Depreciation Rate as per Income Tax Act
1. What is Depreciation?Depreciation under the Income Tax Act is a deduction allowed for the decline in the real value of a tangible or intangible asset used by a taxpayer. The Income Tax Department uses the concept of depreciation for the purpose of writing off the cost of an asset over its useful life.
Depreciation is a mandatory deduction and the Act allows the deduction either under straight-line method or written down value (WDV) method. They calculate the deduction for depreciation under the WDV method except for undertaking engaged in generation or generation and distribution of power. The Act also allows a deduction for additional depreciation in the year of purchase in certain circumstances. To read about additional depreciation visit Additional Depreciation Under the Income Tax Act.
Depreciation under the Income Tax Act is a deduction allowed for the decline in the real value of a tangible or intangible asset used by a taxpayer. The Income Tax Department uses the concept of depreciation for the purpose of writing off the cost of an asset over its useful life.
Depreciation is a mandatory deduction and the Act allows the deduction either under straight-line method or written down value (WDV) method. They calculate the deduction for depreciation under the WDV method except for undertaking engaged in generation or generation and distribution of power. The Act also allows a deduction for additional depreciation in the year of purchase in certain circumstances. To read about additional depreciation visit Additional Depreciation Under the Income Tax Act.
2. Block Of Assets- Concept
Depreciation is calculated on the WDV of a Block of assets. Block of assets is a group of assets falling within a class of assets comprising of:
- Tangible assets, being building, machinery, plant or furniture,
- Intangible assets, being know how, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature
Depreciation is calculated on the WDV of a Block of assets. Block of assets is a group of assets falling within a class of assets comprising of:
- Tangible assets, being building, machinery, plant or furniture,
- Intangible assets, being know how, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature
3. Conditions For Claiming Depreciation
You can avail deduction for depreciation, only if it satisfies the following conditions.- The assets must be owned, wholly or partly, by the assessee.
- They must be in use for the business or profession of the taxpayer. If the assets are not used exclusively for the business, but for other purposes as well, depreciation allowable would be proportionate to the use of business purpose. The Income Tax Officer also has the right to determine the proportionate part of the depreciation under Section 38 of the Act.
- Co-owners can claim depreciation to the extent of the value of the assets owned by each co-owner.
- You cannot claim depreciation on the cost of land.
- Depreciation is mandatory from A.Y. 2002-03 and shall be allowed or deemed to have been allowed as a deduction irrespective of a claim made by a taxpayer in the profit & loss account.
- You can avail deduction for depreciation, only if it satisfies the following conditions.
- The assets must be owned, wholly or partly, by the assessee.
- They must be in use for the business or profession of the taxpayer. If the assets are not used exclusively for the business, but for other purposes as well, depreciation allowable would be proportionate to the use of business purpose. The Income Tax Officer also has the right to determine the proportionate part of the depreciation under Section 38 of the Act.
- Co-owners can claim depreciation to the extent of the value of the assets owned by each co-owner.
- You cannot claim depreciation on the cost of land.
- Depreciation is mandatory from A.Y. 2002-03 and shall be allowed or deemed to have been allowed as a deduction irrespective of a claim made by a taxpayer in the profit & loss account.
4. Written Down Value- Meaning
As per Section 32(1) of the IT Act depreciation should be computed at the prescribed percentage on the WDV of the asset, which in turn is calculated with reference to the actual cost of the assets. In the context of computing depreciation, it is important to understand the meaning of the term ‘WDV’ & ‘Actual Cost’.
WDV under the Income Tax Act means:
- Where the asset is acquired in the previous year, the actual cost of the asset shall be treated as WDV.
- Where the asset is acquired in earlier year WDV shall be equal to the actual cost incurred less depreciation actually allowed under the Act.
As per Section 32(1) of the IT Act depreciation should be computed at the prescribed percentage on the WDV of the asset, which in turn is calculated with reference to the actual cost of the assets. In the context of computing depreciation, it is important to understand the meaning of the term ‘WDV’ & ‘Actual Cost’.
WDV under the Income Tax Act means:
- Where the asset is acquired in the previous year, the actual cost of the asset shall be treated as WDV.
- Where the asset is acquired in earlier year WDV shall be equal to the actual cost incurred less depreciation actually allowed under the Act.
5. Depreciation Allowed
- The allowance for depreciation is calculated under the WDV method except for undertaking engaged in generation or generation and distribution of power. The depreciation rates are given in Appendix 1. In case of undertakings engaged in generation or generation and distribution of power, such undertaking has an option to claim depreciation on WDV method at the rates provided in New Appendix I – if such option is exercised before the due date of filing the return.
