How Equipment Lease Rentals and Pricing Are Worked Out
What goes into an equipment lease rental: asset cost, term, residual value, dry or wet service, the refundable deposit and GST, and why leasing is rarely cheaper than a loan on paper.
A lease rental is the monthly price of using an asset: it recovers the value of the asset you use up over the term, plus a financing cost, and in a wet lease the cost of service. The result is a fixed monthly figure, with GST added on top. This guide explains what moves the rental up and down, what you pay on day one, and how to compare a lease honestly with a purchase or a bank loan.
What a rental is made of
You do not pay for the whole machine. You pay for the part of its value that you consume while you have it. That is the idea behind a lease, and it explains every input below.
A rental is built from three things:
- The value you use up. The asset's cost, less what it is expected to be worth at the end, spread over the term.
- A financing cost. The lessor's money is tied up in the asset for the term, and the rental carries a charge for that.
- Service, in a wet lease. If maintenance, consumables or a technician are bundled, their cost is in the rental too.
On top of the rental sits GST.
The five things that move your rental
1. The cost of the asset
A more expensive asset means a higher rental, all else equal. The vendor's proforma invoice fixes this number, which is why every lease starts from that document.
2. The length of the term
The term is the lease period, set to match the asset's useful life and your cash flow. A shorter term means a higher monthly rental, because the same value is recovered over fewer months. A longer term brings the monthly figure down, at the cost of paying for longer. Terms on equipment typically run from 24 to 60 months, and you can match yours to how long you expect to use the asset.
3. Residual value
Residual value is the estimated worth of the asset at the end of the lease: what it could be sold or re-leased for. It is set at the start, based on the type of asset, how heavily it will be used, how fast it becomes outdated, and market conditions.
Residual value works in your favour: a higher residual value means a lower monthly rental, because you only pay for the value you use, not the value that remains. In an operating lease the lessor carries the residual-value risk. If the asset turns out to be worth less than projected, the lessor absorbs the shortfall and you do not.
4. Dry or wet
A dry lease covers the asset only and has the lower rental, because you handle maintenance and insurance yourself. A wet lease bundles service into one higher, all-inclusive figure. When comparing the two, add your own maintenance and insurance spending to the dry rental and compare the totals. The maintenance and insurance guide explains the split of responsibility.
5. What you put down on day one
Money paid upfront does not change the type of asset but it changes your cash position, so it is part of the price. There are two kinds of upfront payment:
- Security deposit. Typically around 15 percent of the asset cost, held by the lessor and refundable at the end, less deductions for damage beyond fair wear, unpaid rentals or return-condition shortfalls. It protects the lessor and has no effect on the rental. Because it is a genuine refundable deposit, it carries no GST while it remains one.
- Advance rentals. The first one or two rentals can be paid at signing and are adjusted against the schedule. They are not extra; they bring forward part of what you would pay anyway.
Residual value and the security deposit are often confused. Residual value is the estimated worth of the asset, it lowers the rental, and the lessor carries the risk. The deposit is refundable cash, it does not change the rental, and you provide it. They are completely different things.
What GST adds
A lease is a supply of service, so GST is charged on every rental invoice, at the same rate as the underlying asset. For most equipment, plant and machinery, and IT assets that is usually 18 percent. On a wet lease, GST applies to the full bundled amount.
If you are a GST-registered business making taxable supplies, you can generally claim the GST on each rental as input credit and set it against your own GST due. For a normal business that makes GST a matter of timing and not an extra cost. Some sectors have restrictions on input credit, so confirm your own position with your accountant. The GST and TDS guide covers the mechanics.
There is also a day-one difference worth noticing. If you buy an asset or finance one with a bank loan, you front the full GST on the purchase (18 percent of a ₹10 lakh machine is ₹1.8 lakh) and claim it back later. In an operating lease the lessor fronts the GST on the asset, and you pay GST only on the monthly rentals.
The financing cost inside the rental
A lease quotes a monthly rental, not an interest rate, but a financing rate is built into it. It goes by names such as the implied rate, IRR or lease factor. If you want to compare a lease like-for-like against a bank loan, ask for it. It turns two differently shaped offers into numbers you can set side by side.
Day-one cash: lease, loan and purchase compared
Here is how the day-one cash differs for a ₹10,00,000 machine. This is an illustration of structure, not a quote.
| Buy outright | Bank loan on 80% of the cost | Lease | |
|---|---|---|---|
| Cash on day one | ₹10,00,000 (plus GST) | About ₹2,00,000 margin | About ₹1,50,000 refundable deposit plus the first rental |
| Does it come back? | You own an asset that ages | The margin is sunk into the asset | The deposit is refunded at the end, less deductions |
| Debt added | None, but the cash is gone | Yes, on your books | None as a bank loan |
The difference is not only the amount but what happens to it. A loan's margin is spent on the asset. A lease deposit is returned.
Is a lease cheaper than a loan?
On pure nominal cost, usually not. At the same financing rate the numbers are broadly a tie, and once you credit the value of the asset that a buyer keeps at the end, a loan is often slightly cheaper on sticker cost, because a lessee pays for use through to the end of the term and gets no residual value back. The honest summary is that a lease is level to a little more expensive on paper.
What you gain instead is worth weighing on its own terms:
- Cash stays in the business instead of going into a depreciating machine.
- Your bank limit stays free, because a lease is a rental commitment and not a bank facility.
- The lessor carries the risk of the asset ageing, so you can return or upgrade.
- The full rental is generally deductible in an operating lease, which your accountant can confirm for your case.
If you want the full decision framework, read lease vs buy: how to decide. If owning the asset matters most to you, a loan or a finance lease may be the better answer, and it is worth saying so plainly.
The complete list of charges
A fair lease has a short list of costs, and they should all be in the agreement before you sign:
- The monthly rental, usually fixed for the term, plus GST
- The refundable security deposit
- Deductions from the deposit for damage beyond fair wear
- A foreclosure charge if you exit early (typically the remaining rentals, often discounted, plus a fee)
- The purchase price plus GST, if you buy the asset at the end
The base rental is usually fixed for the term. GST follows the statute, so a change in the rate flows through to future invoices.
How to get a quote that means something
A realistic indicative structure needs the asset and the vendor's quotation, your preferred term, and whether you want service included. Everything at that stage is indicative and subject to credit approval. For the sequence from there, read the step-by-step leasing guide; for the end-of-term options that your residual value implies, see what happens at the end of a lease. The equipment leasing in India overview and the FAQ cover the basics.