Depreciation, according to the Income Tax Act, allows you to deduct the declining value of assets such as equipment or property used for your business.
Understanding Depreciation
Depreciation is when an asset loses value over time. It’s an important cost listed in a company’s financial records for assets that wear out or become less valuable. The Income Tax Act gives rules for working out depreciation, using either the Straight-Line method or the Written Down Value (WDV) method.
Most businesses use the WDV method for working out depreciation. However, companies in power generation can choose the straight-line method. Also, sometimes the Act allows an extra deduction for depreciation in the year you buy an asset. You can find more about this in the section on Additional Depreciation in the Income Tax Act.
Understanding Blocks of Assets
Depreciation is figured out based on the Written Down Value (WDV) of a bunch of assets called a Block of Assets. A Block of Assets includes things like buildings, machinery, plants, furniture, patents, copyrights, trademarks, licenses, franchises, or similar rights.
We decide what makes up a block of assets based on how long they last, what they’re used for, and what they are. Also, the depreciation rate for each asset class is crucial for grouping them. Assets with the same depreciation rate are put together in a block of assets.
According to the Income Tax Act, when we calculate depreciation, we look at the whole block of assets instead of each individual asset losing its identity.
Criteria for Claiming Depreciation
To claim depreciation, you must meet certain conditions:
1. Ownership: You must own the assets, either completely or partially.
2. Business Use: The assets must be used for your business or profession. If they’re used for both business and personal purposes, you can claim depreciation proportionately for business use.
3. Co-ownership: If you co-own assets, you can claim depreciation based on the value of what you own individually.
4. Exclusions: You can’t claim depreciation on Goodwill or the cost of land.
5. Mandatory Deduction: Depreciation has been compulsory since Assessment Year 2002-03, regardless of whether you claim it in your profit and loss account.
6. Presumptive Taxation: If you choose the presumptive taxation scheme, depreciation affects the deemed profit.
7. Different Rates: Depreciation rates in the Companies Act, 1956 may not match those in the Income Tax Act. Only rates from the Income Tax Act are allowed, regardless of what’s recorded in your books.
Understanding Written Down Value (WDV) of Assets
In simple terms, the Written Down Value (WDV) of an asset, as per the Income Tax Act, is the basis for calculating depreciation. It’s determined from the actual cost of the asset. To understand how depreciation is calculated, it’s important to know what ‘WDV’ and ‘Actual Cost’ mean.
Under the Income Tax Act, WDV works like this:
1. If you got the asset this year, its actual cost is its WDV.
2. If you got the asset in a past year, its WDV is the actual cost minus the depreciation allowed by the Act.
How Much Depreciation You Get?
Depreciation is calculated using the WDV method, with rates listed in Appendix 1. But if you’re in power generation or distribution, you can pick between WDV and Straight-Line methods before filing your return.
When companies merge or split, they split the total depreciation allowance based on how much they used the assets.
For finance leases, lessees have to treat the assets as their own according to AS-19. That means they can claim depreciation because they own the assets.
