1. What is Depreciation?
Depreciation under the Income Tax Act is a deduction allowed for the decline in the real value of a tangible or intangible asset used by a taxpayer. The Income Tax Department uses the concept of depreciation for the purpose of writing off the cost of an asset over its useful life.
Depreciation is a mandatory deduction and the Act allows the deduction either under straight-line method or written down value (WDV) method. They calculate the deduction for depreciation under the WDV method except for undertaking engaged in generation or generation and distribution of power. The Act also allows a deduction for additional depreciation in the year of purchase in certain circumstances. To read about additional depreciation visit Additional Depreciation Under the Income Tax Act.
2. 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
3. Conditions For Claiming Depreciation
You can avail deduction for depreciation, only if it satisfies the following conditions.
- The assets must be owned, wholly or partly, by the assessee.
- They 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 the 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.
4. Written Down Value- 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 earlier year WDV shall be equal to the actual cost incurred less depreciation actually allowed under the Act.
5. Depreciation Allowed
- The allowance for depreciation is calculated under the WDV method except for undertaking engaged in generation or generation and distribution of power. The depreciation rates are given in Appendix 1. In case of undertakings engaged in generation or generation and distribution of power, such undertaking has an option to claim depreciation on WDV method at the rates provided in New Appendix I – 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 under 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 allowance for depreciation is available to the lessee.
|RATES OF DEPRECIATION||(%)|
|(a) Buildings which are used mainly for residential purposes except for hotels and Boarding House||5|
|(b) Buildings which are not used mainly for residential purposes and other than mentioned in a & c||10|
|(c) Buildings acquired on or after 1-9-2002 for installing P&M forming part of water supply project; or water treatment system and put to use for the purpose of providing infrastructure facilities u/s. 80-IA(4)(i) of the Act||40|
|(d) Purely temporary erections such as wooden structures||40|
“Buildings” include roads, bridges, culverts, wells and tube wells.
A building shall be deemed to be a building used mainly for residential purposes if the built-up floor area thereof used for residential purposes is not less than sixty-six and two-thirds percent of its total built-up floor area and shall include any such buildings in the factory premises.
Water treatment system includes a system for desalination, demineralization, and purification of water.
|(II) Furniture and fittings including electrical fittings||10|
|Electrical fittings include electrical wiring, switches, sockets, other fitting and fans, etc.|
|(III) Machinery and plant:
Plant has been held to include :
Sanitary & pipeline fitting
Ceiling and pedestal fans
However, w.e.f. A.Y. 2004-05, it shall not include buildings, furniture, and fittings.
|1) Machinery & plant other than those covered by sub-items 2, 3 and 8 below:
Machinery and plant includes pipes needed for delivery from the source of supply of raw water to the plant and from the plant to the storage facility
|2) Motor-cars (other than those used in the business of running them on hire) acquired or put to use on or after 1st April 1990||15|
|3) Motor-cars (other than those used in the business of running them on hire) acquired on or after 23rd August 2019 but before 1st April 2020 and is put to use before 1st April 2020||30|
|4) (i) Aeroplane-Aeroengines||40|
|(ii) Motor buses, Motor lorries, and Motor used in a business of running them on hire||30|
|(iii) Motor buses, Motor lorries, and Motor used in a business of running them on hire acquired on or after 23rd August 2019 but before 1st April 2020 and is put to use before 1st April 2020||45|
|(iv) Commercial vehicles acquired on or after 1-10-1998 but before 1-4-1999 and is put to use before 1-4-1999 for the purposes of business or profession||40|
|(v) New commercial vehicles acquired on or after 1-10-1998 but before 1-4-1999 and is put to use before 1-4-1999 in replacement of condemned vehicles of over 15 years of age for the purpose of business or profession||40|
|(vi) New commercial vehicles acquired on or after 1-4-1999 but before 1-4-2000 in replacement of condemned vehicles of over 15 years of age and is put to use before 1-4-2000 for the purpose of business or profession||40|
|(vii) New commercial vehicles acquired on or after 1-4-2001 but before 1-4-2002 and is put to use before 1-4-2002 for the purpose of business or profession||40|
|(viii)New Commercial vehicles acquired on or after 1-1-2009 but before 1-10-2009 and put to use before 1-10-2009 for the purpose of business or profession
“Commercial vehicle” means — heavy goods vehicle, heavy passenger motor vehicle, light motor vehicle, medium goods vehicle, and medium passenger motor vehicle.
