The provision for allowing depreciation is contained in Section 32 of the Income Tax Act, 1961. Depreciation under the Income Tax Act is a deduction allowed for the reduction in the real value of a tangible or intangible asset used by a taxpayer. People claim depreciation deductions only for accounting or taxation purposes.
What is Depreciation?
Depreciation is used for the purpose of writing off the cost of an asset over its useful life. Depreciation is a mandatory deduction in the profit and loss statements of an entity and the Act allows deduction either in Straight-Line method or Written down Value (WDV) method.
Income Tax Act of 1961 allows the depreciation of tangible assets and intangible assets. In the case of a tangible asset, claim the deduction against building, plant, and machinery. In the case of an intangible asset, claim a deduction against the patents, trademark, copyright, license, franchise or any other business or commercial right of similar nature. The deduction of depreciation claim on those assets which have been used by the assessee for the purpose of business or profession during the previous year.
If any asset which has been used for more than 180 days then 50% of depreciation is allowable in that year. For availing the benefit of deduction under depreciation, it is not mandatory that assets should be used by the assessee in the previous year. If an assessee purchases an asset and then leases it to a lessee, the assessee may seek depreciation under the Act. For example , A Machine was bought and put to use on 21th December 2020 then the depreciation rate will be 15/2=7.5%.
Block of assets
Depreciation is calculated on the WDV of a Block of assets. “Block of asset” means a group of assets falling within a class of assets comprising –
(i). Tangible assets, being buildings, machinery, plant or furniture,
(ii). Intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed.
For the purpose of classification of assets into blocks, the percentage of depreciation within the class of assets needs to be considered. Each such class of asset with the same percentage of depreciation will be identified as a block of the asset.
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Calculation of WDV (Written Down Value) of block of asset |
|
| WDV of block of asset as on 1st day of previous year |
xxx |
| Add: Actual cost of asset bought during the PY of the respective block |
xxx |
| Less: Money payable in respect of asset of the block which is sold, discarded, demolished or destroyed during PY. |
(xxx) |
| WDV of the block at the end available for calculating depreciation for the PY. |
xxx |
Different Methods of Depreciation Calculation
Methods of Depreciation and the useful life of depreciable assets may vary from asset to asset. Based on asset type and industry, it can differ for taxation and accounting purposes also. Most commonly employed methods of depreciation are the Straight Line Method and the Written down Value Method. One of the basic differences in income tax depreciation calculation and companies act depreciation other than rates of depreciation is the method of calculation.
On Depreciation as per Companies Act, 1956
- Straight Line Method
- Written Down Value Method
On Depreciation as per Companies Act, 2013
- Straight Line Method
- Written Down Value Method
- Unit of Production Method
On Depreciation as per Income Tax Act, 1961
- Written Down Value Method (Block wise)
- Straight Line Method for Power Generating Units
Depreciation Rates as per the Income Tax Act
Asset Type |
Rate of Depreciation |
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PART A |
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|
TANGIBLE ASSETS |
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|
I. BUILDING |
|
| (1) Buildings which are used mainly for residential purposes (except hotels and boarding houses) |
5% |
| (2) Buildings other than those used mainly for residential purposes and not covered by sub-items (1) above and (3) below |
10% |