In the case of amalgamation or demerger, the aggregate depreciation allowance shall be apportioned between the amalgamating and the amalgamated company, or the demerged and the resulting company. The aggregate depreciation would be computed as if the amalgamation or demerger had not taken place. It shall be apportioned based on the number of days the assets were used by such companies.
In case of a finance lease transaction, the lessee has to capitalise the assets in its books under AS-19 – the Accounting standard on leases. In such cases, the lessee can exercise the rights of the owner in his own right and hence the allowance for depreciation is available to the lessee.
RATES OF DEPRECIATION (%) (I) Buildings: (a) Buildings which are used mainly for residential purposes except for hotels and Boarding House 5 (b) Buildings which are not used mainly for residential purposes and other than mentioned in a & c 10 (c) Buildings acquired on or after 1-9-2002 for installing P&M forming part of water supply project; or water treatment system and put to use for the purpose of providing infrastructure facilities u/s. 80-IA(4)(i) of the Act 40 (d) Purely temporary erections such as wooden structures 40 Note:“Buildings” include roads, bridges, culverts, wells and tube wells.
A building shall be deemed to be a building used mainly for residential purposes if the built-up floor area thereof used for residential purposes is not less than sixty-six and two-thirds percent of its total built-up floor area and shall include any such buildings in the factory premises.
Water treatment system includes a system for desalination, demineralization, and purification of water.
(II) Furniture and fittings including electrical fittings 10 Electrical fittings include electrical wiring, switches, sockets, other fitting and fans, etc. (III) Machinery and plant:Plant has been held to include :
Movable partitions
Sanitary & pipeline fitting
Ceiling and pedestal fans
Wells
Hospital
However, w.e.f. A.Y. 2004-05, it shall not include buildings, furniture, and fittings.
1) Machinery & plant other than those covered by sub-items 2, 3 and 8 below:Machinery and plant includes pipes needed for delivery from the source of supply of raw water to the plant and from the plant to the storage facility
15 2) Motor-cars (other than those used in the business of running them on hire) acquired or put to use on or after 1st April 1990 15 3) Motor-cars (other than those used in the business of running them on hire) acquired on or after 23rd August 2019 but before 1st April 2020 and is put to use before 1st April 2020 30 4) (i) Aeroplane-Aeroengines 40 (ii) Motor buses, Motor lorries, and Motor used in a business of running them on hire 30 (iii) Motor buses, Motor lorries, and Motor used in a business of running them on hire acquired on or after 23rd August 2019 but before 1st April 2020 and is put to use before 1st April 2020 45 (iv) Commercial vehicles acquired on or after 1-10-1998 but before 1-4-1999 and is put to use before 1-4-1999 for the purposes of business or profession 40 (v) New commercial vehicles acquired on or after 1-10-1998 but before 1-4-1999 and is put to use before 1-4-1999 in replacement of condemned vehicles of over 15 years of age for the purpose of business or profession 40 (vi) New commercial vehicles acquired on or after 1-4-1999 but before 1-4-2000 in replacement of condemned vehicles of over 15 years of age and is put to use before 1-4-2000 for the purpose of business or profession 40 (vii) New commercial vehicles acquired on or after 1-4-2001 but before 1-4-2002 and is put to use before 1-4-2002 for the purpose of business or profession 40 (viii)New Commercial vehicles acquired on or after 1-1-2009 but before 1-10-2009 and put to use before 1-10-2009 for the purpose of business or profession“Commercial vehicle” means — heavy goods vehicle, heavy passenger motor vehicle, light motor vehicle, medium goods vehicle, and medium passenger motor vehicle.
It does not include “maxi-cab”, “motor-cab”, “tractor” and “road-roller”.
40 (ix) Moulds used in rubber and plastic goods factories 30 (x) Air pollution control equipment 40 (xi) Water pollution control equipment 40 (xii) Solid waste control equipment 40 (xiii) Machinery and plant used in semiconductor industry 30 (xiv) Lifesaving medical equipment 40 (xv) Any new plant and machinery installed in or after the P.Y. pertaining to A.Y. 1988-89 for manufacture of articles or things by using any technology or know-how developed or an article invented in a laboratory owned by a public sector company, Government, recognized University subject to specified conditions (See Rule 5(2)) 40 5) Containers made of glass or plastic used as refills 40 6) Computers (including computer software)“Computer Software” means any computer programme recorded on any disc, tape, perforated media or other information storage device.
