An operating lease is treated like renting – payments are considered operational expenses and the asset being leased stays off the balance sheet. At the end of the operational lease the asset is returned to the lessor.
In contrast, a financial lease or capital lease is more like a loan; the asset is treated as being owned by the lessee so it stays on the balance sheet.
Under Ind AS 17 (no longer followed) and old Accounting Standards (which are still applicable to smaller companies), there is a clear distinction in identifying operating vs finance lease and their accounting treatment.
Under Ind AS 116 this distinction exists only for the lessor. Refer detailed Ind AS 116 overview for more information