| (3) Buildings acquired on or after the 1st day of September, 2002 for installing machinery and plant forming part of water supply project or water treatment system and which is put to use for the purpose of business of providing infra- structure facilities under clause (i) of sub-section (4) of section 80-IA |
40% |
| (4) Purely temporary erections such as wooden structures |
40% |
|
II. FURNITURE AND FITTINGS |
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| Furniture and fittings including electrical fittings |
10% |
|
III. MACHINERY AND PLANT |
|
| (1) Machinery and plant other than those covered by sub-items (2), (3) and (8) below |
15% |
| (2) (i) Motor cars, other than those used in a business of running them on hire, acquired or put to use on or after the 1st day of April, 1990 except those covered under entry (ii); |
15% |
| (ii) 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 – Aeroengines |
40% |
| (ii) (a) Motor buses, motor lorries and motor taxis used in a business of running them on hire other than those covered under entry (b). |
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% |
| (iii) Commercial vehicle which is acquired by the assessee on or after the 1st day of October, 1998, but before the 1st day of April, 1999 and is put to use for any period before the 1st day of April, 1999 for the purposes of business or profession in accordance with the third proviso to clause (ii) of sub-section (1) of Section 32 |
40% |
| (iv) New commercial vehicle which is acquired on or after the 1st day of October, 1998, but before the 1st day of April, 1999 in replacement of condemned vehicle of over 15 years of age and is put to use for any period before the 1st day of April, 1999 for the purposes of business or profession in accordance with the third proviso to clause (ii) of sub-section (1) of Section 32 |
40% |
| (v) New commercial vehicle which is acquired on or after the 1st day of April, 1999 but before the 1st day of April, 2000 in replacement of condemned vehicle of over 15 years of age and is put to use before the 1st day of April, 2000 for the purposes of business or profession in accordance with the second proviso to clause (ii) of sub-section (1) of Section 32 |
40% |
| (vi) New commercial vehicle which is acquired on or after the 1st day of April, 2001 but before the 1st day of April, 2002 and is put to use before the 1st day of April, 2002 for the purposes of business or profession |
40% |
| (via) 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 |
40% |
| (vii) Moulds used in rubber and plastic goods factories |
30% |
| (viii) Air pollution control equipment, being— |
40% |
| (a) Electrostatic precipitation systems | |
| (b) Felt-filter systems | |
| (c) Dust collector systems | |
| (d) Scrubber-counter current/venturi/packed bed/cyclonic scrubbers | |
| (e) Ash handling system and evacuation system | |
| (ix) Water pollution control equipment, being— |
40% |
| (a) Mechanical screen systems | |
| (b) Aerated detritus chambers (including air compressor) | |
| (c) Mechanically skimmed oil and grease removal systems | |
| (d) Chemical feed systems and flash mixing equipment | |
| (e) Mechanical flocculators and mechanical reactors | |
| (f) Diffused air/mechanically aerated activated sludge systems | |
| (g) Aerated lagoon systems | |
| (h) Biofilters | |
| (i) Methane-recovery anaerobic digester systems | |
| (j) Air floatation systems | |
| (k) Air/steam stripping systems | |
| (l) Urea Hydrolysis systems | |
| (m) Marine outfall systems | |
| (n) Centrifuge for dewatering sludge | |
| (o) Rotating biological contractor or bio-disc | |
| (p) Ion exchange resin column | |
| (q) Activated carbon column | |
| (x) (a) Solid waste control equipments being -caustic /lime/chrome/mineral/cryolite recovery systems |
40% |
| (b) Solidwaste recycling and resource recovery systems |
40% |
| (xi) Machinery and plant, used in semi-conductor industry covering all integrated circuits (ICs) (excluding hybrid integrated circuits) ranging from small scale integration (SSI) to large scale integration/very large scale integration (LSI/VLSI) as also discrete semi-conductor devices such as diodes, transistors, thyristors, triacs, etc., other than those covered by entries (viii), (ix) and (x) of this sub-item and sub-item (8) below |