40 7) Machinery and plants used in weaving, processing and garment sector of textile industry purchased under TUFS on or after 1-4-2001 but before 1-4-2004 and is put to use before 1-4-2004 40 8) Machinery and plant acquired and installed on or after the 1-9-2002 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 80-IA(4)(i) 40 9) For other items of Plant & Machinery refer to Rule 5 App. 1 40 9) (i) Books owned by assessees carrying on a professionAnnual publications
Other books
4040
(ii) Books owned by assessees carrying on business in running lending libraries 40 (IV) Ships“Speedboat” means a motorboat driven by a high-speed internal combustion engine capable of propelling the boat at a speed exceeding 24 kilometers per hour in still water and so designed that when running at a speed, it will plane, i.e., its bow will rise from the water.
20 (V) Intangible AssetsKnow-how patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature acquired on or after 1-4-1998.
25
- The allowance for depreciation is calculated under the WDV method except for undertaking engaged in generation or generation and distribution of power. The depreciation rates are given in Appendix 1. In case of undertakings engaged in generation or generation and distribution of power, such undertaking has an option to claim depreciation on WDV method at the rates provided in New Appendix I – if such option is exercised before the due date of filing the return.
In the case of amalgamation or demerger, the aggregate depreciation allowance shall be apportioned between the amalgamating and the amalgamated company, or the demerged and the resulting company. The aggregate depreciation would be computed as if the amalgamation or demerger had not taken place. It shall be apportioned based on the number of days the assets were used by such companies.
In case of a finance lease transaction, the lessee has to capitalise the assets in its books under AS-19 – the Accounting standard on leases. In such cases, the lessee can exercise the rights of the owner in his own right and hence the allowance for depreciation is available to the lessee.
RATES OF DEPRECIATION | (%) |
(I) Buildings: | |
(a) Buildings which are used mainly for residential purposes except for hotels and Boarding House | 5 |
(b) Buildings which are not used mainly for residential purposes and other than mentioned in a & c | 10 |
(c) Buildings acquired on or after 1-9-2002 for installing P&M forming part of water supply project; or water treatment system and put to use for the purpose of providing infrastructure facilities u/s. 80-IA(4)(i) of the Act | 40 |
(d) Purely temporary erections such as wooden structures | 40 |
Note: “Buildings” include roads, bridges, culverts, wells and tube wells. A building shall be deemed to be a building used mainly for residential purposes if the built-up floor area thereof used for residential purposes is not less than sixty-six and two-thirds percent of its total built-up floor area and shall include any such buildings in the factory premises. Water treatment system includes a system for desalination, demineralization, and purification of water. | |
(II) Furniture and fittings including electrical fittings | 10 |
Electrical fittings include electrical wiring, switches, sockets, other fitting and fans, etc. | |
(III) Machinery and plant: Plant has been held to include : Movable partitions Sanitary & pipeline fitting Ceiling and pedestal fans Wells Hospital However, w.e.f. A.Y. 2004-05, it shall not include buildings, furniture, and fittings. | |
1) Machinery & plant other than those covered by sub-items 2, 3 and 8 below: Machinery and plant includes pipes needed for delivery from the source of supply of raw water to the plant and from the plant to the storage facility | 15 |
2) Motor-cars (other than those used in the business of running them on hire) acquired or put to use on or after 1st April 1990 | 15 |
3) Motor-cars (other than those used in the business of running them on hire) acquired on or after 23rd August 2019 but before 1st April 2020 and is put to use before 1st April 2020 | 30 |
4) (i) Aeroplane-Aeroengines | 40 |
(ii) Motor buses, Motor lorries, and Motor used in a business of running them on hire | 30 |
(iii) Motor buses, Motor lorries, and Motor used in a business of running them on hire acquired on or after 23rd August 2019 but before 1st April 2020 and is put to use before 1st April 2020 | 45 |
(iv) Commercial vehicles acquired on or after 1-10-1998 but before 1-4-1999 and is put to use before 1-4-1999 for the purposes of business or profession | 40 |
(v) New commercial vehicles acquired on or after 1-10-1998 but before 1-4-1999 and is put to use before 1-4-1999 in replacement of condemned vehicles of over 15 years of age for the purpose of business or profession | 40 |
(vi) New commercial vehicles acquired on or after 1-4-1999 but before 1-4-2000 in replacement of condemned vehicles of over 15 years of age and is put to use before 1-4-2000 for the purpose of business or profession | 40 |
(vii) New commercial vehicles acquired on or after 1-4-2001 but before 1-4-2002 and is put to use before 1-4-2002 for the purpose of business or profession | 40 |
