Land and building depreciation rate: How to calculate, formula, examples

Every type of asset losses its value over time. Though real estate is considered to be one of the best investment opportunities, it also faces depreciation. The value of buildings may depreciate due to various reasons like poor maintenance, lack of adequate facilities, etc. However, the most important factor is the age of a building.

Keep reading to learn more about the depreciation of buildings and land and how to calculate it.

Building depreciation rate 

Depreciation of a building is the process by which its recorded cost is reduced in an organised way till its total value falls to zero. Or the value of the building reaches its salvage value. Only the plot of land on which a building is constructed does not lose its value. All built structures depreciate in value over time as their remaining useful life decreases.

Allowance for depreciation of building is provided as per the Income Tax Act, 1961. The Income Tax Act does not provide any specific definition for the word ‘building’. Therefore, its meaning must be taken in its true grammatical sense and judicial interpretation.

The meaning of the word ‘building’ as per the Oxford English Dictionary is a 'structure with a roof and walls, such as a house or factory’.

Land and building depreciation rate

The depreciation of a building refers to its fall in selling price. One thing that remains useful for centuries is land. Even when the value of a structure depreciates with time, the value of land reacts inversely. Therefore, you do not need to consider the land value when calculating depreciation.

Two of the most important factors that affect a building’s depreciation rate are its remaining useful life and its year of construction. Other factors responsible for depreciation include weather conditions, the property's location, maintenance frequency and the amenities located nearby. A well-maintained property in a desirable location may not depreciate over time.

Any expenditure incurred by an assessee for land is not calculated as a part of the cost of constructing a building. Depreciation is not permitted on the premium you pay for leasehold land, as this amount is not a part of the cost of the land. 

Land and building depreciation rate as per the Income Tax Act 

As per the Income Tax Act as well as various case laws and notifications, here is a list of the items that can also be classified as buildings. This is to charge depreciation allowance as per our country’s laws:

• Fencing or walls
• Wells and tube wells
• Compound walls and driveways
• Processing warehouse
• Landscaping
• Toll roads constructed by the assessee
• Hoarding structures used for outdoor advertising
• Road built within factory premises as links to the other buildings

Other than these, cold storage, cinema studios, administrative blocks, canteens, buildings allotted to employees, temples or churches constructed within factory premises are all considered as buildings.

Land and building depreciation rate as per the Companies Act

Schedule 2 of the Companies Act, 2013 provides the details regarding the useful life of assets that are tangible in nature. Depreciation of any type of asset is calculated using its Written Down Value (WDV) and Straight Line Depreciation (SLM) as per this act. 

Following is a table with the useful life and rates of depreciation of buildings as per the Companies Act, 2013:

Land and building depreciation percentage

The income tax department lets taxpayers claim deductions based on the reduction in the value of assets like property. Therefore, every financial year, the tax department announces the rate of depreciation. For buildings, the property type is not uniform. Some buildings are residential while others are commercial or industrial. 

Following are the rates of depreciation as per the Income Tax Act:

• Residential premises

Residential premises are buildings that are generally used for residential purposes. Exceptions to this type of building include hotels and boarding houses. As per the Income Tax Act depreciation rate applicable for residential premises is 5%.

• Other buildings 

Buildings which are not utilised for residential purposes are applicable for 10% depreciation. A building is usually considered a residential premise if 66.66% or more of the built-up floor area is used for residential purposes.

• Water treatment facility building

This refers to buildings acquired on or after 1^st September 2002 to make a water supply plant and install machinery for it. Other than that, this type of building can be used as a water treatment system. This building needs to be put to use for the business of providing infrastructure facility as per section 80 IA is chargeable with a special depreciation rate of 100%.

• Wooden structure

Temporary tin sheds or wooden structures are applicable for a depreciation rate of 100%. These structures are erected exclusively for temporary purposes.

Calculation of depreciation of a building as per the Income Tax Act is possible using the above blocks. These blocks are made keeping the class of asset and depreciation rate under consideration. Calculation of depreciation takes place as per the Written Down Value of a block of an asset. 

If you have purchased an asset in the previous year, its actual cost will be taken for calculating its depreciation rate. If this asset was bought before the previous year, its actual cost minus depreciation for the previous years will be used for calculating the total depreciation.

The formula for calculating depreciation using WDV is:

R = {1 – (S/C)^1/n} x 100

Here R = rate of depreciation in %

          S = Scrap value of an asset after its useful life

          C = Cost of an asset or its written-down value 

          n = Remaining useful life of an asset in years

Additionally, there is the Straight Line Method of calculating depreciation. Its formula is as follows:

Annual depreciation expense = [(Original cost-residual value)/useful life]

If we are to calculate the depreciation of a property, its formula would be the number of years within which it was constructed divided by its total useful age. This will help in calculating its current price. To find the total cost of a property, add the price of the land on which it is located. 

Let us take an example to understand how this calculation works:

For example, you decide to sell your property which is 15 years old. The value of land when you purchased it 15 years ago was Rs. 10 lakh. Its construction value at that time was Rs. 5 lakh. The total useful life of the property is 30 years. At present, its land value is Rs. 20 lakh. 

According to the formula, the depreciation value of the property is 15/30 which is 1/2.

After this, you need to deduct the depreciation from the construction cost.

Depreciated building rate = Rs. 5,00,000 * (1/2) = Rs. 2,50,000

= Rs. 5,00,000 lakh – Rs. 2,50,000 lakh 

= Rs. 2,50,000 lakh

After this, add the appreciated land value which is Rs. 20 lakh.

Therefore, the final market value that you can quote is around Rs. 22,50,000.

As you can see, calculating depreciation values is quite a complex procedure. Therefore, you can use any online depreciation calculator to calculate depreciation in a hassle-free manner. Using an online calculator you only need to input cost of an asset, residual value, method of depreciation, and its life. 

Final words

The depreciation of a building depends on a wide range of factors. These include legal issues, infrastructure development, location, physical maintenance, etc. Depreciation of a property is unavoidable. A property's selling price does not however always depend on the depreciation rate.

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