30% |
| (xia) Life saving medical equipment, being— |
40% |
| (a) D.C. Defibrillators for internal use and pace makers | |
| (b) Haemodialysors | |
| (c) Heart lung machine | |
| (d) Cobalt Therapy Unit | |
| (e) Colour Doppler | |
| (f) SPECT Gamma Camera | |
| (g) Vascular Angiography System including Digital subtraction Angiography | |
| (h) Ventilator used with anaesthesia apparatus | |
| (i) Magnetic Resonance Imaging System | |
| (j) Surgical Laser | |
| (k) Ventilators other than those used with anaesthesia | |
| (l) Gamma knife | |
| (m) Bone Marrow Transplant Equipment including silastic long standing intravenous catheters for chemotherapy | |
| (n) Fibreoptic endoscopes including Paediatric resectoscope/audit resectoscope, Peritoneoscopes, Arthoscope, Microlaryngoscope, Fibreoptic Flexible Nasal Pharyngo Bronchoscope, Fibreoptic Flexible Laryngo Bronchoscope, Video Laryngo Bronchoscope and Video Oesophago Gastroscope, Stroboscope, Fibreoptic Flexible Oesophago Gastroscope | |
| (o) Laparoscope (single incision) | |
| (4) Containers made of glass or plastic used as re-fills |
40% |
| (5) Computers including computer software |
40% |
| (6) Machinery and plant, used in weaving, processing and garment sector of textile industry, which is purchased under TUFS on or after the 1st day of April, 2001 but before the 1st day of April, 2004 and is put to use before the 1st day of April, 2004 |
40% |
| (7) Machinery and plant, acquired and installed on or after the 1st day of September, 2002 in a water supply project or a water treatment system and which is 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) (i) Wooden parts used in artificial silk manufacturing machinery |
40% |
| (ii) Cinematograph films – bulbs of studio lights |
40% |
| (iii) Match factories – Wooden match frames |
40% |
| (iv) Mines and quarries : |
40% |
| (a) Tubs, winding ropes, haulage ropes and sand stowing pipes |
|
| (b) Safety lamps | |
| (v) Salt works – Salt pans, reservoirs and condensers, etc., made of earthy, sandy or clayey material or any other similar material |
40% |
| (vi) Flour mills – Rollers |
40% |
| (vii) Iron and steel industry – Rolling mill rolls |
40% |
| (viii) Sugar works – Rollers |
40% |
| (ix) Energy saving devices, being— | |
| A. Specialized boilers and furnaces: |
40% |
| (a) Ignifluid/fluidized bed boilers | |
| (b) Flameless furnaces and continuous pusher type furnaces | |
| (c) Fluidized bed type heat treatment furnaces | |
| (d) High efficiency boilers (thermal efficiency higher than 75 per cent in case of coal fired and 80 per cent in case of oil/gas fired boilers) | |
| B. Instrumentation and monitoring system for monitoring energy flows: |
40% |
| (a) Automatic electrical load monitoring systems | |
| (b) Digital heat loss meters | |
| (c) Micro-processor based control systems | |
| (d) Infra-red thermography | |
| (e) Meters for measuring heat losses, furnace oil flow, steam flow, electric energy and power factor meters | |
| (f) Maximum demand indicator and clamp on power meters | |
| (g) Exhaust gases analyser | |
| (h) Fuel oil pump test bench | |
| C. Waste heat recovery equipment: |
40% |
| (a) Economisers and feed water heaters | |
| (b) Recuperators and air pre-heaters | |
| (c) Heat pumps | |
| (d) Thermal energy wheel for high and low temperature waste heat recovery | |
| D. Co-generation systems: |
40% |
| (a) Back pressure pass out, controlled extraction, extraction-cum-condensing turbines for co-generation along with pressure boilers | |
| (b) Vapour absorption refrigeration systems | |
| (c) Organic rankine cycle power systems | |
| (d) Low inlet pressure small steam turbines | |
| E. Electrical equipment: |
40% |
| (a) Shunt capacitors and synchronous condenser systems | |
| (b) Automatic power cut off devices (relays) mounted on individual motors | |
| (c) Automatic voltage controller | |
| (d) Power factor controller for AC motors | |
| (e) Solid state devices for controlling motor speeds | |
| (f) Thermally energy-efficient stenters (which require 800 or less kilocalories of heat to evaporate one kilogram of water) | |
