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Depreciation under Income Tax Act

Updated on :  

08 min read.

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 depreciationrates charged in the books of accounts.

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 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 as per Income Tax Act for Most Commonly Used Assets

Sl.NoAsset ClassAsset TypeRate of Depreciation
1BuildingResidential buildings not including boarding houses and hotels5%
2BuildingBoarding houses and hotels10%
3BuildingPurely temporary constructions like wooden structures40%
4FurnitureAny fittings / furniture including electrical fittings10%
5Plant and machineryMotor cars excluding those used in a business of running them on hire15%
6Plant and machineryMotor cars excluding those used in a business of running them on hire purchased on or after 23 August 2019 but before the 1 April 2020 and is put to use before 1 April 202030%
7Plant and machineryLorries/taxis/motor buses used in a business of running them on hire30%
8Plant and machineryLorries/taxis/motor buses used in a business of running them on hire purchased on or after 23 August 2019 but before the 1 April 2020 and is put to use before 1 April 202045%
9Plant and machineryComputers and computer software40%
10Plant and machineryBooks owned by assessee carrying on a profession being annual publications100%
11Plant and machineryBooks owned by assessee carrying on profession not being annual publications60%
12Plant and machineryBooks owned by assessee carrying on business in running lending libraries100%
13Intangible assetsFranchise, trademark, patents, license, copyright, know-how or other commercial or business rights of similar nature25%

