Mukesh Patel.in
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Drive Home Amazing Tax Saving!

Purchase New Car Before September, ‘09

And Recover 25% Of Your Car Cost By March, ‘11

Note the figure ‘632,’ being the Cost Inflation Index just announced for FY 2009-10. This would be helpful in computing any taxable long term capital gains earned by you in the current financial year.

50% Depreciation on Car Purchase Until September

            Planning to purchase a new motor car for your business or professional use in the financial year 2009-10? Are you aware of the fact that buying your car by 30th September, as compared to any time on or after 1st October can have a huge impact on your resultant tax saving?

            With a view to give a boost to the auto-sector in the prevailing economic recession, the Central Board of Direct Taxes (CBDT) vide its Notification No. 10/2009, dated 19-01-2009 announced a special rate of depreciation of 50% on new commercial vehicles acquired and put to use between 1st January to 31st March, 2009.  Vide further Notification No.37/2009 dated 21-04-2009, this benefit came to be extended until 30th September, 2009.  

Write-off 75% Car Cost by March, 2011

             Keeping in view the normal 15% depreciation rate on motor car, the special rate of 50% (available only for new car purchases until 30th September) can amazingly go to speed up your tax saving! So much so, that in a period of just about 18 months, you can virtually write off by way of depreciation nearly 75% cost of your car. If you are in the top tax bracket of 33.99%, you can effectively recover over 25% of your car cost from the resultant tax saving you can reap through availing 50% depreciation during this period (refer Chart-A). Just compare it with the 21% depreciation write off and around 7% tax saving over the similar period (refer Chart-B), if you were to avail the normal 15% depreciation on car purchase made on or after 1st October.

Key Points to Remember

  • Only new and not second hand cars eligible for higher depreciation. 
  • It needs to be borne in mind that from FY 2011-12, under the proposed Direct Tax Code, depreciation will be only at the normal rate of 15% per annum. 
  • The benefit of depreciation being available only in respect a car used by a taxpayer for his business or profession (lawyer, doctor etc. included), a salaried employee cannot avail of any tax saving through the purchase of a new car. 
  • In the case of a car purchased by a company or a partnership firm from its funds (thus treated as being of its ownership) and used for its business, though registered in the name of its director or partner, the company or firm would very much be entitled to claim depreciation. 
  • In case of a car purchased under a finance scheme, the interest payable on the car loan is also deductible business expenditure. 
  • Motor car running and maintenance expenses or depreciation is no longer liable to Fringe Benefit Tax (FBT). 
  • However, do keep in mind that the value of a car (as reduced by any liability against the same) held by a company, individual or HUF, even for business purposes, is liable to wealth-tax. The basic exemption limit for wealth-tax as on 31st March, 2011 will be Rs.30 lakhs.  
CHART-A: Working for Car purchased for Rs.10,00,000 before 30th September, 2009

 FINANCIAL YEAR

COST/WDV

DEPRECIATION

RATE

DEPRECIATION

AMOUNT

TAX SAVING

@ 30.9%

TAX SAVING

@ 33.99%

2009-10

10,00,000

50%

5,00,000

1,54,500

1,69,950

2010-11

5,00,000

50%

2,50,000

77,250

84,975

TOTAL

 

 

7,50,000

2,31,750

2,54,925

 

CHART-B: Working for Car purchased for Rs.10,00,000 on or after 1st October, 2009

 FINANCIAL YEAR

COST/WDV

DEPRECIATION

RATE

DEPRECIATION

AMOUNT

TAX SAVING

@ 30.9%

TAX SAVING

@ 33.99%

2009-10

10,00,000

*7.50%

75,000

23,175

25,493

2010-11

9,25,000

15%

1,38,750

42,874

47,161

TOTAL

 

 

2,13,750

66,049

72,654

* Worked out at half the rate of normal depreciation, since the car is held for less than six months.

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