Depreciation Rates for FY 2023-24 for Most Commonly Used Assets
| Sl. No | Asset Class | Asset Type | Rate of Depreciation |
| 1 | Building | Residential buildings not including boarding houses and hotels | 5% |
| 2 | Building | Boarding houses and hotels | 10% |
| 3 | Building | Purely temporary constructions like wooden structures | 40% |
| 4 | Furniture | Any fittings / furniture including electrical fittings | 10% |
| 5 | Plant and machinery | Motor cars excluding those used in a business of running them on hire | 15% |
| 6 | Plant and machinery | Motor 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 2020 | 30% |
| 7 | Plant and machinery | Lorries/taxis/motor buses used in a business of running them on hire | 30% |
| 8 | Plant and machinery | Lorries/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 2020 | 45% |
| 9 | Plant and machinery | Computers and computer software | 40% |
| 10 | Plant and machinery | Books owned by assessee carrying on a profession being annual publications | 100% |
| 11 | Plant and machinery | Books owned by assessee carrying on profession not being annual publications | 60% |
| 12 | Plant and machinery | Books owned by assessee carrying on business in running lending libraries | 100% |
| 13 | Intangible assets | Franchise, trademark, patents, license, copyright, know-how or other commercial or business rights of similar nature | 25% |
Depreciation rates according to the Income Tax Act (Comprehensive Chart)
Are divided into two sections:
Part A: Tangible Assets
Part B: Intangible Assets
| Asset Class | Sr. No. | Asset Type | Rate of Depreciation |
| Part A Tangible Assets | |||
| Building | 1 | Buildings used primarily for residential reasons (excluding boarding houses and hotels) | 5% |
| 2 | Buildings apart from those used primarily for residential reasons and not covered by subitems 1 (above) and 3 (below) | 10% | |
| 3 | Buildings 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-IA | 40% | |
| 4 | Purely temporary erections like wooden structures | 40% | |
| Furniture and fittings | Furniture and fittings including electrical fittings | 10% | |
| Plant and machinery | 1 | Plant and machinery excluding those covered by sub-items (2), (3) and (8) below | 15% |
| 2 | Motor cars, excluding those used in a business of running them on hire, procured or put to use on or after April 1, 1990 | 15% | |
| 3 | Motor 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 Engines | 40% | |
| 3(ii) | (a) Motor taxis, motor buses and motor lorries used in a business of running them on hire | 30% | |
| (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 32 | 40% | |
| 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 32 | 40% | |
| 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 32 | 40% | |
| 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 business | 40% | |
| 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 factories | 30% | |
| 3(viii) | Air pollution control equipment | 40% | |
| 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 equipment | 40% | |
| 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 systems | 40% | |
| 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) below | 30% | |
| 3(xi)a | Life Saving medical equipment | 40% | |
| 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 | |||
| Fibre optic 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 | |||
| 4 | Containers made of plastic or glass used as refills | 40% | |
| 5 | Computers including computer software | 40% | |
| 6 | Plant 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, 2004 | 40% | |
| 7 | Plant 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-IA | 40% | |
| 8 | 1. Wooden parts used in artificial silk manufacturing machinery | 40% | |
| 2. Match factories, wooden match frames | 40% | ||
| 3. Cinematograph films, bulbs of studio lights | 40% | ||
| 4. Salt works, condensers, reservoirs, salt pans, etc., made of clayey, sandy or earthy material or any other similar material | 40% | ||
| 5. Quarries and mines | |||
| Sand stowing pipes, winding ropes, tubs and haulage ropes | 40% | ||
| Safety lamps | 40% | ||
| 6. Flour mills, rollers | 40% | ||
| 7. Sugar works, rollers | 40% | ||
| 8. Steel and iron industry, rolling mill rolls | 40% | ||
| 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 treatment | 40% | ||
| (B) Instrumentation and monitoring system for monitoring energy flows | |||
| (i) Digital heat loss meters | |||
| (ii) Automatic electrical load monitoring systems | |||
| (iii) Infrared thermography | 40% | ||
| (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 recuperators | 40% | ||
| (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 boilers | 40% | ||