(viii)New Commercial vehicles acquired on or after 1-1-2009 but before 1-10-2009 and put to use before 1-10-2009 for the purpose of business or profession “Commercial vehicle” means — heavy goods vehicle, heavy passenger motor vehicle, light motor vehicle, medium goods vehicle, and medium passenger motor vehicle. It does not include “maxi-cab”, “motor-cab”, “tractor” and “road-roller”. | 40 |
(ix) Moulds used in rubber and plastic goods factories | 30 |
(x) Air pollution control equipment | 40 |
(xi) Water pollution control equipment | 40 |
(xii) Solid waste control equipment | 40 |
(xiii) Machinery and plant used in semiconductor industry | 30 |
(xiv) Lifesaving medical equipment | 40 |
(xv) Any new plant and machinery installed in or after the P.Y. pertaining to A.Y. 1988-89 for manufacture of articles or things by using any technology or know-how developed or an article invented in a laboratory owned by a public sector company, Government, recognized University subject to specified conditions (See Rule 5(2)) | 40 |
5) Containers made of glass or plastic used as refills | 40 |
6) Computers (including computer software) “Computer Software” means any computer programme recorded on any disc, tape, perforated media or other information storage device. | 40 |
7) Machinery and plants used in weaving, processing and garment sector of textile industry purchased under TUFS on or after 1-4-2001 but before 1-4-2004 and is put to use before 1-4-2004 | 40 |
8) Machinery and plant acquired and installed on or after the 1-9-2002 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 80-IA(4)(i) | 40 |
9) For other items of Plant & Machinery refer to Rule 5 App. 1 | 40 |
9) (i) Books owned by assessees carrying on a profession Annual publications Other books | 40 40 |
(ii) Books owned by assessees carrying on business in running lending libraries | 40 |
(IV) Ships “Speedboat” means a motorboat driven by a high-speed internal combustion engine capable of propelling the boat at a speed exceeding 24 kilometers per hour in still water and so designed that when running at a speed, it will plane, i.e., its bow will rise from the water. | 20 |
(V) Intangible Assets Know-how patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature acquired on or after 1-4-1998. | 25 |
6. Example for Depreciation calculation
In 2017-18 Company purchased the following assets –
Asset Name Purchase Amt. Date of Purchase Depreciation Rate Machine 1 500000 14-Apr 15% Furniture 20000 15-Aug 10% Car 300000 25-Dec 15% Machine 2 40000 26-Jan 15%
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)
500000
40000
20000
300000
Less-Sold during the year
0
0
0
Closing value of block before depreciation 540000 20000 300000 Depreciation 78000 2000 22500 (500000*15% + 40000*15%*1/2) (20000*10%) (300000*15%*1/2) Closing WDV after depreciation 462000 18000 277500
In 2017-18 Company purchased the following assets –
Asset Name | Purchase Amt. | Date of Purchase | Depreciation Rate |
Machine 1 | 500000 | 14-Apr | 15% |
Furniture | 20000 | 15-Aug | 10% |
Car | 300000 | 25-Dec | 15% |
Machine 2 | 40000 | 26-Jan | 15% |
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) | 500000 40000 | 20000 |
300000 |
Less- Sold during the year | 0 | 0 | 0 |
Closing value of block before depreciation | 540000 | 20000 | 300000 |
Depreciation | 78000 | 2000 | 22500 |
(500000*15% + 40000*15%*1/2) | (20000*10%) | (300000*15%*1/2) | |
Closing WDV after depreciation | 462000 | 18000 | 277500 |
7. Methods of Depreciation Calculation
Methods of Depreciation and useful life of depreciable assets may vary from asset to asset. Based on asset-type and industry, it can differ for accounting and taxation purposes also.
Most commonly employed methods of depreciation are Straight Line Method and 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.
Methods of depreciation as per Companies Act, 1956 (Based on Specified Rates):
- Straight Line Method
- Written Down Value Method
Methods of depreciation as per Companies Act, 2013 (Based on Useful Life of assets):
- Straight Line Method
- Written Down Value Method
- Unit of Production Method
Methods of depreciation as per Income Tax Act, 1961 (Based on Specified Rates):
- Written Down Value Method (Block wise)
- Straight Line Method for Power Generating Units
Methods of Depreciation and useful life of depreciable assets may vary from asset to asset. Based on asset-type and industry, it can differ for accounting and taxation purposes also.
Most commonly employed methods of depreciation are Straight Line Method and 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.
Methods of depreciation as per Companies Act, 1956 (Based on Specified Rates):
- Straight Line Method
- Written Down Value Method
Methods of depreciation as per Companies Act, 2013 (Based on Useful Life of assets):
- Straight Line Method
- Written Down Value Method
- Unit of Production Method
Methods of depreciation as per Income Tax Act, 1961 (Based on Specified Rates):
- Written Down Value Method (Block wise)
- Straight Line Method for Power Generating Units