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
Edit
Asset ClassSr. No.Asset TypeRate of Depreciation
Part A Tangible Assets
Building1Buildings used primarily for residential reasons (excluding boarding houses and hotels)5%
2Buildings apart from those used primarily for residential reasons and not covered by subitems 1 (above) and 3 (below)10%
3Buildings procured on or after September 1, 2002, for installing plant and machinery forming part of water treatment system or water supply project and which is used for the purpose of business of providing infrastructure facilities under clause (i) of subsection (4) of section 80-IA40%
4Purely temporary erections like wooden structures40%
Furniture and fittingsFurniture and fittings including electrical fittings10%
Plant and machinery1Plant and machinery excluding those covered by sub-items (2), (3) and (8) below15%
2Motor cars, excluding those used in a business of running them on hire, procured or put to use on or after April 1, 199015%
3Motor cars, other than those used in a business of running them on hire, acquired on or after the 23rd day of August, 2019 but before the 1st day of April, 2020 and is put to use before the 1st day of April, 2020.30%
3(i)Aeroplanes, Aero Engines40%
3(ii)(a) Motor taxis, motor buses and motor lorries used in a business of running them on hire30%
(b) Motor buses, motor lorries and motor taxis used in a business of running them on hire, acquired on or after the 23rd day of August, 2019 but before the 1st day of April, 2020 and is put to use before the 1st day of April, 2020.45%
3(iii)Commercial vehicle which is procured by the assessee on or after October 1, 1998, but before April 1, 1999, and is used for any period of time prior to April 1, 1999, for the purpose of profession or business in agreement with the third proviso to clause (ii) of sub-section (1) of section 3240%
3(iv)New commercial vehicle procured on or after October 1, 1998, but prior to April 1, 1999, in replacement of condemned vehicle of more than 15 years of age and is used for any period of time prior to April 1, 1999, for the purpose of business or profession in agreement with the third proviso to clause (ii) of sub-section (1) of section 3240%
3(v)New commercial vehicle procured on or after April 1, 1999, but before April 1, 2000, in replacement of condemned vehicle of more than 15 years of age and is put to use prior to April 1, 2000, for the purposes of profession or business in agreement with the second proviso to clause (ii) of sub-section (1) of section 3240%
3(vi)New commercial vehicle procured on or after April 1, 2001, but before April 1, 2002, and is put to use before April 1, 2002, for the purpose of profession or business40%
New commercial vehicle which is acquired on or after the 1st day of January, 2009 but before the 1st day of October, 2009 and is put to use before the 1st day of October, 2009 for the purposes of business or profession [See paragraph 6 of the Notes below this Table]40%
3(vii)Moulds used in plastic and rubber goods factories30%
3(viii)Air pollution control equipment40%
Felt-filer system
Electrostatic precipitation systems
Scrubber
Counter current / packed bed / venture / cyclonic scrubbers
Dust collector systems
Evacuation system and ash handling system
3(ix)Water pollution control equipment40%
Aerated detritus chambers (including air compressor)
Mechanical screen systems
Mechanically skimmed grease and oil removal systems
Flash mixing equipment and chemical feed systems
Mechanical reactors and mechanical flocculators
Mechanically aerated activated sludge / diffused air systems
Biofilters
Aerated lagoon systems
Air floatation systems
Methane
recovery anaerobic digester systems
Steam/air stripping systems
Marine outfall systems
Urea Hydrolysis systems
Activated carbon column
Bio
Disc or rotating biological contractor
Marine outfall systems
Ion exchange resin column
Centrifuge for dewatering sludge
3(x)(a) Solid waste, control equipment Cryolite / mineral / lime / caustic / chrome recovery system (b) Resource recovery and solid waste recycling systems40%
3(xi)Plant and machinery used in semiconductor industry covering all integrated circuits (ICs) (not including hybrid integrated circuits) ranging from small scale integration (SSI) to large scale integration / very large scale integration (LSI/VLSI) as also discrete semiconductor devices like diodes, triacs, thyristors, transistors, etc., except those covered by entries (viii), (ix), (x) of this sub-item and sub-item (8) below30%
3(xi)aLife Saving medical equipment40%
D.C Defibrillators for pacemakers and internal use
Colour Doppler
Haemodialysis
Cobalt therapy unit
Vascular Angiography System including Digital subtraction Angiography
Heart lung machine
Spect Gamma Camera
Magnetic Resonance Imaging System
Ventilator used with anaesthesia apparatus
Ventilator except those used with anaesthesia
Surgical laser
Gamma knife
Fibreoptic endoscopes including audit resectoscope/paediatric resectoscope, arthoscope, peritoneoscopes, fibreoptic flexible nasal pharyngo, microaryngoscope, video laryngo, fiberoptic flexible laryngo bronchoscope.
Bronchoscope, video oescophago gastroscope, video oescopghago bronchoscope, fibreoptic flexible oesophago gastroscope
4Containers made of plastic or glass used as refills40%
5Computers including computer software40%
6Plant and machinery, used in processing, weaving and garment sector of textile industry, which is bought under TUFS on or after April 1, 2001, but prior to April 1, 2004, and is put to use prior to April 1, 200440%
7Plant and machinery procured and installed on or after September 1, 2002, in a water treatment system or a water supply project and put to use for the purpose of business of providing infrastructure facility under clause (i) of sub-section (4) of section 80-IA40%
