Lessor explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Ind AS 116 keeps two models for the lessor, a finance lease and an operating lease, while the lessee has one model. It also says what happens when the lessee's payments or term change, and what a company may book when it sells an asset and leases it back. This guide covers all three and works a finance lease and a sale and leaseback with figures of our own.
A lessor classifies each lease at inception by whether it transfers substantially all the risks and rewards of ownership (paragraphs 61 to 66). A finance lease is booked as a receivable equal to the net investment, with finance income at a constant rate (paragraphs 67 and 75). In a sale and leaseback that qualifies as a sale, the seller-lessee recognises only the gain that relates to the rights transferred (paragraph 100).
Ind AS as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015). Amendments notified after 1 April 2025 are not reflected in this article and should be checked on mca.gov.in. The lessee side is in our first Ind AS 116 guide; the standard is outlined in Ind AS 116 Leases. Leasing schedules of this kind form part of financial statement preparation work.
What the paragraphs require
| Paragraph | Requirement | What it means in practice |
|---|---|---|
| 62-66 | Finance lease if substantially all risks and rewards pass; judged on substance; fixed at inception, reassessed only on a modification | Paragraph 63 lists situations such as transfer of ownership, a purchase option reasonably certain to be used, a term for the major part of the economic life, present value of payments at substantially all of fair value |
| 67-70 | Show the net investment as a receivable, using the implicit rate; initial direct costs are included automatically in that rate | Net investment = present value of lease payments plus unguaranteed residual |
| 75-77 | Finance income at a constant periodic rate; apply Ind AS 109 for impairment; review unguaranteed residual regularly | A cut in the residual estimate changes the income pattern and accrued amounts are cut at once |
| 81-85 | Operating lease: income straight line or another systematic basis; depreciate the asset normally; add initial direct costs to the asset | Income recognised over the term, not as billed |
| 39-43 | Lessee remeasures the liability on a change in term, a purchase-option view, a residual value guarantee or an index or rate | The adjustment goes to the right-of-use asset; if the asset is already nil, to profit or loss |
| 44-46 | Modification: a separate lease if scope grows at a stand-alone price; otherwise remeasure at a revised rate | Partial termination: reduce the asset and book the gain or loss (paragraph 46(a)) |
| 98-103 | Sale and leaseback: test the sale under Ind AS 115; if a sale, gain only on rights transferred; if not a sale, a financial liability | Off-market terms are split into prepayment or extra financing (paragraph 101) |
Lessor method
- Classify at inception using paragraphs 62 to 65.
- For a finance lease, derive the implicit rate that equates the payments and the unguaranteed residual to the fair value of the asset plus initial direct costs (paragraph 69).
- Book the net investment, then each period add finance income and deduct receipts (paragraph 76).
- For an operating lease, keep the asset in the books by its nature (paragraph 88) and spread income and costs systematically.
- On a modification of a finance lease, check whether it is a separate lease (paragraph 79) and whether the lease would have been an operating lease from inception (paragraph 80). A modification of an operating lease is a new lease from its effective date (paragraph 87).
Lessee changes in brief
A change in the lease term or in a purchase-option assessment requires a revised discount rate (paragraphs 40 and 41). A change in index-linked payments is picked up when the cash flows change, at an unchanged rate unless a floating rate caused the change (paragraphs 42 and 43). Either way, the liability's remeasurement is matched by an adjustment to the right-of-use asset (paragraph 39). For a modification that is not a separate lease, the lessee allocates the consideration, fixes the new term and remeasures at the rate on the modification date (paragraph 45). The temporary rent concession expedient in paragraphs 46A and 46B is limited to payments due on or before 30 June 2022 and so is of historical interest only.
Worked example, part A: a finance lease
The entity and all figures in this example are invented for illustration.
Nilgiri Leasing Limited buys a machine for Rs 50,00,000 and leases it for four years. The lessee pays Rs 15,00,000 at the end of each year. At the end of year 4 the machine returns to the lessor with an expected value of Rs 5,00,000 that nobody guarantees. The lessor pays Rs 1,00,000 of initial direct costs. The lease transfers the risks and rewards: the present value of the payments is about 95 per cent of the fair value (paragraph 63(d)) and the term covers the major part of the machine's life, so the company treats it as a finance lease.
Net investment (paragraphs 67 and 69). Rs 50,00,000 + Rs 1,00,000 = Rs 51,00,000. Gross investment = 4 x 15,00,000 + 5,00,000 = Rs 65,00,000. Unearned finance income = 65,00,000 - 51,00,000 = Rs 14,00,000.
Implicit rate. The rate that discounts the payments and the residual to Rs 51,00,000 is 9.968 per cent a year (computed by trial; for arithmetic only the factors are 0.9094, 0.8269, 0.7520 and 0.6838 for years 1 to 4).
