2. • In recent years, leasing has become a popular source of
financing in India. From the lessees point of view, leasing
has the attraction of eliminating immediate cash
outflow, and the lease rentals can be claimed as
admissible expenditure against the business income. On
the other hand, buying has the advantages of
depreciation allowance and interest on borrowed capital
being tax-deductible. Thus, an evaluation of the two
alternatives is to be made in order to take a decision.
Lease or Buy Decision
3. Lease or Buy Decision
• Lease or buy decision involves applying capital budgeting principles to
determine if leasing as asset is a better option than buying it.
• Leasing in a contractual arrangement in which a company (the lessee) obtains
an asset from another company (the lessor) against periodic payments of
lease rentals. It may typically also involve an option to transfer the ownership
of the asset to the lessee at the end of the lease.
• Buying the asset involves purchase of the asset with company’s own funds or
arranging a loan to finance the purchase.
• In finding out whether leasing is better than buying, we need to find out the
periodic cash flows under both the options and discount them using the after-
tax cost of debt to see where does the present value of the cost of leasing
stands as compared to the present value of the cost of buying. The alternative
with lower present value of cash outflows is selected.
4. ADVANTAGES:
• Advantages when Assets are taken on Lease : Lease Rental can be
claimed as deduction as revenue expenditure. However Depreciation
cannot be claimed since assets are not owned by the assessee.
• Advantage when Assets are Purchased : Depreciation on specified
assets can be claimed as deduction u/s 32. the Assets may be
purchased out rightly or may be taken on loan. Where the asset is
taken on loan interest amount can either be claimed as revenue
expenditure or can be capitalized. But where interest is paid after the
asset is first put us use, the deduction on account of interest shall be
claimed as revenue expenditure, i.e. such interest cannot be
capitalized.