three wheeled vehicles28%18%
4.Fuel Cell Motor Vehicles including hydrogen vehicles based on fuel cell technology12%5%
5.Tractors (except road tractors for semi-trailers of engine capacity more than 1800 cc)12%5%
6.Road tractors for semi-trailers of engine capacity more than 1800 cc28%18%
7.Motor vehicles for the transport of ten or more persons, including the driver [other than buses for use in public transport, which exclusively run on Bio-fuels which is already at 18%]28%18%
8.Motor cycles of engine capacity upto 350 cc28%18%
9.Specified solar assets12%5%
Rates increased
10.Station wagons, racing cars, petrol, LPG and CNG cars of engine capacity exceeding 1200 cc or length exceeding 4000 mm28%40%
11.Diesel cars of either engine capacity exceeding 1200 cc or length exceeding 4000 mm28%40%
12.Motor vehicles with both spark-ignition internal combustion reciprocating piston engine and electric motor as motors for propulsion, of engine capacity exceeding 1200cc  or of length exceeding 4000 mm28%40%
13.Motor cycles of engine capacity exceeding 350 cc28%40%

Read More:

  1. Rentals on finance leases: To deduct it all or just the interest slice? 
  2. An Overview of GST Implications on Lease Transactions

Rentals on finance leases: To deduct it all or just the interest slice? 

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Tax accounting standard ICDS IX raises an unanswered question

– Chirag Agarwal | Assistant Manager (finserv@vinodkothari.com)

While leasing in India has developed much lesser as compared to other countries12, there is an interesting and growing line of business in India – CTC leasing, that is, lease of assets offered to employees of large companies with the rentals forming part of the employee’s CTC. The key to the tax neutrality of a CTC lease to the employer is the full deductibility of the lease rentals, as the rentals replace what would otherwise have been the employment benefit expense. But if the lease is intrinsically a financial lease, is it that the employer will still be able to expense the rentals, particularly after tax accounting standard ICDS IX, providing that the interest component of a financial lease will be treated as a cost of borrowing? CTC leasing practices in the past may have depended on some tax rulings, which pertain to the period before the applicability of the ICDS  – hence, the question is still an open one.

CTC leasing of passenger cars alone is nearly Rs 6000 crores annual volume business in India, constituting roughly 1% of passenger vehicles sold in the country.

In this article, we explore:

  • What is a financial lease? Is there a concept of financial lease, from the lessee perspective, now that accounting standards have eliminated the distinction from the lessee perspective?
  • Why is a financial lease equivalent to a borrowing transaction?
  • Why is the tax neutrality of a CTC lease to an employer important? 
  • Past rulings that may or may not hold the answer?
  • So, is ICDS IX decisive?
  • So, if ICDS IX does not apply, does ICDS I (substance over form) apply?

What is a Financial Lease and its accounting from the perspective of a lessee?

Finance Lease is an alternative to taking a loan. In this type of lease, all major risks and benefits of owning the asset are passed from the lessor to the lessee. The lessor only provides finance and keeps the legal ownership. At the end of the lease, the ownership of the equipment usually gets transferred to the lessee.

In Asea Brown Boveri vs IFCI, the Supreme Court quoted the following para from Vinod Kothari’s book Lease Financing and Hire Purchase, with approval specifying the features of a financial lease: 

“1. The asset is use-specific and is selected for the lessee specifically. Usually, the lessee is allowed to select it himself.

2. The risks and rewards incident to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset.

3. Therefore, the lessee bears the risk of obsolescence.

4. The lessor is interested in his rentals and not in the asset. He must get his principal back along with interest. Therefore, the lease is non- cancellable by either party.

5. The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period.

6. The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation.

7. The lessor is typically a financial institution and cannot render specialized service in connection with the asset.

8. The lease is usually full-pay-out, that is, the single lease repays the cost of the asset together with the interest.”

As per AS 19, in a financial lease, the rent paid is divided into two parts, i.e., finance charges and capital recovery. 

With Ind AS 116, this changed. Under Ind AS 116, the lessee will need to show all leases as a “right of use asset” (ROU Asset) along with a liability to pay rent over time.

In this case, only the lessor needs to classify leases as financial or operating. For the lessee, there is no such difference and the asset will simply be recorded as a ROU asset. This position is supported by Para 61 of Ind AS 116 which states “A lessor shall classify each of its leases as either an operating lease or a finance lease.”. Further, Paras 22 to 60A, which deal specifically with lessee accounting, do not mention any requirement for classifying leases into finance or operating categories.

Why is a financial lease equivalent to a borrowing transaction?

A financial lease is considered similar to a borrowing transaction because, in substance, it functions like a loan. The lessor recovers the full cost of the asset along with a financing return through lease rentals, while the lessee gains the right to use the asset and repays the cost over time. The lessor’s primary risk relates to the lessee’s repayment capacity rather than the asset’s residual value, making it economically similar to a borrowing arrangement rather than a traditional lease.

Why is the tax neutrality of a CTC lease to an employer important? 