Finance income schedule (paragraphs 75 and 76). Income is the rate on the opening net investment, rounded to the rupee; year 4 is the balancing figure (it differs by Rs 2 from the rounded computation).
| Year | Opening net investment (Rs) | Finance income (Rs) | Receipt (Rs) | Closing (Rs) |
|---|---|---|---|---|
| 1 | 51,00,000 | 5,08,368 | 15,00,000 | 41,08,368 |
| 2 | 41,08,368 | 4,09,522 | 15,00,000 | 30,17,890 |
| 3 | 30,17,890 | 3,00,823 | 15,00,000 | 18,18,713 |
| 4 | 18,18,713 | 1,81,287 | 15,00,000 | 5,00,000 |
| Total | 14,00,000 | 60,00,000 |
| Particulars | Debit (Rs) | Credit (Rs) |
|---|---|---|
| Commencement Net investment in finance lease | 51,00,000 | |
| To Bank (machine and direct costs) | 51,00,000 | |
| Year 1 Bank | 15,00,000 | |
| To Finance income | 5,08,368 | |
| To Net investment in finance lease | 9,91,632 |
Check. Total finance income Rs 14,00,000 equals the unearned finance income at the start. The balance after year 4 is the Rs 5,00,000 residual. If the residual estimate were later cut, paragraph 77 would require the income allocation to be revised and any reduction for amounts already accrued recognised at once.
Worked example, part B: sale and leaseback
The entity and all figures in this example are invented for illustration.
Palar Textiles Limited sells a building with a carrying amount of Rs 60,00,000 and a fair value of Rs 1,00,00,000 for Rs 1,00,00,000 cash and leases it back for five years at Rs 12,00,000 a year payable at each year end. The transfer meets the Ind AS 115 test for a sale (paragraph 99). The lease payments are at market rates, so no adjustment under paragraph 101 is needed. The discount rate is 8 per cent (assumed, for arithmetic only), annuity factor 3.9927.
| Working (paragraph 100(a)) | Rs |
|---|---|
| Lease liability: 12,00,000 x 3.9927 (unrounded factor) | 47,91,252 |
| Share of fair value retained: 47,91,252 / 1,00,00,000 | 47.91252% |
| Right-of-use asset: 60,00,000 x 47.91252% | 28,74,751 |
| Total gain: 1,00,00,000 - 60,00,000 | 40,00,000 |
| Gain on rights transferred: 40,00,000 x (1 - 47.91252%) | 20,83,499 |
| Particulars | Debit (Rs) | Credit (Rs) |
|---|---|---|
| Bank | 1,00,00,000 | |
| Right-of-use asset | 28,74,751 | |
| To Building (carrying amount) | 60,00,000 | |
| To Lease liability | 47,91,252 | |
| To Gain on sale and leaseback | 20,83,499 |
Check. Debits Rs 1,28,74,751 = credits Rs 60,00,000 + 47,91,252 + 20,83,499. The gain of Rs 19,16,501 that relates to the right of use kept stays unrecognised, as paragraph 100(a) requires: the seller-lessee recognises "only the amount of any gain or loss that relates to the rights transferred".
Afterwards the liability runs at 8 per cent: closing Rs 39,74,552, 30,92,516, 21,39,917, 11,11,110 and nil (year 5 interest of Rs 88,890 is the balancing figure). The asset is depreciated over the five-year term at Rs 5,74,950 a year, with Rs 5,74,951 in year 5. Paragraph 102A ensures that later payments are determined so that no gain or loss on the retained right is recognised.
Presentation and disclosure
A finance-lease receivable is a financial asset subject to the Ind AS 109 impairment rules (paragraph 77). Assets under operating leases are shown by their nature (paragraph 88). A seller-lessee presents the right-of-use asset and liability as any lessee would, and the sale-and-leaseback gain goes to profit or loss. The disclosure paragraphs for lessors follow the presentation paragraphs of the standard, and the quantitative lessee disclosures cover sale and leaseback transactions.
Common mistakes
- Booking the whole sale and leaseback gain on the day of sale.
- Forgetting that a sale that does not qualify under Ind AS 115 is a financing (paragraph 103).
- Reclassifying a lease because the residual value estimate changed (paragraph 66 bars this).
- Capitalising initial direct costs separately in a finance lease when the implicit rate already includes them (paragraph 69).
- Using the old discount rate after a change in lease term (paragraph 41 requires a revised rate).
Need help with lessor and sale and leaseback accounting?
Net investment schedules, modification workings and gain splits are easy to get wrong when the paragraphs are applied from memory. Our team can prepare and review these workings within your financial statement preparation engagement, so that your auditors can trace each figure.
Key takeaways
- Classify the lease at inception on substance; only a modification reopens it.
- The finance lease receivable starts at the net investment and earns a constant rate.
- A lessee adjusts the right-of-use asset for most remeasurements.
- A sale and leaseback gain is limited to the rights transferred.
- Off-market terms are split into a prepayment or extra financing.
Read next
- Lessee accounting under Ind AS 116: the right-of-use asset and lease liability, worked
- ITFG clarifications on Ind AS 116: lease term, land leases, escalating rentals and transition
- Fair value measurement under Ind AS 113: three-level hierarchy, worked
- AS 19 Leases: finance lease v operating lease
Disclaimer: Based on the Indian Accounting Standards as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015) and, where named, the ITFG clarification bulletins of ICAI, as consulted on 4 October 2026. The worked example uses invented figures. Amendments notified after 1 April 2025 should be checked on mca.gov.in. This article is general information, not legal advice; check the official text before acting.