It does not include “maxi-cab”, “motor-cab”, “tractor” and “road-roller”.
|(ix) Moulds used in rubber and plastic goods factories||30|
|(x) Air pollution control equipment||40|
|(xi) Water pollution control equipment||40|
|(xii) Solid waste control equipment||40|
|(xiii) Machinery and plant used in semiconductor industry||30|
|(xiv) Lifesaving medical equipment||40|
|(xv) Any new plant and machinery installed in or after the P.Y. pertaining to A.Y. 1988-89 for manufacture of articles or things by using any technology or know-how developed or an article invented in a laboratory owned by a public sector company, Government, recognized University subject to specified conditions (See Rule 5(2))||40|
|5) Containers made of glass or plastic used as refills||40|
|6) Computers (including computer software)
“Computer Software” means any computer programme recorded on any disc, tape, perforated media or other information storage device.
|7) Machinery and plants used in weaving, processing and garment sector of textile industry purchased under TUFS on or after 1-4-2001 but before 1-4-2004 and is put to use before 1-4-2004||40|
|8) Machinery and plant acquired and installed on or after the 1-9-2002 in a water supply project or a water treatment system and which is put to use for the purpose of business of providing infrastructure facility under 80-IA(4)(i)||40|
|9) For other items of Plant & Machinery refer to Rule 5 App. 1||40|
|9) (i) Books owned by assessees carrying on a profession
|(ii) Books owned by assessees carrying on business in running lending libraries||40|
“Speedboat” means a motorboat driven by a high-speed internal combustion engine capable of propelling the boat at a speed exceeding 24 kilometers per hour in still water and so designed that when running at a speed, it will plane, i.e., its bow will rise from the water.
|(V) Intangible Assets
Know-how patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature acquired on or after 1-4-1998.
6. Example for Depreciation calculation
In 2017-18 Company purchased the following assets –
|Asset Name||Purchase Amt.||Date of Purchase||Depreciation Rate|
Depreciation will be computed as follows:
|Name of asset||Block 1||Block 2||Block 3|
|Machine – 15%||Furniture – 10%||Car -15%|
Purchases (>or = 180 days)
Purchase (<180 days)
Sold during the year
|Closing value of block before depreciation||540000||20000||300000|
|(500000*15% + 40000*15%*1/2)||(20000*10%)||(300000*15%*1/2)|
|Closing WDV after depreciation||462000||18000||277500|
7. Methods of Depreciation Calculation
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. One of the basic differences in income tax depreciation calculation and companies act depreciation other than rates of depreciation is the method of 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
8. Analysis of AS-22 with reference to Depreciation
Under Accounting Standard-22, Deferred Tax is recognized as the tax effect of Timing Differences. The whole concept of deferred tax is dependent on timing difference.
a. Accounting Income(loss)
Accounting income (loss) is the net profit or loss for a period, as reported in the statement of profit and loss, before deducting income tax expense or adding income tax saving.
b. Taxable Income (loss)
Taxable income (tax loss) is the amount of the income (loss) for a period, determined in accordance with the tax laws, based upon which income tax payable (recoverable) is determined.
c. Timing Differences
As per AS-22 timing differences are the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.
Example: – Say, you purchased an asset of Rs.1 lakh having a useful life of 5 years and allowed 100% depreciation under the Income Tax Act. You can claim Rs.20,000 (i.e. Rs. 100,000/5) as depreciation while calculating the account income. And Rs.1,00,000 is allowed as full depreciation in the year of purchase while computing the taxable income. The profit before depreciation is Rs.2 lakh.
Accounting Income is Rs.1,80,000 (2,00,000-20,000)
Taxable Income is Rs.1,00,000 (2,00,000-1,00,000)
Here, the difference between Accounting Income and Taxable Income created in the first year is called timing difference. The tax effect on the timing difference is recognised as Deferred tax asset in the books of the taxpayer. Further, this difference shall be reversed in subsequent years (as and when a deduction is claimed for the balance depreciation of Rs.80,000 (i.e. 100,000 minus 20,000). In this example, a timing difference of Rs.20,000 would reverse in each year when the entity deducts the depreciation of Rs.20,000 while computing the accounting income as compared to zero depreciation allowed while computing the taxable income.