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Wednesday, March 13, 2013

Is buying a car an investment or a liability?

March is the month when the last instalment of advance tax becomes due. Many professionals try to maximise their tax benefits by buying capital assets to avail of depreciation benefits. That is one reason for high demand for 2-wheelers and 4-wheelers in March.

For salaried employees, March is also the month when last minute investments are made by many to avail of tax benefits. Is March a good month to buy a car? In this month's guest post, Nishit explains when and how to go about buying a car to maximise benefits. 

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We talk about investing and preserving wealth.  Buying a car is a necessity for many of us. Is it an investment or a liability?

The value of a car keeps decreasing with every passing day. The minute it is driven out of the car showroom a 10% depreciation happens. So, how does one maximise a depreciating asset?

The trick is to go for the right car at the right time. If one is buying a car with a time horizon of 5-6 years, then which month of the year a car is bought is immaterial. December constitutes the best month for a discerning buyer because of low demand.

April is also a lean month for car sales. Why is this so? Most of the buyers who file income tax returns as professionals (they constitute a major chunk of the car buyers), buy a car in the month of March to avail of depreciation benefits.

The pent-up demand peaks in March thanks to this tax benefit, and also because people tend to wait for tax policy after the budget In February. One can, therefore, get good discounts in April.

Next, what one needs to evaluate is the likely usage. For example if you are going to drive around 750-1000 kilometres in a month, you are better off with a petrol car. This is because the running cost with a mileage of 12 km comes to around Rs 6 a kilometer, whereas for a Diesel variant of same car it will be around Rs 4. Diesel cars are priced at least Rs 1.50 lakhs more than petrol cars of same make. So, your breakeven point is 50000 kms and 5 years by which time you will probably change your car anyway. Also, the Rs 1.50 lakhs saved can be invested and the profits used to pay for the petrol bills.

Another option, especially with Maruti cars, is to go for the Duo option where one gets a CNG tank in addition to a Petrol tank. The cost per kilometer is very low - about Rs 1.50–2.

The next option is whether one pays the entire amount in cash or takes a loan for the car. A full cash payment often entitles one to a bigger discount from the car dealer.

Also, there are a certain car models which are very good but a bit slow moving. One can always get a higher rate of discount here. If one is going to keep the car for a longer time, the make of the car hardly matters as long as it does not break down often. However, one has to also keep in mind the likely resale value of the car.

So, that in a nutshell is how one can maximize the returns on buying a car. Buy at the right time, at the right price squeezing out maximum discounts from the dealer.

Postscript: I just now read that Tata Motors is offering a guarantee to buy back your Tata Indigo Manza car after 3 years and giving you 60% cash back. This scheme looks interesting in the sense that a sedan usually depreciates 50-60% after 3 years. You are being charged only 40% of the car value.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)


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