| (g) Series compensation equipment | |
| (h) Flexible AC Transmission (FACT) devices – Thyristor controlled series compensation equipment | |
| (i) Time of Day (ToD) energy meters | |
| (j) Equipment to establish transmission highways for National Power Grid to facilitate transfer of surplus power of one region to the deficient region | |
| (k) Remote terminal units/intelligent electronic devices, computer hardware/software, router/bridges, other required equipment and associated communication systems for supervisory control and data acquisition systems, energy management systems and distribution management systems for power transmission systems | |
| (l) Special energy meters for Availability Based Tariff (ABT) | |
| F. Burners: |
40% |
| (a) 0 to 10 per cent excess air burners | |
| (b) Emulsion burners | |
| (c) Burners using air with high pre-heat temperature (above 300°C) | |
| G. Other equipment: |
40% |
| (a) Wet air oxidation equipment for recovery of chemicals and heat | |
| (b) Mechanical vapour recompressors | |
| (c) Thin film evaporators | |
| (d) Automatic micro-processor based load demand controllers | |
| (e) Coal based producer gas plants | |
| (f) Fluid drives and fluid couplings | |
| (g) Turbo charges/super-charges | |
| (h) Sealed radiation sources for radiation processing plants | |
| (x) Gas cylinders including valves and regulators |
40% |
| (xi) Glass manufacturing concerns – Direct fire glass melting furnaces |
40% |
| (xii) Mineral oil concerns: | |
| (a) Plant used in field operations (above ground) distribution – Returnable packages |
40% |
| (b) Plant used in field operations (below ground), but not including kerbside pumps including underground tanks and fittings used in field operations (distribution) by mineral oil concerns |
40% |
| (c) Oil wells not covered in clauses (a) and (b) (with effect from the assessment year 2016-17) |
15% |
| (xiii) Renewal energy devices being— |
40% |
| (a) Flat plate solar collectors | |
| (b) Concentrating and pipe type solar collectors | |
| (c) Solar cookers | |
| (d) Solar water heaters and systems | |
| (e) Air/gas/fluid heating systems | |
| (f) Solar crop driers and systems | |
| (g) Solar refrigeration, cold storage and air-conditioning systems | |
| (h) Solar steels and desalination systems |
|
| (i) Solar power generating systems | |
| (j) Solar pumps based on solar-thermal and solar-photovoltaic conversion | |
| (k) Solar-photovoltaic modules and panels for water pumping and other applications | |
| (l) Windmills and any specially designed devices which run on wind-mills installed on or before March 31, 2012 | |
| (m) Any special devices including electric generators and pumps running on wind energy installed on or before March 31, 2012 | |
| (n) Biogas plant and biogas engines | |
| (o) Electrically operated vehicles including battery powered or fuel-cell powered vehicles | |
| (p) Agricultural and municipal waste conversion devices producing energy | |
| (q) Equipment for utilizing ocean waste and thermal energy | |
| (r) Machinery and plant used in the manufacture of any of the above sub-items | |
| (9) (i) Books owned by assessees carrying on a profession— | |
| (a) Books, being annual publications |
40% |
| (b) Books, other than those covered by entry (a) above |
40% |
| (ii) Books owned by assessees carrying on business in running lending libraries |
40% |
|
IV. SHIPS |
|
| (1) Ocean-going ships including dredgers, tugs, barges, survey launches and other similar ships used mainly for dredging purposes and fishing vessels with wooden hull |
20% |
| (2) Vessels ordinarily operating on inland waters, not covered by sub-item (3) below |
20% |
| (3) Vessels ordinarily operating on inland waters being speed boats |
20% |
|
PART B |
|
|
INTANGIBLE ASSETS |
|
| Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature not being goodwill of business of profession |
25% |
Author Bio
Sir,
I read your article and I like it because it clear all my doubts regarding depreciation, and I was confused why the depreciation term is used in taxation Law.
So, thank you