Depreciation Rates for FY 2023-24 Under Income Tax Act

The concept of depreciation is allowed under the Income Tax Act. Depreciation under the Income Tax Act is a deduction allowed for the reduction in the real value of a tangible or intangible asset used by a taxpayer.

What is Depreciation?

The concept of depreciation is used for the purpose of writing off the cost of an asset over its useful life. Depreciation is a mandatory deduction in the profit and loss statements of an entity using depreciable assets and the Act allows deduction either using the Straight-Line method or Written Down Value (WDV) method.

The calculation for depreciation under the WDV method is widely used. However, in case the undertaking is engaged in power generation or its generation and distribution, there is an option to choose the straight-line method. 

In certain circumstances, the Act also allows a deduction for additional depreciation in the year of purchase. To read about additional depreciation visit- Additional Depreciation Under the Income Tax Act.

Block Of Assets- Concept

Depreciation is calculated on the WDV of a Block of assets. Block of assets is a group of assets falling within a class of assets comprising of:

• Tangible assets, being building, machinery, plant or furniture,
• Intangible assets, being know how, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature

The block of assets is identified depending on its life, nature, and similar use. Further, the depreciation percentage within the class of assets must be considered for asset classification. Each such class of asset with the same rate of depreciation will be identified as a block of the asset.

Individual assets lose their identity under Income Tax Act as depreciation is calculated on the block of assets rather than on individual assets.

Conditions For Claiming Depreciation

• The assets must be owned, wholly or partly, by the assessee.
• The assets must be in use for the business or profession of the taxpayer. If the assets are not used exclusively for the business, but for other purposes as well, depreciation allowable would be proportionate to the use of business purpose. The Income Tax Officer also has the right to determine the proportionate part of the depreciation under Section 38 of the Act.
• Co-owners can claim depreciation to the extent of the value of the assets owned by each co-owner.
• You cannot claim depreciation on Goodwill and cost of land.
• Depreciation is mandatory from A.Y. 2002-03 and shall be allowed or deemed to have been allowed as a deduction irrespective of a claim made by a taxpayer in the profit & loss account. That is, the taxpayer can carry forward the WDV after reducing the depreciation amount.
• If opted for presumptive taxation scheme, the deemed profit is said to have considered the effect of depreciation.
• Depreciation under the Companies Act, 1956 is different from that of 
  Income Tax Act. Therefore, depreciation rates prescribed under the Income Tax Act are only allowed irrespective of the depreciation rates charged in the books of accounts.

Written Down Value or WDV of Assets - Meaning

As per Section 32(1) of the IT Act depreciation should be computed at the prescribed percentage on the WDV of the asset, which in turn is calculated with reference to the actual cost of the assets. In the context of computing depreciation, it is important to understand the meaning of the term ‘WDV’ & ‘Actual Cost’.

WDV under the Income Tax Act means:

• Where the asset is acquired in the previous year, the actual cost of the asset shall be treated as WDV.
• Where the asset is acquired in an earlier year, the WDV shall be equal to the actual cost incurred less depreciation actually allowed under the Act.

Amount of Depreciation Allowed

• The depreciation is calculated under the WDV method. The depreciation rates are given in Appendix 1 .
• Except in the case of undertakings engaged in power generation or its generation and distribution, such undertaking has an option to claim depreciation on WDV method or Straight-Line method – if such option is exercised before the due date of filing the return.
• In the case of amalgamation or demerger, the aggregate depreciation allowance shall be apportioned between the amalgamating and the amalgamated company, or the demerged and the resulting company. The aggregate depreciation would be computed as if the amalgamation or demerger had not taken place. It shall be apportioned based on the number of days the assets were used by such companies.
• In case of a finance lease transaction, the lessee has to capitalise the assets in its books as per AS-19 – the Accounting Standard on Leases. In such cases, the lessee can exercise the rights of the owner in his own right and hence the depreciation is allowed to be taken by the lessee.

Depreciation Rates for FY 2023-24 for Most Commonly Used Assets

Depreciation Rates as per the Income Tax Act (Comprehensive Chart)

The below depreciation rate chart is divided into two parts

• Part A Tangible Assets
• Part B Intangible Assets

For example, the depreciation will be computed as follows:

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

Formula for Calculating Depreciation by Straight-Line Method

a. Straight-Line Method Rate of Depreciation =

[ (Original Cost – Residual Value) / Useful Life ] x 100 

b. Depreciation =

Original Cost x Rate of Depreciation under SLM (as calculated in (a))

Analysis of AS-22/IND AS 12 with reference to Depreciation

Depreciation methods differ for taxation purpose and accounting purpose. Hence, the amount of depreciation differs which gives rise to a timing difference. Such timing difference needs to be quantified in financial statements in the form of deferred tax liability / asset.

Under Accounting Standard-22, deferred Tax is income tax payable/recoverable in future periods due to taxable temporary differences. 

Temporary differences are the differences between the carrying amount of an asset or liability in the Balance sheet and its tax base. Tax Base is the amount attributed to the asset or liability for tax purpose.

Illustration: 
An asset with a cost Rs 150 has a carrying amount of Rs 100. 
Cumulative depreciation for tax purposes is Rs 90 and the tax rate is 25%. 
therefore, the tax base (opening balance as per IT Act) is –

(Cost of Rs 150 less cumulative tax depreciation of Rs 90), i.e. Rs 60

To recover the carrying amount of Rs 100, the entity must earn taxable income of Rs 100, but will only be able to deduct tax depreciation of Rs 60. Consequently, the entity will pay income taxes of Rs 10 (Rs 40 at 25%) when it recovers the carrying amount of the asset. The difference between the carrying amount of Rs 100 and the tax base of Rs 60 is a taxable temporary difference of Rs 40. 

Therefore, the entity recognizes a deferred tax liability of Rs 10 (Rs 40 at 25%) representing the income taxes that it will pay when it recovers the carrying amount of the asset.

Also Read:
Car and Bike Depreciation Rate
Land and Building Depreciation Rate
Computer, Laptop & Printer Depreciation Rate
Mobile Phone Depreciation Rate
Furniture Depreciation Rate
Plant and Machinery Depreciation Rate

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