As we know, the value of any asset gets reduced over a period of time mainly due to wear and tear or due to the passage of time. Such a process of reduction in the value over a period of time is termed as ‘depreciation’.
From the company law perspective, as per provisions of section 123(2) of the Companies Act, 2013, depreciation shall be provided in accordance with the provisions of schedule II.
Let us briefly understand the depreciation provisions as covered under the Companies Act, 2013.
Important bases for understanding depreciation as per Companies Act, 2013
First of all, let us go through the following important definitions provided under Schedule II –
1. Depreciation –
Depreciation means a systematic allocation of the ‘depreciable amount’ of an asset over its ‘useful life’. Importantly, the term depreciation includes amortization.
2. Depreciable amount –
Depreciable amount of an asset means the cost of an asset (or other amount substituted for cost) less its residual value.
3. Useful life –
Useful life of an asset means the period over which an asset is expected to be available for use by an entity (or the number of production/ similar units expected to be obtained from the asset by an entity).
Other important points –
> The useful life of an asset shall not ordinarily be different from the useful life specified in Part C of Schedule II.
In case the company adopts useful life different from the useful life specified in Part C, then, the financial statement of the company shall disclose such difference along with justification thereof.
> The residual value of an asset shall not be more than 5% of the original cost of an asset.
In case the company adopts a different residual value above the prescribed limit, then, the financial statement of the company shall disclose such difference along with justification thereof.
> Double shift and/ or triple shift depreciation –
In case the asset is used for the double shift for any time during the year, then, the depreciation will increase by 50% for the period for which the asset is used for a double shift.
In case the asset is used for the triple shift for any time during the year, then, the depreciation will increase by 100% for the period for which the asset is used for a triple shift.
Importantly, extra shift depreciation will not be available for the assets specifically marked as NESD (i.e. No Extra Shift Depreciation) in part C of schedule II.
> Provisions of depreciation under the Companies Act, 2013 are applicable only to the tangible assets. Accounting Standard 26 is to be followed for intangible assets.
Useful life of an asset as specified in part C of Schedule II –
Summarizing hereunder the useful life of different assets as specified in part C of Schedule II –
| Nature of assets | Useful life (in years) | |
| Building (NESD) | Building RCC frame structure (other than factory building) | 60 |
| Building other than RCC frame structure (other than factory building) | 30 | |
| Factory building | 30 | |
| Fences, tube wells, wells | 5 | |
| Others (which includes temporary structure, etc.) | 3 | |
| Bridges, culverts, bunders, etc. (NESD) | 30 | |
| Roads (NESD) | Carpeted roads (RCC) | 10 |
| Carpeted roads (other than RCC) | 5 | |
| Non-carpeted roads | 3 | |
|
Plant and Machinery |
General rate applicable to plant and machinery (which are not covered under special plant and machinery) | |
| Plant and machinery other than continuous process plant (not covered under specific industries) | 15 | |
| Continuous process plant for which no special rates has been prescribed (NESD) | 8 | |
| Special Plant and Machinery | ||
| Plant and machinery related to production and exhibition of Motion Picture Films | ||
| 1. Cinematograph films –
Machinery used in the production and exhibition of cinematograph films; developing machines; printing machines; recording and reproducing equipments; synchronisers; editing machines and studio lights (except bulbs). |
13 | |
| 2. Projecting equipment for the exhibition of films | 13 | |
| Plant and Machinery used in glass manufacturing | ||