The entire CTC leasing model is based on the taxation benefit, where the employer claims the entire lease rental as a deduction while computing income under “Profits and Gains from Business or Profession.” This also benefits the employee since the taxable value under perquisites is comparatively lower than if the same amount were paid as direct salary. 

However, if we were to say that the employer, as the lessee, cannot claim full deduction for the lease rental, the employer would likely prefer paying the equivalent amount directly as salary. This is because salary expenses are fully deductible, making direct salary payments more tax-efficient in such a scenario for the employer.

There is yet another way the neutrality to the employer is impacted: the employer books an ROU assset and a related OTP liability; however, that may still be okay considering the employees’ interest. However, losing a tax benefit may be an added cost.

So, is ICDS IX decisive?

ICDS IX deals with borrowing costs, which defines the same as, 

are interest and other costs incurred by a person in connection with the borrowing of funds and include:

(iv) finance charges in respect of assets acquired under finance leases or under other similar arrangements.

Hence, as per ICDS IX, the interest component of a financial lease will be treated as a cost of borrowing, and the deduction can be claimed only for the interest portion which is relevant only for the lessee.

However, as discussed above, under Ind AS 116, there is no difference between FL/OL for the lessee.  Accordingly, ICDS IX should not apply here. 

So, if ICDS IX does not apply, does ICDS I (substance over form) apply?

It may be noted that the ICAI Technical Guide on ICDS warrants that substance should prevail over the form (ICDS I). 

Hence, if we say that ICDS IX does not apply whether ICDS I should also not apply in case of financial lease? In our view, the substance of the lease would definitely matter. Even if the accounting distinction does not matter, if the transaction of lease is so structured so as to be equivalent to a loan, the deductibility of entire lease rentals would not be allowed. 

Hence, to get the benefit of deductibility, the lease shall be a true lease. The following may be considered as essential features of a true lease:

Past rulings that may or may not hold the answer?

The Supreme Court in its decision in the case of ICDS Limited Vs CIT (350 ITR 527) held that in a leasing transaction, the lessor would be entitled to claim depreciation under section 32 of the IT Act on the leased assets. On the other hand, the lessee would be entitled to claim the entire lease rentals as a deduction while computing its total income.

Similarly, in the case of Wipro Ge Healthcare Private Limited vs Assistant Commissioner Of Income Tax, 2023, it was held that the assessee is entitled to claim a deduction on account of lease rentals paid as it is a revenue expenditure on the ground that the assessee is only a lessee and the lessor is the owner of the assets leased.

A similar judgment was passed in the case of Tesco Bangalore Private Limited vs Deputy Commissioner Of Income Tax, on 23 May, 2022.

However, the case laws relate to the assessment year before the introduction of ICDS IX and hence the same cannot be relied upon now.

Thus, tax treatment of leases for lessees is still a grey area. While Ind AS 116 has made accounting simple by removing the difference between operating and finance leases, the taxability of leases still remains a question because of ICDS IX. 

Therefore, there is a need for a clear guideline by the IT dept that finally settles this question. 

Footnotes:

  1. We have discussed the evolution of leasing in India in this publication: https://www.ifc.org/content/dam/ifc/doc/mgrt/evolution-of-leasing-in-india-aug-30-2019.pdf ↩︎
  2. See India chapter in WLY 2023 volume: https://www.world-leasing-yearbook.com/wp-content/uploads/2023/12/India_WLY.pdf ↩︎

A brief on the law and mechanics of CTC based Device Leasing 

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– Aditya Iyer, Manager (Legal) | finserv@vinodkothari.com

 I. Introduction to CTC Device Leasing

The economic device of purchasing an asset, and generating revenue by leasing it out is surely nothing new. However, through innovative leverage of accounting and tax norms, market participants devise offerings that continue to add novelty to this age-old practice. Today, there is an emerging business-opportunity with respect to leasing of electronic devices, which is gaining popularity due to associated tax benefits, short-tenures, and mass-market potential. In this article, we walk the reader through the quintessential features of this model, and the tax rules that make it possible.

Many are likely familiar with the CTC car-leasing model, which is considered a unique by-product of the Indian taxation system, and has been in vogue for several decades now. It entails a reduction in the employee’s taxable income due to the rules pertaining to valuation of perquisites [see Rule 3(2)(A) of the Income Tax Rules]. 

However, this arrangement is typically only made available to employees meeting a certain salary threshold, as it entails a significant financial contribution, and time commitment, on part of the employee (the time commitment is also of note here because it would require the employee to hold their position long enough to make pay-outs continuously for the tenure of lease).

As a result, the incentives and benefits associated with this CTC car leasing model do not percolate to employees who are not able to make said commitments/do not meet said thresholds.

Likely as a response to this market gap, there is now an emerging model of CTC leasing where the employer obtains a lease for electronics such as smartphones, laptops and tablets, and makes it available to the employees, while treating such lease payments as a part of the employee’s CTC. That is to say, the employer pays the lease rentals, but the same constitutes a part of the CTC – therefore, on a CTC basis, it is the employee who is actually paying the lease rentals. At the end of the lease tenure, the lessor may make the assets available to the employee for purchase at the residual value / other agreed value as specified in the contract.  The leasing of such assets to the employer, and the making available of such assets by the employers, to the employees, will be referred to as CTC Device Leasing.

