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Depreciation under Income Tax Act

by | Apr 26, 2024 | Income Tax | 0 comments

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Important Keyword: Income Tax Act Business Expenses, Depreciation.

Depreciation under Income Tax Act

Depreciation, in essence, embodies the gradual reduction in the value of an asset over time. From a taxation standpoint, it serves as a legitimate business expense, thereby allowing taxpayers to offset it against their taxable income. The Income Tax Act delineates depreciation as the decline in an asset’s value throughout its useful lifespan, thereby permitting taxpayers to deduct this expense from their taxable income. This deduction is applicable to both tangible and intangible assets, subject to the prescribed rates stipulated in the Income Tax Act.

However, the calculation of depreciation under the Income Tax Act diverges from that under the Companies Act. In the case of companies, depreciation is computed based on the rates and methodologies outlined in the Companies Act of 2013. Consequently, the depreciation recorded in a company’s books of accounts may differ from the amount specified in its Income Tax Return.

The concept of “Block of Assets” encompasses a cluster of assets belonging to the same category and subjected to identical depreciation rates. The Gross Block represents the cumulative value of all assets at the commencement of the financial year, while the Net Block denotes the collective value of assets at the conclusion of the financial year subsequent to the deduction of depreciation.

Assets falling within the ambit of a Block of Assets can be categorized into two main types:
  1. Tangible Assets: These encompass assets that possess a physical form, such as land, buildings, furniture, vehicles, machinery, and equipment.
  2. Intangible Assets: This category encompasses assets devoid of physical manifestation, such as goodwill, patents, copyrights, licenses, and franchises.

Understanding the nuances of depreciation and the classification of assets within Blocks is indispensable for taxpayers and businesses alike, facilitating accurate financial reporting and taxation compliance.

Calculation of Gross Block of Assets is as per the table below:
 ParticularsAmount
 Opening WDV as on 1st AprilXXXX
AddCost of Assets purchasedXXXX
LessSale Value of Assets sold(XXXX)
 WDV of Block of AssetsXXXX
LessDepreciation(XXXX)
 Closing WDV at the end of the yearXXXX

To claim depreciation under the Income Tax Act, taxpayers must adhere to specific conditions:

  1. Ownership: The taxpayer must possess ownership of the asset, either wholly or partially.
  2. Business Use: The asset should be utilized for business or professional purposes and not for personal use.
  3. Actual Utilization: The asset must be actively utilized during the financial year.
  4. Co-ownership: Each co-owner can claim depreciation proportionate to their ownership stake in the asset.
The method and rate of depreciation calculation differ between the Income Tax Act and the Companies Act of 2013:

Under the Companies Act 2013, methods include the Unit of Production method, Written-down Value method, and Straight-line method. Under the Income Tax Act 1961, depreciation is primarily computed using the Written-down Value method, with specific provisions for units generating power. Depreciation rates for various asset blocks are stipulated in the Income Tax Act. If an asset is used for 180 days or more during the financial year, the full depreciation rate applies. If utilized for less than 180 days, depreciation is calculated at half the rate.

Interest paid on borrowed funds used to acquire capital assets can be added to the asset’s cost until it’s put to use. Subsequently, the taxpayer can claim this interest as a revenue expenditure.

For the Assessment Year 2019-20, the Income Tax Department has prescribed depreciation rates applicable from the year 2003-04 onwards, available on the incometaxindia.gov.in website.

In addition to standard depreciation, taxpayers engaged in manufacturing can claim Additional Depreciation at a rate of 20% for newly acquired plant or machinery installed after March 31, 2005. This rate is applicable for assets used for 180 days or more, while for assets used for less than 180 days, the rate is 10%.

To illustrate depreciation calculation, consider the following example:
ParticularsAmount
Opening WDV of Plant & Machinery as on 1st April 201940,00,000
New machine purchased & put to use on 30th June 201915,00,000
New machine purchased & put to use on 1st February 202010,00,000
Computer purchased on 25th January 20202,00,000
Solution
ParticularsAmount
Normal Depreciation 
Dep at the full rate of 15% on P&M of 40 lacs6,00,000
Dep at the full rate of 15% on P&M of 15 lacs used for more than 180 days2,25,000
Dep at half rate of 7.5% on P&M of 10 lacs used for less than 180 days75,000
Dep at the full rate of 40% on Computer of 2 lacs80,000
Additional Depreciation 
Dep at the full rate of 20% on new P&M of 15 lacs used for more than 180 days3,00,000
Dep at half rate of 10% on P&M of 10 lacs used for less than 180 days1,00,000
Total Depreciation13,80,000
Block of Assets
 ParticularsP&MComputer
 Opening WDV as on 1st April40,00,000NIL
AddCost of Assets purchased25,00,0002,00,000
LessSale Value of Assets soldNILNIL
 WDV of Block of Assets65,00,0002,00,000
LessDepreciation13,00,00080,000
 Closing WDV at the end of year52,00,0001,20,000

Read More: Capital Expenditure and Revenue Expenditure

Web Stories: Capital Expenditure and Revenue Expenditure

Official Income Tax Return filing website: https://incometaxindia.gov.in/

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