Leasing – Structure & Cash Flow Benefits

Introduction

Leasing separates Usage from Ownership. Why buy a ₹100 Crore airplane if you can rent it for ₹1 Crore/month?

1. Types of Lease

A. Finance Lease (Capital Lease)

• Long term. Covers almost the entire life of asset.
• Risk: Transferred to Lessee (User). If plane breaks, Lessee fixes it.
• Nature: Almost like a loan. You cannot cancel it easily.

B. Operating Lease

• Short term. (e.g., Renting a car for 3 days or a computer for 1 year).
• Risk: Remains with Lessor (Owner).
• Nature: Cancelable.

2. Advantages

For Lessee (User)

• No Upfront Cash: 100% financing.
• Tax Benefit: Lease rentals are tax-deductible expenses.
• Obsolescence Risk: In Operating Lease, you return the old machine and get a new one.

For Lessor (Owner)

• Security: He owns the asset. If Lessee defaults, he takes the asset back.
• Depreciation: Lessor claims depreciation tax benefit.

Summary

• Finance Lease: Long term, Non-cancelable (Like owning).
• Operating Lease: Short term, Cancelable (Like renting).
• Tax: Rentals are deductible for Lessee.

Quiz Time! 🎯

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