| 1. Plant and machinery (except direct fire glass melting furnaces) – Recuperative and regenerative glass melting furnaces. | 13 | |
| 2. Plant and machinery (except direct fire glass melting furnaces) – Moulds (NESD) | 8 | |
| 3. Float glass melting furnaces (NESD) | 10 | |
| Plant and Machinery used in mines and quarries- portable underground machinery & earth moving machinery used in open cast mining (NESD) | 8 | |
| Plant and Machinery used in Telecommunications (NESD) | ||
| 1. Towers | 18 | |
| 2. Telecom transceivers, transmission, switching centres and other network equipment | 13 | |
| 3. Telecom – Cables, ducts and optical fibre | 18 | |
| 4. Satellites | 18 | |
| Plant and Machinery used in exploration, production and refining oil & gas (NESD) | ||
| 1. Refineries | 25 | |
| 2. Oil & gas assets (including wells), processing plant and facilities | 25 | |
| 3. Petrochemical plant | 25 | |
| 4. Storage tanks and related equipment | 25 | |
| 5. Pipelines | 30 | |
| 6. Drilling Rig | 30 | |
| 7. Field operations above ground, drilling tools, portable boilers, well-head tanks, etc. | 8 | |
| 8. Loggers | 8 | |
| Plant and Machinery used in transmission, generation and distribution of power (NESD) | ||
| 1. Thermal/ Combined/ Gas cycle power generation plant | 40 | |
| 2. Hydro power generation plant | 40 | |
| 3. Nuclear power generation plant | 40 | |
| 4. Transmission lines, cables & other network assets | 40 | |
| 5. Wind power generation plant | 22 | |
| 6. Electric distribution plant | 35 | |
| 7. Gas storage and distribution plant | 30 | |
| 8. Water distribution plant (including pipelines) | 30 | |
| Plant and Machinery used in the manufacture of steel | ||
| 1. Sinter plant | 20 | |
| 2. Blast Furnace | 20 | |
| 3. Coke ovens | 20 | |
| 4. Rolling mill in steel plant | 20 | |
| 5. Basic oxygen furnace converter | 25 | |
| Plant and Machinery used in the manufacture of non-ferrous metals | ||
| 1. Metal pot line (NESD) | 40 | |
| 2. Bauxite crushing & grinding section (NESD) | 40 | |
| 3. Digester section (NESD) | 40 | |
| 4. Turbine (NESD) | 40 | |
| 5. Equipment for calcination (NESD) | 40 | |
| 6. Copper Smelter (NESD) | 40 | |
| 7. Roll grinder | 40 | |
| 8. Soaking pit | 30 | |
| 9. Annealing Furnace | 30 | |
| 10. Rolling Mills | 30 | |
| 11. Equipment for scaling, slitting, etc. (NESD) | 30 | |
| 12. Surface Miner, Ripper Dozer etc. used in mines | 25 | |
| 13. Copper refining plant (NESD) | 25 | |
| Plant and machinery used in medical & surgical operations (NESD) | ||
| 1. Electrical machinery, X-ray & electrotherapeutic apparatus (accessories thereto), medical, diagnostic equipment (namely Cat-Scan, ECG monitors, ultrasound machines, etc. | 13 | |
| 2. Other equipment | 15 | |
| Plant and machinery used in the manufacture of pharmaceuticals & chemicals (NESD) | ||
| 1. Reactors | 20 | |
| 2. Distillation Columns | 20 | |
| 3. Drying equipment/ Centrifuges & Decanters | 20 | |
| 4. Vessel/ storage tanks | 20 | |
| Plant and Machinery used in civil construction | ||
| 1. Concreting, piling, crushing equipment and road making equipment | 12 | |
| 2. Heavy lift equipment – cranes with a capacity of more than 100 tons | 20 | |
| 3. Heavy lift equipment – cranes with a capacity of less than 100 tons | 15 | |
| 4. Transmission line, tunneling equipment (NESD) | 10 | |
| 5. Earth moving equipment | 9 | |
| 6. Others (including material handling/ pipeline/ welding equipment) (NESD) | 12 | |
| Plant and machinery used in salt works (NESD) | 15 | |
| Furniture & fittings (NESD) | ||
| 1. General furniture & fittings | 10 | |
| 2. Furniture & fittings used in restaurants and boarding houses, hotels, schools/ colleges and other educational institutions, welfare centres, libraries, cinema house, meeting halls, theatres & circuses. | 8 | |
| 3. Furniture & fittings let out on hire for use on the occasion of marriage and similar functions | 8 | |
| Motor Vehicles (NESD) | ||
| 1. Motor cycles, scooters and other mopeds | 10 | |
| 2. Motor buses, motor cars, motor taxies and motor lorries used in the business of running them on hire | 6 | |