| (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 equipment | 40% | ||
| (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 burners | 40% | ||
| (G) Other equipment | |||
| (i) Mechanical vapour recompressors | |||
| (ii) Wet air oxidation equipment for recovery of heat and chemicals | |||
| (iii) Automatic microprocessor based load demand controllers | 40% | ||
| (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 valves | 40% | ||
| 11. Glass manufacturing concerns, Direct fire glass melting furnaces | 40% | ||
| 12. Mineral oil concerns | 40% | ||
| (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) above | 15% | ||
| 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 conversion | 40% | ||
| (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 publications | 40% | ||
| (ii) Books, excluding those covered by entry (i) above | 40% | ||
| (iii) Books owned by assessees carrying on business in running lending libraries | 40% | ||
| Ships | 4(i) | Ocean-going ships including tugs, survey launches, dredgers, barges and other similar ships used primarily for dredging purposes and sighing vessels with wooden hull | 20% |
| 4(ii) | Vessels ordinarily operating on inland waters, not covered by sub-item (iii) below | 20% | |
| 4 (iii) | Vessels ordinarily operating on inland waters being speed boats | 20% | |
| 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 asset | Block 1 | Block 2 | Block 3 |
| Machine – 15% | Furniture – 10% | Car – 15% | |
| Opening Value | 0 | 0 | 0 |
| Add– Purchases (>or = 180 days) Purchase (<180 days) | 5,00,000 40,000 | 20,000 | 3,00,000 |
| Less– Sold during the year | 0 | 0 | 0 |
| Closing value of block before depreciation | 5,40,000 | 20,000 | 3,00,000 |
| Depreciation | 78,000 | 2,000 | 22,500 |
| (5,00,000 x 15%) + (40,000 x 15% x 1/2) | 20000 x 10% | 300000 x 15% x 1/2 | |
| Closing WDV after depreciation | 4,62,000 | 18,000 | 2,77,500 |
Depreciation Calculation Methods
The ways we figure out depreciation and how long we think assets will last can differ based on the type of asset and the industry it’s in. This can also affect how we do accounting and taxes. Two common methods for depreciation are the Straight-Line Method and the Written Down Value Method.
There’s a key difference between how the Income Tax Act and the Companies Act handle depreciation calculation, including the methods they use.
Under the Companies Act, 1956 (Using Specified Rates), we have:
– Straight Line Method
– Written Down Value Method
Under the Companies Act, 2013, we consider the useful life of assets and have:
– Straight Line Method
– Written Down Value Method
– Unit of Production Method
According to the Income Tax Act, 1961, we use specified rates and have:
– Written Down Value Method (by blocks)
– Straight Line Method for Power Generating Units
Formula for Calculating Depreciation Using the Straight-Line Method:
a. Depreciation Rate under Straight-Line Method:
\[ \text{Depreciation Rate} = \left[ \frac{(Original Cost – Residual Value)}{\text{Useful Life}} \right] \times 100 \]
b. Depreciation Amount:
\[ \text{Depreciation} = \text{Original Cost} \times \text{Depreciation Rate under SLM} \]
This is found from step (a).
Analysis of AS-22/IND AS 12 Regarding Depreciation
Different methods for depreciation are used in tax and accounting practices, leading to varied depreciation amounts and creating timing discrepancies. These timing disparities need to be addressed in financial statements through deferred tax liabilities/assets.
As per Accounting Standard-22, deferred tax signifies income tax that will be owed/recoverable in future periods due to temporary differences that are taxable.
Temporary differences arise from differences between the recorded amount of an asset or liability in the balance sheet and its taxable value. The taxable value refers to the amount attributed to the asset or liability for tax purposes.
Example:
Let’s say there’s an asset that cost Rs 150 and has a carrying amount of Rs 100. The cumulative tax depreciation is Rs 90, with a tax rate of 25%. Therefore, the tax base (starting balance per IT Act) is calculated as follows:
Tax Base = Cost of Rs 150 – Cumulative tax depreciation of Rs 90
= Rs 60
To recover the carrying amount of Rs 100, the entity needs to generate taxable income of Rs 100. However, it can only deduct tax depreciation of Rs 60. Consequently, the entity will face income taxes of Rs 10 (25% of Rs 40) when recovering the asset’s carrying amount. The difference between the carrying amount of Rs 100 and the tax base of Rs 60 constitutes a taxable temporary difference of Rs 40.
So, the entity records a deferred tax liability of Rs 10 (25% of Rs 40), representing the income taxes payable upon recovering the asset’s carrying amount.
