BAJAJ BROKING
March 01, 2025
9 mins read
Assets lose value over time due to wear, tear, and usage. The Income Tax Act, 1961, allows depreciation deductions under Section 32 for eligible assets, reducing taxable income and ensuring accurate reporting.
Depreciation, under Section 32 of the Income Tax Act, 1961, refers to the reduction in an asset’s value due to continuous usage, wear, or obsolescence over time. It allows taxpayers to claim deductions on tangible assets like buildings, machinery, and furniture, and intangible assets like patents, trademarks, and copyrights. Depreciation helps reduce taxable income and must be calculated using the Written Down Value (WDV) method for most assets, except for power-generating units, which use the Straight Line Method (SLM). The rates are predefined based on the asset type and usage, ensuring systematic, accurate deduction calculations in compliance with tax regulations.
The Income Tax Act, 1961, classifies assets into tangible and intangible categories for depreciation purposes under Section 32. Depreciation is calculated on a block of assets, ensuring simplified, accurate, and consistent deductions for taxpayers, which helps streamline tax filing and improve financial reporting.
Tangible Assets:
Buildings: Residential (5%) and non-residential (10%).
Machinery and Plant: General (15%), ships (20%), and aircraft (40%).
Furniture and Fittings: 10%.
Motor Vehicles: Personal use (15%) and commercial use (30%).
Computers and Software: 40%.
Intangible Assets:
Know-how, patents, trademarks, and copyrights (25%).
Depreciation is applied using the Written Down Value (WDV) method for most assets, except power-generating units, which use the Straight Line Method (SLM). Accurate categorization ensures better compliance with depreciation provisions and efficient, transparent, and legally sound tax calculations for businesses and professionals alike.
The Income Tax Act specifies prescribed rates of depreciation for different asset categories to ensure consistent tax deductions. These rates vary based on the asset type, purpose, usage, industry practices, and relevant tax laws. Depreciation is calculated using the Written Down Value (WDV) method for most assets, except power-generating units, which use the Straight Line Method (SLM). Below are the prescribed depreciation rates:
Asset Type | Depreciation Rate |
Residential Buildings | 5% |
Non-Residential Buildings | 10% |
Furniture and Fittings | 10% |
Computers and Software | 40% |
Plant and Machinery | 15% |
Personal Use Motor Vehicles | 15% |
Commercial Use Motor Vehicles | 30% |
Ships | 20% |
Aircraft | 40% |
Intangible Assets | 25% |
These rates apply to the respective asset blocks for tax deductions, ensuring consistency in claims for both businesses and individuals.
Claiming depreciation under the Income Tax Act requires following specific steps to ensure proper deductions. Depreciation helps reduce taxable income, thereby lowering tax liability. Below are the key steps to claim depreciation:
Classify Assets: Group assets into appropriate blocks, based on type and depreciation rate.
Calculate Written Down Value (WDV): Determine the WDV of each block at the beginning of the financial year.
Apply Depreciation Rates: Use the prescribed depreciation rates for each block as per the Income Tax Act.
Record in Accounts: Ensure depreciation amounts are recorded accurately in the profit and loss account.
File Income Tax Returns: Include the depreciation claim when filing returns, reducing taxable income.
Ownership and Usage: Ensure the asset is owned and used for business purposes to qualify.
Co-ownership: If applicable, co-owners can claim depreciation based on their share of the asset.
Asset Classifications
Under the Income Tax Act, assets are classified into distinct categories for depreciation purposes. These classifications simplify depreciation calculations and ensure consistent tax deductions. Assets are grouped into two main categories: tangible and intangible assets.
Tangible Assets: These include physical items such as buildings, machinery, furniture, and vehicles. Tangible assets are subject to specific depreciation rates based on their type, purpose, and usage.
Intangible Assets: These consist of non-physical assets like patents, copyrights, trademarks, and goodwill. These assets also qualify for depreciation, but at different rates than tangible assets.
Each asset category is further grouped into "blocks of assets" based on shared depreciation rates. Depreciation is then calculated for the entire block, ensuring uniformity and simplicity in tax deductions, offering clarity for taxpayers.
Lease vs. Ownership
When it comes to claiming depreciation under the Income Tax Act, there is a clear distinction between leased assets and owned assets. Depreciation benefits are available only to the owner of the asset, as ownership is a prerequisite for claiming deductions.
Ownership: If a taxpayer owns an asset, they are eligible to claim depreciation on it, regardless of how the asset is financed. This applies to tangible assets like machinery, vehicles, and buildings, as well as intangible assets like patents, trademarks, or copyrights.
Lease: In the case of leased assets, the lessee is not eligible to claim depreciation. The lessor (owner) retains the right to claim depreciation on the asset. However, if the lessee purchases the asset, they may claim depreciation once ownership is transferred.
The Income Tax Act emphasizes that ownership must be clearly established to benefit from depreciation claims, whether the asset is fully owned or partially financed.
Business or Professional Use
To claim depreciation under the Income Tax Act, the asset must be used for business or professional purposes. Depreciation can only be claimed for assets that contribute to income generation. If an asset is used for personal purposes, depreciation will be allowed only for the period it is used for business. Additionally, even if an asset is used for part of the financial year, depreciation can still be claimed proportionately for that period. This ensures that only assets actively contributing to business operations receive tax benefits.
Depreciation on Sold Assets
Depreciation cannot be claimed on assets that are sold, discarded, or destroyed within the same financial year. If an asset is disposed of during the year, it is excluded from depreciation calculations for that period, ensuring that only active, income-generating assets benefit from deductions.
Co-ownership Considerations
In cases of co-ownership, each co-owner can claim depreciation on their share of the asset. Depreciation is calculated proportionately based on the ownership percentage, ensuring fair tax benefits for all co-owners involved in the asset’s use, maintenance, and value appreciation.
