Plant and machinery depreciation rate: Calculation process, example and formulas

Depreciation is the decrease in the monetary value of any asset over time due to usage, wear and tear and technological advancement. Machinery, equipment and currency are examples of some assets that usually depreciate over some time. 

You can estimate the rate of depreciation of an asset by finding out an asset's useful life. Keep reading to find out how the depreciation rate of plant and machinery are calculated.

Plant and machinery depreciation rate 

According to the Income Tax Act, certain depreciation rates are applicable in case a company purchases a plant or machinery during a fiscal year. If a company invests in furniture, equipment or machinery throughout a year, it needs to record depreciation as the assets' values decrease over time. 

For income tax calculation, the term 'plant' includes scientific apparatus, ships, vehicles, and surgical equipment required for a business to operate.

Machines include different types of mechanical items and devices. Machinery does not need to be self-contained units and can be part of bigger machinery. Alternatively, it can be one or more machines used with each other.

A company's plant and machinery can include a wide variety of movable assets, which are included in the list below:

• Telephone systems
• Electric fans and air conditioners
• Electrical transformers
• Gas cylinders
• Safe deposit lockers
• Scaffolding and ladders
• Books containing technological knowledge
• Tools and equipment
• Shelves and bins in a factory
• Data processing machines, computers and printers 
• Mains, switch gears and service lines

Plant and machinery depreciation rate as per the Income Tax Act 

Depreciation is discussed under Section 32 of the Income Tax Act, 1961. As per the Income Tax Act, deductions for deprecation are applicable for both tangible and non-tangible assets. With capital assets, the deduction is done from the cost of a factory or equipment. This deduction is calculated using the Written Down Value (WDV) of a block of assets. For power-generating units, the Straight Line Method (SLM) is applicable.

Different depreciation rates are applicable for different types of plants and machinery. Here is a way to find out the depreciation rate of any asset using the income tax department's website:

1: Log in to the official website of income tax India and go to 'Charts and Tables'.

2: On the search bar present on this page, enter 'depreciation rates' and click 'Search'.

3: Click on the 'Depreciation rates' result link, and you will be able to check the rates of depreciation applicable for a particular plant or machinery.

Depreciation rates applicable as per Income Tax Act on plants and machinery can be divided into the following categories:

• Any type of plant or machinery that a company does not employ in a business of operating them on rent, including motor vehicles. These are applicable for 15% depreciation.
• Motor buses, motor taxis and motor lorries that a company uses in a business involved in renting them out can get 15% depreciation. Moulds used in rubber factories or plastic industries have the same depreciation rate applicable. 
• 40% depreciation is applicable for aero-engines and aeroplanes, life-saving medicines, and plastic or glass containers used as refills. Other than that, plants or machinery used for garment sectors, weaving, and processing that are purchased on or after 1st April 2001 and before 1st April 2004 can also get 40% depreciation. 

All other types of plants and machinery that were applicable for 60%, 80% and 100% depreciation rates are also in the 40% depreciation bracket since 1st April 2017.

According to Income Tax Act following are the conditions that need to be satisfied to claim a deduction:

• An assessee should wholly or partly own the asset.
• The asset must be in use for business or professional purposes. In case a company does not use it for business or any other purpose, the depreciation is allowable in proportion to the business purpose. The Income Tax Officer even has the right to learn about the proportionate part of depreciation as per Section 38 of the Income Tax Act.
• Co-owners are also eligible to claim depreciation equal to the part of the asset's value that each co-owner owns.
• The cost of land is not a qualifiable factor for the adjustment of depreciation value.

According to Section 32(A) of the Income Tax Act, if a company purchases any asset in the previous year, it can consider the real cost as the Written Down Value. However, in case the asset is purchased before the previous year, WDV would be the original cost minus depreciation allowed under this act.

Plant and machinery depreciation rate as per the Companies Act, 2013

Depreciation calculation as per the Companies Act, 2013 has been applicable since the financial year 2014-15. Companies need to calculate depreciation by an asset's cost, life and residual value per the Companies Act. 

Companies can use both SLM and WDV to calculate the depreciation value. Schedule II contains a list of the useful life of any class of asset. An asset's residual value should not exceed 5% of its original value.

Companies have the freedom to adopt a useful life more than what is specified or a residual value of more than 5%. However, they need to offer justification for this along with technical advice when filing tax returns. 

The company needs to mention the depreciation calculation method in its accounts. If any asset is purchased or sold, the calculation is done as per the date of purchase/sale.

The depreciation rate remains the same for assets with No Extra Shift depreciation. However, if any company uses an asset for a double shift, its rate of depreciation increases by 50% and for a triple shift, it increases by 100%. Every part of an asset shall be applicable for depreciation separately, considering its cost significance.

Here's the formula for calculating depreciation using the WDV method:

R = {1 – (S/C) ^1/n} x 100

Here R = rate of depreciation in %

          S = Scrap value of an asset after a useful life

          C = Cost or written down value of an asset

          n = Remaining useful life of an asset in years

Here's the formula for calculating depreciation using SLM:

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

Therefore Depreciation = Original Cost * Rate of Depreciation under SLM (according to the previous formula)

As you can see, calculating depreciation is quite complex using mathematical formulas. Therefore, you can use any online calculator for this purpose. You only need to enter the cost, residual value, method of depreciation and the life of an asset. After this, you can view a depreciation timeline, including the asset's opening value, depreciation and closing value.

Final word

Whether it is a laptop or match frames in a factory, all assets have a specific depreciation rate. Therefore, you need to confirm the rate at which the income tax department calculates the depreciation rates of a specific asset. Whether you follow the Companies Act, 2013 or the Income Tax Act, the depreciation rates apply to every asset.