81. Wooden parts used in artificial silk manufacturing machinery40%
2. Match factories, wooden match frames40%
3. Cinematograph films, bulbs of studio lights40%
4. Salt works, condensers, reservoirs, salt pans, etc., made of clayey, sandy or earthy material or any other similar material40%
5. Quarries and mines
Sand stowing pipes, winding ropes, tubs and haulage ropes40%
Safety lamps40%
6. Flour mills, rollers40%
7. Sugar works, rollers40%
8. Steel and iron industry, rolling mill rolls40%
9. Energy saving devices
(A) Furnaces and specialised boilers
(i) Fluidized bed boilers / ignifluid
(ii) Continuous pusher type furnaces and flameless furnaces
(iii) High efficiency boilers
(iv) Fluidized bed type heat treatment40%
(B) Instrumentation and monitoring system for monitoring energy flows
(i) Digital heat loss meters
(ii) Automatic electrical load monitoring systems
(iii) Infrared thermography40%
(iv) Microprocessor based control systems
(v) Meters for measuring heat losses, steam flow, furnace oil flow, power factor and electric energy meters
(vi) Exhaust gas analysers
(vii) Maximum demand indicator and clamp on power meters
(viii) Fuel oil pump test bench
(C) Waste heat recovery equipment
(i) Air pre-heaters and recuperators40%
(ii) Feed water heaters and economisers
(iii) Thermal energy wheel for low and high temperature heat recovery
(iv) Heat pumps
(D) Co-generation systems
(i) Controlled extraction, back pressure pass out, extraction cum condensing turbines for cogeneration along with pressure boilers40%
(ii) Organic rankine cycle power systems
(iii) Vapour absorption refrigeration systems
(iv) Low inlet pressure small steam turbines
(E) Electrical equipment
(i) Synchronous condenser systems and shunt capacitors
(ii) Relays (automatic power cut off devices)
(iii) Power factor controller for AC motors
(iv) Automatic voltage controller
(v) Solid state devices for controlling motor speeds
(vi) FACT (Flexible AC Transmission) devices, Thyristor controlled series compensation equipment40%
(vii) Thermally energy-efficient stenters
(viii) Series compensation equipment
(ix) TOD (Time of Day) energy meters
(x) Intelligent electronic devices/remote terminal units, computer software/hardware, bridges/router, other required equipment and associated communication systems for data acquisition systems and supervisory control, distribution management systems and energy management systems for power transmission systems
(xi) Special energy meters for ABT (Availability Based Tariff)
(F) Burners
(i) Zero to ten per cent excess air burners
(ii) Burners using air with high preheat temperature (above 300 degrees Celsius)
(iii) Emulsion burners40%
(G) Other equipment
(i) Mechanical vapour recompressors
(ii) Wet air oxidation equipment for recovery of heat and chemicals
(iii) Automatic microprocessor based load demand controllers40%
(iv) Thin film evaporators
(v) Fluid couplings and fluid drives
(vi) Coal based producer gas plants
(vii) Super-charges/turbo charges
(viii) Sealed radiation sources for radiation processing plants
10. Gas cylinders including regulators and valves40%
11. Glass manufacturing concerns, Direct fire glass melting furnaces40%
12. Mineral oil concerns40%
(i) Plant used in field operations (above ground) distribution, returnable packages
(ii) Plant used in field operations (below ground), but not including kerbside pumps including fittings and tanks used in field operations (distribution) by mineral oil concerns
(iii) Oil wells not covered in (i) and (ii) above15%
13. Renewable energy devices
(i) Pipe type and concentrating solar collectors
(ii) Flat plate solar collectors
(iii) Solar cookers
(iv) Air/fluid/gas heating systems
(v) Solar water heaters and systems
(vi) Solar crop drivers and systems
(vii) Solar steels and desalination systems
(viii) Solar refrigeration, air conditioning systems and cold storages
(ix) Solar pumps based on solar-photovoltaic and solar-thermal conversion40%
(x) Solar power generating systems
(xi) Solar-photovoltaic panels and modules for water pumping and other applications
14. Wind mills and any other specially designed devices that operate on wind mills (installed on or after April 1, 2014)
15. Any special devices including electric pumps and generators operating on wind energy (installed on or after April 1, 2014)
16. Books owned by assessees carrying on a profession
(i) Books, being annual publications40%
(ii) Books, excluding those covered by entry (i) above40%
(iii) Books owned by assessees carrying on business in running lending libraries40%
Ships4(i)Ocean-going ships including tugs, survey launches, dredgers, barges and other similar ships used primarily for dredging purposes and sighing vessels with wooden hull20%
4(ii)Vessels ordinarily operating on inland waters, not covered by sub-item (iii) below20%
4 (iii)Vessels ordinarily operating on inland waters being speed boats20%
Part B Intangible Assets
Franchise, trademark, patents, license, copyright, know-how or other commercial or business rights of similar nature 25%

For example, the depreciation will be computed as follows:

Name of assetBlock 1Block 2Block 3
 Machine – 15%Furniture – 10%Car – 15%
Opening Value000
Add– Purchases (>or = 180 days)
Purchase (<180 days)
5,00,000
40,000
20,0003,00,000
Less– Sold during the year 0 0 0
Closing value of block before depreciation5,40,00020,0003,00,000
Depreciation78,0002,00022,500
 (5,00,000 x 15%) +
(40,000 x 15% x 1/2)
20000 x 10%300000 x 15% x 1/2
Closing WDV after depreciation4,62,00018,0002,77,500

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 recognises 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.

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