Claiming depreciation under the Income Tax Act requires meeting specific conditions:
Ownership of Asset: The taxpayer must be the asset's owner, fully or partially. Only the owner, including co-owners, can claim depreciation on their share of the asset.
Business or Professional Use: The asset must be used for business or professional purposes. Depreciation can be claimed proportionately if the asset is used part of the year for income generation or operational purposes.
Asset Classification: The asset must belong to the categories prescribed for depreciation, including tangible assets (machinery, vehicles) and intangible assets (patents, trademarks, copyrights).
Exclusion of Land and Goodwill: Depreciation cannot be claimed on land, as it does not depreciate. Goodwill is also excluded as it doesn’t experience wear and tear or obsolescence.
Non-Sale of Asset: Depreciation cannot be claimed for assets sold, discarded, or destroyed in the same financial year, ensuring only actively used assets qualify.
Mandatory Depreciation: Depreciation became mandatory starting from fiscal year 2002-03 and must be allowed, even if not explicitly claimed in the profit and loss account.
Co-ownership: Each co-owner can claim depreciation on their respective share of the asset, based on ownership percentage.
Asset Usage Period: Depreciation is eligible for the period the asset is used, even if it’s for part of the year.
The Income Tax Act provides two primary methods for calculating depreciation: the Written Down Value (WDV) method and the Straight Line Method (SLM).
WDV Method: Depreciation is calculated on the reduced value of the asset at the beginning of each year. The amount decreases annually.
SLM: Depreciation is calculated on the original cost of the asset, applied equally over its useful life.
These methods are used based on asset type and industry requirements.
Depreciation under the Companies Act, 1956
Depreciation rates differ from those in the Income Tax Act.
Depreciation calculation is based on the company's books, not tax laws.
Companies can use either the WDV or SLM methods for asset depreciation.
Depreciation under the Companies Act, 2013
Depreciation is calculated as per the company's books, not tax laws.
The Companies Act 2013 follows the straight-line method (SLM) for depreciation.
Companies must comply with Schedule II for asset depreciation rates.
Depreciation under the Income Tax Act, 1961
Depreciation is allowed on both tangible and intangible assets.
Calculated using the WDV or SLM methods.
Prescribed rates vary by asset type and usage.
Mandatory from fiscal year 2002-03.
To claim depreciation under the Income Tax Act, certain conditions must be met:
Ownership of Asset: The taxpayer must be the asset's owner, either fully or partially. Co-owners can also claim depreciation based on their share.
Business or Professional Use: The asset must be used for business or professional purposes to qualify for depreciation. If used for personal reasons, only the proportionate business-use period can be claimed.
Exclusion of Land and Goodwill: Depreciation cannot be claimed on land, as it does not depreciate. Similarly, goodwill is excluded since it doesn't experience wear and tear.
Non-Sale of Asset: Depreciation is not allowed to be claimed on assets that are sold, discarded, or destroyed within the same financial year. This rule ensures that deductions are only applicable to assets that remain in active use throughout the year, preventing claims for assets that are no longer in service or have been disposed of.
Mandatory Depreciation: Since fiscal year 2002-03, depreciation is mandatory. Even if not explicitly claimed in the profit and loss account, it must be presumed as a deduction.
Co-ownership: Co-owners can claim depreciation on their respective portion of the asset.
Asset Classification: The asset must belong to an eligible category, such as tangible assets (machinery, vehicles) or intangible assets (patents, trademarks).
Tax depreciation offers several advantages for businesses and individuals:
Reduces Taxable Income: Depreciation lowers taxable income, leading to reduced tax liabilities and increased cash flow, which helps businesses grow.
Encourages Investment: Depreciation incentives businesses to invest in new assets, promoting growth and modernization of operations and efficiency.
Improves Cash Flow: As a non-cash expense, depreciation does not affect actual cash flow, allowing for reinvestment in operations, leading to expansion.
Simplifies Compliance: Grouping assets into blocks for depreciation simplifies tax calculations and reduces administrative complexity, ensuring accurate reporting.
Provides Long-Term Financial Relief: Depreciation spreads tax benefits over an asset's useful life, ensuring consistent financial relief and stability for businesses.
Understanding depreciation under the Income Tax Act is crucial for effective tax planning. By correctly applying depreciation methods, asset classifications, and eligibility requirements, businesses and individuals can reduce their taxable income and optimize financial outcomes. Depreciation also encourages investment in new assets, improves cash flow, and simplifies compliance with tax laws. Ensuring accurate reporting and adherence to depreciation rules helps maximize benefits and long-term financial stability, ensuring proper tax deductions.
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Depreciation under the Income Tax Act refers to the reduction in the value of assets over time due to usage, wear and tear, or obsolescence. It allows taxpayers to claim deductions on tangible and intangible assets, reducing taxable income for businesses and individuals.
Assets are classified for depreciation purposes based on their type and usage. Tangible assets include buildings, machinery, and furniture, while intangible assets encompass patents, trademarks, and copyrights. Depreciation is applied to a block of assets sharing the same depreciation rate.
Current rates of depreciation for different assets under the Income Tax Act are prescribed. For example, residential buildings have a 5% rate, while commercial vehicles have 30%. Rates vary depending on asset type and usage, such as plant and machinery, which have a 15% rate.
To claim depreciation, assets must be owned by the taxpayer, used for business or professional purposes, and not sold or discarded within the same financial year. Depreciation cannot be claimed on land or goodwill, which are excluded under the Income Tax Act.
Two primary methods are used to calculate depreciation under the Income Tax Act: the Written Down Value (WDV) method and the Straight Line Method (SLM). The WDV method applies depreciation to the asset’s reduced value, while SLM distributes depreciation evenly over the asset's useful life.
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