The lessor is the party that owns an asset and gives the right to use it; the lessee is the party that gets that right and pays for it. If you are paying rent, you are the lessee; if you are receiving rent on an asset you own, you are the lessor. Under Ind AS 116 most leases now sit on the lessee's balance sheet as a right-of-use asset and a lease liability.
Facts checked: 10 October 2026. The 12-month short-term and low-value exemptions, the right-of-use and lease liability model and the lessor finance/operating split were checked against published summaries and ICAI-hosted material that reproduce Ind AS 116. The standard's text on mca.gov.in and icai.org could not be opened directly and should be read before you rely on paragraph wording. The AS 19 position is from an ICAI Expert Advisory Committee opinion and practitioner guides. The tax paragraph is general and not tied to a section.
Lessor and lessee in plain terms
| Party | Who it is | Rights | Obligations |
|---|---|---|---|
| Lessor | Owner who lets the asset out | Rent; return of the asset at the end; protection of its residual value | Allow the agreed use; usually keep legal title |
| Lessee | User who takes the asset on lease | Control of use for the lease term | Pay rent; look after the asset; return it as agreed |
Three everyday cases:
- Factory building. A manufacturing company takes a plant building from a landowner for nine years. The landowner is the lessor; the manufacturer is the lessee.
- Vehicle lease. A leasing company buys cars and gives them to a firm for four years against monthly payments. The leasing company is the lessor.
- Retail shop. A retailer pays rent plus a share of sales to a mall owner for a shop. The mall owner is the lessor; the retailer is the lessee.
Note that a sub-lease makes one entity both: a lessee of the head lease and a lessor of the sub-lease.
How a lessee accounts under Ind AS 116
Ind AS 116 (effective for periods beginning on or after 1 April 2019) uses a single model for lessees. At the start of the lease the lessee recognises:
- a lease liability, being the present value of lease payments over the lease term, discounted at the rate implicit in the lease or, if that cannot be readily determined, the lessee's incremental borrowing rate; and
- a right-of-use asset, normally equal to that liability plus any payments made at or before commencement and initial direct costs.
Afterwards the asset is depreciated and the liability bears interest, so expense is front-loaded compared with straight-line rent.
Two optional exemptions let the lessee simply expense payments (usually straight-line):
- Short-term leases: a term of 12 months or less at commencement, with no purchase option. The choice is made by class of underlying asset.
- Low-value assets: the standard sets no rupee figure; it looks at the asset's value when new, and the asset must be usable on its own or with readily available resources (laptops and small office furniture are typical examples). The choice can be made lease by lease.
How a lessor classifies
The lessor keeps the two-way split. A finance lease transfers substantially all the risks and rewards incidental to ownership; the lessor derecognises the asset and records a net investment (a receivable) in the lease. An operating lease does not; the lessor keeps the asset on its balance sheet, depreciates it and recognises rent, generally on a straight-line basis.
Companies not on Ind AS: AS 19
Companies not covered by the Ind AS roadmap follow AS 19 Leases. The lessee splits leases into finance leases (asset and liability on the balance sheet) and operating leases (rent charged to the statement of profit and loss, usually straight-line). The "everything on the balance sheet" outcome of Ind AS 116 does not apply there. A lessor and lessee in the same transaction can therefore follow different standards.
Worked example (illustrative)
A lessee on Ind AS takes machinery for 3 years, paying ₹1,00,000 at the end of each year. Its incremental borrowing rate is 10% a year. Present value of the payments is ₹2,48,685, so both the right-of-use asset and the liability start at that figure. Depreciation is straight-line over 3 years: ₹82,895 a year. Initial direct costs and advance payments are ignored.
| Date | Debit | Credit | ₹ |
|---|---|---|---|
| Start | Right-of-use asset | Lease liability | 2,48,685 |
| Year 1 | Finance cost (10% of 2,48,685) | Lease liability | 24,869 |
| Year 1 | Lease liability | Bank | 1,00,000 |
| Year 1 | Depreciation | Right-of-use asset | 82,895 |
| Year 2 | Finance cost (10% of 1,73,554) | Lease liability | 17,355 |
| Year 2 | Lease liability | Bank | 1,00,000 |
| Year 3 | Finance cost (10% of 90,909) | Lease liability | 9,091 |
| Year 3 | Lease liability | Bank | 1,00,000 |
Liability at the end of year 1 is ₹1,73,554, at the end of year 2 ₹90,909 and at the end of year 3 nil. Year 1 charge is ₹1,07,764 (interest plus depreciation) against ₹1,00,000 cash, which is why expense is heavier early in the lease.
Tax angle, at a high level
Accounting treatment does not decide tax. GST on lease rentals and income-tax deductions or depreciation depend on the contract and the tax statutes, so a lessee should not assume that a book depreciation and interest charge is what is claimed for tax. Check the specific provision before filing.
Frequently asked questions
Is the landlord the lessor or the lessee?
The landlord is the lessor and the tenant is the lessee.
Does a 12-month lease always escape the balance sheet?
No. The exemption is optional, applies by class of asset, and falls away if the lease has a purchase option. A change in the term or a modification means the lease is looked at again as a new lease.
What is the right-of-use asset?
It is the lessee's asset representing the right to use the leased item, measured at the lease liability plus initial costs and advance payments.
Which discount rate does a lessee use?
The rate implicit in the lease if readily determinable; otherwise the lessee's incremental borrowing rate.
Does AS 19 require a lease liability for every lease?
No. Only finance leases are capitalised under AS 19; operating lease rent goes to the statement of profit and loss.
For audit testing of these balances see lease accounting audit under Ind AS 116: testing procedures and the Ind AS 116 lease testing checklist.
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