Important Keyword: Income Tax Act Business Expenses, Depreciation.
Table of Contents
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:
- Tangible Assets: These encompass assets that possess a physical form, such as land, buildings, furniture, vehicles, machinery, and equipment.
- 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:
| Particulars | Amount | |
| Opening WDV as on 1st April | XXXX | |
| Add | Cost of Assets purchased | XXXX |
| Less | Sale Value of Assets sold | (XXXX) |
| WDV of Block of Assets | XXXX | |
| Less | Depreciation | (XXXX) |
| Closing WDV at the end of the year | XXXX |
To claim depreciation under the Income Tax Act, taxpayers must adhere to specific conditions:
- Ownership: The taxpayer must possess ownership of the asset, either wholly or partially.
- Business Use: The asset should be utilized for business or professional purposes and not for personal use.
- Actual Utilization: The asset must be actively utilized during the financial year.
- Co-ownership: Each co-owner can claim depreciation proportionate to their ownership stake in the asset.
Methods of Calculating Depreciation
Methods of Depreciation and useful life of depreciable assets may vary from asset to asset. Based on asset type and industry, it can differ for accounting and taxation purposes also. Most commonly employed methods of depreciation are Straight Line Method and Written Down Value Method.
Other than depreciation rates, the basic differences depreciation calculation as per the income tax Act and companies act is the method used for depreciation calculation.
Methods of depreciation as per Companies Act, 1956 (Based on Specified Rates):
- Straight Line Method
- Written Down Value Method
Methods of depreciation as per Companies Act, 2013 (Based on Useful Life of assets):
- Straight Line Method
- Written Down Value Method
- Unit of Production Method
Methods of depreciation as per Income Tax Act, 1961 (Based on Specified Rates):
- Written Down Value Method (Block wise)
- Straight Line Method for Power Generating Units
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.
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%.
Depreciation Rates – FY 2024–25 (AY 2025–26)
Part A: Tangible Assets
| Sl. No. | Asset Class | Asset Type / Description | Rate of Depreciation |
|---|---|---|---|
| 1 | Building | Residential buildings (excluding boarding houses and hotels) | 5% |
| 2 | Building | Boarding houses and hotels | 10% |
| 3 | Building | Temporary structures (e.g., wooden structures) | 40% |
| 4 | Furniture & Fittings | Furniture and fittings, including electrical fittings | 10% |
| 5 | Plant & Machinery | Motor cars (not used in business of hiring) | 15% |
| 6 | Plant & Machinery | Motor cars (purchased between 23-Aug-2019 and 01-Apr-2020, used before 01-Apr-2020) | 30% |
| 7 | Plant & Machinery | Lorries, taxis, buses used for hire | 30% |
| 8 | Plant & Machinery | Lorries, taxis, buses used for hire (purchased between 23-Aug-2019 and 01-Apr-2020, used before 01-Apr-2020) | 45% |
| 9 | Plant & Machinery | Computers and computer software | 40% |
| 10 | Plant & Machinery | Books (owned by professionals – annual publications) | 100% |
| 11 | Plant & Machinery | Books (owned by professionals – other than annual publications) | 60% |
| 12 | Plant & Machinery | Books (owned by business of running lending libraries) | 100% |
Part B: Intangible Assets
| Sl. No. | Asset Class | Asset Type / Description | Rate of Depreciation |
|---|---|---|---|
| 13 | Intangible Assets | Franchise, trademark, patent, license, copyright, know-how, or similar rights | 25% |
Special Cases – Tangible Assets with 40% Depreciation Rate
| Category | Asset Description (Examples) |
|---|---|
| Pollution Control Equipment | Air/water pollution control devices like scrubbers, dust collectors, centrifuges |
| Renewable Energy Devices | Solar panels, windmills, solar heaters, solar pumps, and photovoltaic systems |
| Computers & Software | Includes hardware, desktops, laptops, servers, licensed software |
| Life-saving Medical Equipment | MRI, ventilators, surgical lasers, defibrillators, and high-end diagnostic machines |
| Energy Saving Devices | Heat recovery systems, cogeneration systems, automatic voltage controllers, high-efficiency boilers, and monitoring tools |
| Books (Special Cases) | Books owned by lending libraries or for professional use (annual and non-annual publications) |
To illustrate depreciation calculation, consider the following example:
| Particulars | Amount |
| Opening WDV of Plant & Machinery as on 1st April 2019 | 40,00,000 |
| New machine purchased & put to use on 30th June 2019 | 15,00,000 |
| New machine purchased & put to use on 1st February 2020 | 10,00,000 |
| Computer purchased on 25th January 2020 | 2,00,000 |
Solution
| Particulars | Amount |
| Normal Depreciation | |
| Dep at the full rate of 15% on P&M of 40 lacs | 6,00,000 |
| Dep at the full rate of 15% on P&M of 15 lacs used for more than 180 days | 2,25,000 |
| Dep at half rate of 7.5% on P&M of 10 lacs used for less than 180 days | 75,000 |
| Dep at the full rate of 40% on Computer of 2 lacs | 80,000 |
| Additional Depreciation | |
| Dep at the full rate of 20% on new P&M of 15 lacs used for more than 180 days | 3,00,000 |
| Dep at half rate of 10% on P&M of 10 lacs used for less than 180 days | 1,00,000 |
| Total Depreciation | 13,80,000 |
Block of Assets
| Particulars | P&M | Computer | |
| Opening WDV as on 1st April | 40,00,000 | NIL | |
| Add | Cost of Assets purchased | 25,00,000 | 2,00,000 |
| Less | Sale Value of Assets sold | NIL | NIL |
| WDV of Block of Assets | 65,00,000 | 2,00,000 | |
| Less | Depreciation | 13,00,000 | 80,000 |
| Closing WDV at the end of year | 52,00,000 | 1,20,000 |
Read More: Capital Expenditure and Revenue Expenditure
Web Stories: Capital Expenditure and Revenue Expenditure
Official Income Tax Return filing website: https://incometaxindia.gov.in/
