Depreciation is a key concept in Indian taxation that allows businesses to account for the wear and tear of their assets over time. Under the Income Tax Act, 1961, depreciation serves as a tax-deductible expense, reducing taxable income and, consequently, the tax liability.
What is Depreciation?
Depreciation refers to the gradual reduction in the value of an asset due to factors like wear and tear, aging, or obsolescence. In the context of taxation, it allows businesses to allocate the cost of tangible and intangible assets over their useful lives, thereby reducing taxable income.
Block of Assets Concept
The Income Tax Act introduces the concept of ‘Block of Assets,’ which groups assets of similar nature and depreciation rates. Instead of calculating depreciation for each asset individually, it’s computed for the entire block. This simplifies the process and ensures uniformity
Depreciation Rates as per Income Tax Act
Depreciation rates vary based on the type of asset. Here’s a simplified chart:
Tangible Assets
| Asset Type | Depreciation Rate (%) |
|---|---|
| Buildings (residential) | 5% |
| Buildings (non-residential) | 10% |
| Furniture and fittings | 10% |
| Plant and machinery | 15% |
| Motor vehicles (used in business) | 15% |
| Motor vehicles (commercial use) | 30% |
| Computers and software | 40% |
Intangible Assets
| Asset Type | Depreciation Rate (%) |
|---|---|
| Know-how, patents, copyrights, trademarks | 25% |
Note: These rates are subject to change based on amendments to the Income Tax Act. It’s advisable to refer to the latest provisions or consult a tax professional.
How to Calculate Depreciation?
Depreciation is primarily calculated using the Written Down Value (WDV) method under the Income Tax Act.
Written Down Value (WDV) Method
In the WDV method, depreciation is calculated on the reduced value of the asset/block each year.
Formula:
Depreciation = WDV at the beginning of the year × Depreciation rate
Example:
If the WDV of machinery at the beginning of the year is ₹1,00,000 and the depreciation rate is 15%, then:
Depreciation = ₹1,00,000 × 15% = ₹15,000
New WDV = ₹1,00,000 – ₹15,000 = ₹85,000
In the next year, depreciation will be calculated on ₹85,000.
Conditions for Claiming Depreciation
To claim depreciation under the Income Tax Act:
- Ownership: The asset must be owned, wholly or partly, by the assessee.
- Usage: The asset should be used for the purpose of business or profession.
- Put to Use: If the asset is used for less than 180 days in a financial year, only 50% of the depreciation is allowed.
Additional Depreciation
Under Section 32(1)(iia) of the Income Tax Act, additional depreciation of 20% is allowed for new machinery or plant (other than ships and aircraft) acquired and installed by a manufacturing company. This is over and above the normal depreciation.
Conclusion
Understanding depreciation is crucial for businesses to optimize their tax liabilities. By accurately calculating and claiming depreciation, businesses can ensure compliance with tax laws and make informed financial decisions.
Always consult with a tax professional or refer to the latest provisions of the Income Tax Act for accurate and updated information.
