Buying a car to claim tax depreciation? Think Again!

To save income tax by reducing tax liability, Financial Experts advise you to buy a car or similar depreciating assets – Laptop, Mobile Phone etc.

But does it practically make sense to make huge expenses just to save on paying taxes?

Let’s understand it through an example of buying a car of Rs 10 Lakh.

If you buy a car of Rs.10 lakh, you can claim depreciation of that car worth 10 lakh rupees over a period of certain years, @ 15% per year on Written Down Value of Car,

The depreciation claim on the car will reduce your income by the depreciation amount, which is 15% of the claim.

Tax liability on the above said depreciation amount will be in the range of 25% to 30% depending upon your firm’s income tax slab.

Thus the total income tax benefit which you will get will be around 25% to 30% of the total,

Means in our example case we can get tax benefit up to 2.5 lakhs to 3 lakhs.

For the next 20 years of buying that car, the below table highlights how the amount and tax liability benefit would play out.

As highlighted in the above table, over 20 years we get a tax benefit of Rs 2.88 Lakh, by having an expense of 10 Lakh rs upfront.

Buying a depreciating asset for claiming depreciation is an absurd decision.

It is also a loss-making decision, as eventually, we will be better placed if we pay the tax upfront instead of buying just for depreciation and invest the remaining after-tax amount in appreciating assets like stocks and other investments

We pay income tax when we have an “Income”, we should duly optimise for saving the payable tax. But in doing so, we should not hamper our savings in ways where, just to not pay some amount of income tax, we’re destroying the future purchase power of our current income by not saving and investing it.

What will you gain by investing the amount remaining after paying taxes?