Much of the value associated with CTC Device Leasing is linked once again to the reduction in taxable income for the employee, for, in the absence of the same, the employee may simply obtain those assets through any prevailing EMI schemes (consider also the fact that these EMI schemes may offer more competitive interest rates due to the absence of GST component). However, in that case, the employee earns the gross CTC, and pays tax on the same. To illustrate:

Assume an employee’s agreed CTC is Rs 100,000 a month, and the employer arranges for him a top-class laptop costing Rs 1 lakh, paying lease rentals of Rs 12000 a month for a year. Since this payment of Rs 12000 is a part of the CTC, the employer will now have to pay a salary of Rs 88,000 a month, which is taxed as his salary. However, for the employer, the CTC is Rs 1 lakh. At the end of the 12-month rental period, the employee gets to own the laptop from the lessor.

II. Unpacking the CTC Device Leasing Model

a.   Tax and GST Aspects

The reduction in the taxable income may be due to any one or more of the criteria mentioned under Rule 3(7) of the Income Tax Rules, and the legality of the same (i.e. whether that specific facility qualifies for the exemptions) would need to be evaluated on a case-to-case basis. However, generally speaking, reference in the case of mobile phone leasing (which is a common asset class being made available under this modell) is made to Rule 3(7)(ix) of the rules, read with Section 17 of the Income Tax Act, which would provide that

“Taxable value of perquisite shall be computed on the basis of cost to the employer (under an arm’s length transaction) less amount recovered from the employee. However, expenses on telephones including a mobile phone incurred by the employer on behalf of employee shall not be treated as taxable perquisite”[1]

Here, it becomes necessary to examine the burden on the employer under the device leasing model. In the CTC car-leasing model for instance, the employer remains “cost-agnostic”. Because under that model regardless of whether the benefit is given to the employee by deducting ‘x’ amount from their CTC component beforehand, or by paying said ‘x’ component to the employee, the financial obligation viz. expense for the employer remains unchanged. However, because in CTC car-leasing the employer is not able to claim ITC on the GST paid to the Lessor with the Lease rentals (due to it being blocked credit  under Section 17(5) of the CGST Act), the cost is passed on to the employee, from whose salary along with lease rentals are also deducted the GST amount.

Under CTC Device Leasing, the employer is similarly cost-agnostic with the key difference being that employers are able to claim the ITC on the inputs (as it is not blocked credit). Hence, the employer would deduct only the actual lease rentals net-off from GST from the employee’s salary.

b.   Residual Value considerations

As has been mentioned above, at the end of the lease tenure, the lessor typically would make the asset available to the employee for purchase basis its residual value. An important consideration here is that unless the lessor is a financial sector entity, they would usually not wish to keep a very low residual value (10% or below) lest the lease be considered a “financial lease” as per accounting norms, and thus eventually require the lessor to obtain an NBFC registration (as the transaction would be considered substantively a financing transaction, with the assets being financial assets, and income from the assets posing concerns with respect to the PBC criteria). 

However, a higher residual value could also correspond to a decrease in the tax benefit for the employee, because the option to purchase the asset would be exercised post the lease tenure by the employee themselves, and such payout being made by the employee directly against the residual value, may not qualify for the exemptions under the Income Tax Rules.  Hence, there is a delicate balance the lessors would have to maintain, to ensure viability of the business-model, while also ensuring that the structure remains compliant with tax law.

c.    Trend-Cycling & Data Protection

One practical consideration here is that the tenure of the lease in  CTC leasing models gives the employer an added employee-retention benefit. However, in the case of device leasing, the lease tenures may need to account for the “trend-cycles”, whereby younger workforce (in particular) may have a preference towards upgrading the device as and when newer models are released (for e.g. new iPhone models are typically released within a year of the previous launch). If the lease tenure exceeds this time-span, the facility may lose some of its charm.

Another consideration here, would pertain to the deletion of the employee’s data from the device, having regards to applicable data protection law, in case the employee does not exercise the purchase

option / the possession of device is transferred to another employee (for e.g. due to employee’s exit from the company).

III.  Concluding Notes  – Impact on Leasing Volumes and Industry in India

Because this model is in its nascent stage, it may be too soon to predict what its impact would be on leasing volumes in India. However, as the data captured in our report, available here, may reveal – the growth of leasing volumes in India has been very low. The use of leasing appears to be kept afloat by models such as CTC car leasing, and now maybe through device leasing.

However, one can surely expect this model to be popular with the lessors who would be able to enter the leasing space without making significant capital expenditures / taking on large borrowings, and to some extent may even be able to lease by obtaining the assets through their own funds rather than borrowings, and use the churn (due to the short tenure) to keep the leasing going.

[1] See CBDT Resource on Income Tax Rules, available at: https://incometaxindia.gov.in/_layouts/15/dit/pages/viewer.aspx?grp=rule&cname=cmsid&cval=103120000000007059&searchfilter= .