| 3. Motor buses, motor cars and motor lorries other than those used in the business of running them on hire | 8 | |
| 4. Motor tractors, harvesting combines & heavy vehicles | 8 | |
| 5. Electrically operated vehicles (including battery powered or fuel cell powered vehicles) | 8 | |
| Ships (NESD) | ||
| Ocean going ships | ||
| 1. Bulk carriers & liner vessels | 25 | |
| 2. Crude tankers, product carriers and easy chemical carriers with/ without conventional tank coatings | 20 | |
| 3. Chemical and acid carriers with stainless steel tanks | 25 | |
| 4. Chemical and acid carrier with other tanks | 20 | |
| 5. Liquified gas carriers | 30 | |
| 6. Conventional large passenger vessels (which are used for cruise purpose also) | 30 | |
| 7. Coastal service ships of all categories | 30 | |
| 8. Offshore supply & support vessels | 20 | |
| 9. Catamarans and other high-speed passenger for ship/ boat | 20 | |
| 10. Drill ships | 25 | |
| 11. Hovercrafts | 15 | |
| 12. Fishing vessels with a wooden hull | 10 | |
| 13. Dredgers, barges, tugs, survey launches and other similar ships used mainly for dredging purpose | 14 | |
| Vessels ordinarily operating on inland waters – | ||
| 1. Speed boats | 13 | |
| 2. Other vessels | 28 | |
| Aircrafts/ helicopters (NESD) | 20 | |
| Railway sidings, rolling, locomotives, tramways and railways used by concerns (excluding railway concerns) (NESD) | 15 | |
| Ropeway structures (NESD) | 15 | |
| Office equipment (NESD) | 5 | |
| Computer and data processing units (NESD) | ||
| 1. Servers & networks | 6 | |
| 2. End user devices (such as desktop, laptops, etc.) | 3 | |
| Laboratory equipment (NESD) | ||
| 1. General laboratory equipment | 10 | |
| 2. Laboratory equipment used in educational institutions | 5 | |
| Electrical Installations and Equipment (NESD) | 10 | |
| Hydraulic works, pipelines and sluices (NESD) | 15 | |
Opting of a method for depreciation –
Methods for depreciation under the Companies Act are –
1. Straight Line Method (SLM) –
Under the Straight Line Method, the asset will be depreciated equally over the useful life of the asset. It is the simplest method. The formula for calculating the same is –
Depreciation = Cost of an asset – residual value
Life of the asset
2. Written Down Value Method (WDV) –
Under Written Down Value, the company charges the depreciation rate on the reducing balance of the asset. The formula for calculating the same is –
Depreciation = Carrying value of the asset X rate of depreciation
Rate of depreciation = [1 – (Residual value/ Cost of the asset) ^ (1/ useful life)] * 100
It is important to note that one more depreciation method i.e. Unit of production is also allowed under the Companies Act, 2013.
FAQs on Depreciation as per Companies Act, 2013
Frequently Asked Questions relating to depreciation as per the Companies Act, 2013 are summarized hereunder –
1. What is depreciation as per company Act?
Part A of Schedule II of the Companies Act, 2013 defines the term ‘depreciation’ as a systematic allocation of the depreciable amount of the asset over its useful life.
2. What are the 3 types of depreciation?
Three types of depreciation method under the Companies Act, 2013 are –
- Straight Line Method (SLM);
- Written Down Value (WDV);
- Unit of Production.
3. What are the main 2 methods of depreciation?
The main 2 methods of depreciation are the Straight Line Method and the Written Down Value method.
4. What is difference between SLM and WDV depreciation?
In SLM, depreciation is charged evenly through each accounting period. Whereas, in WDV, depreciation is charged on the reducing balance of the asset.
5. Which is better SLM or WDV?
Depreciation as per SLM is better in case of fixed assets which has negligible repairs and maintenance. Whereas, WDV is better in case of fixed assets whose repair increase with time.
6. Is depreciation mandatory under Companies Act, 2013?
Yes, it is mandatory to claim depreciation under the Companies Act, 2013.
7. Which asset Cannot be depreciated?
The land is the asset which cannot be depreciated.
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