Depreciation as per Companies Act vs Income Tax Act – Reconciliation Guide 2026

Introduction

Depreciation is an important accounting and tax adjustment for businesses in India. However, companies often find that the depreciation charged in their financial statements is different from the depreciation allowable while computing taxable business income.

This difference arises because depreciation for financial reporting is governed by the Companies Act, 2013 and applicable accounting standards, whereas tax depreciation is governed by the income-tax law and prescribed depreciation rules.

For periods beginning on or after 1 April 2026, the Income-tax Act, 2025 has replaced the Income-tax Act, 1961. The tax depreciation framework continues to operate through prescribed asset categories, rates and written-down-value mechanisms, subject to the provisions of the new law.

Therefore, businesses need to maintain a proper reconciliation between:

Depreciation as per Books of Accounts → Tax Adjustments → Depreciation as per Income-tax Law

What is Depreciation?

Depreciation represents the systematic allocation of the depreciable amount of a tangible asset over its estimated useful life.

For accounting purposes, depreciation reflects the consumption or utilisation of an asset’s economic benefits over its useful life.

For income-tax purposes, depreciation is a statutory deduction allowed according to the prescribed tax rules rather than necessarily according to the actual useful life estimated by the company.

Depreciation under the Companies Act, 2013

Under the Companies Act, depreciation is primarily governed by Schedule II, along with applicable accounting standards.

Companies generally determine depreciation by considering:

Cost of the asset

Estimated useful life

Residual value

Date the asset is available for use

Depreciation method

Component accounting, where applicable

Schedule II prescribes useful lives for various categories of assets. The Ministry of Corporate Affairs has also clarified that where a company uses a different useful life or residual value, the appropriate disclosures are required in the financial statements.

Examples of indicative useful lives

Asset	Indicative useful life under Schedule II
Buildings – RCC structure	60 years
Buildings – other than RCC	30 years
General Plant & Machinery	15 years
Furniture & Fixtures	10 years
Office Equipment	5 years
Computers & Data Processing Equipment	3 years
Motor Vehicles	Generally 6 years, subject to category

The exact useful life should always be checked against the applicable category and Schedule II requirements.

Depreciation under Income-tax Law

Tax depreciation follows a fundamentally different approach.

Instead of calculating depreciation separately for every individual asset based on its accounting useful life, tax depreciation is generally calculated on blocks of assets at prescribed rates.

For 2026, the Income-tax Department’s notified return schedules continue to show prescribed depreciation categories and rates, including:

Plant and machinery – commonly 15%

Certain plant and machinery – higher prescribed rates depending on the asset

Building – 5%, 10% or 40%, depending on the category

Furniture and fittings – 10%

Intangible assets – 25%

Computers and certain computer software – 40%

The applicable rate depends on the specific asset/block and the relevant tax provisions.

Major Difference Between Book and Tax Depreciation

The most important difference is the basis of calculation.

Companies Act

Depreciation is generally calculated based on:

Asset cost – residual value ÷ useful life

subject to the applicable accounting framework.

Income-tax Law

Depreciation is generally calculated using:

Written Down Value (WDV) of the relevant block × prescribed depreciation rate

This difference alone can result in different depreciation amounts in the financial statements and tax computation.

Companies Act vs Income-tax Act – Key Comparison

Particulars	Companies Act / Books	Income-tax Law
Basic approach	Useful-life based	Block-of-assets based
Depreciation basis	Individual asset/component	Block of assets
Useful life	Relevant for calculation	Generally not the primary calculation basis
Rate	Based on useful life	Statutory prescribed rate
Residual value	Generally considered	Tax rules determine tax WDV mechanism
Asset-wise depreciation	Yes	Generally block-wise
Half depreciation for new assets	Accounting depends on available-for-use policy	Specific statutory rule applies
Component accounting	Applicable where required	Generally not applied in the same manner
Purpose	Financial reporting	Tax computation
Result	Book depreciation	Tax depreciation

Why Does Reconciliation Become Necessary?

Suppose a company purchases machinery for ₹10,00,000.

The company may depreciate the machinery over its estimated useful life for accounting purposes.

For tax purposes, however, the machinery may fall into a block attracting a prescribed depreciation rate.

As a result:

Book Depreciation ≠ Tax Depreciation

The difference needs to be adjusted while calculating taxable business income.

Example of Depreciation Reconciliation

Suppose:

Cost of machinery: ₹10,00,000

Book depreciation for the year: ₹1,00,000

Tax depreciation allowable: ₹1,50,000

The company’s Profit & Loss Account contains depreciation of ₹1,00,000.

For tax computation:

Step 1 – Add back book depreciation

₹1,00,000 is added back because the accounting depreciation is not itself the amount used for tax depreciation computation.

Step 2 – Deduct tax depreciation

₹1,50,000 is deducted as the depreciation allowable under the income-tax provisions.

Net tax adjustment

Taxable profit is reduced by an additional:

₹50,000

Therefore:

Book Profit

Book Depreciation

– Tax Depreciation

= Taxable Business Profit

Simple Reconciliation Format

Businesses can maintain a depreciation reconciliation schedule like this:

Particulars	Amount
Profit Before Tax as per Books	₹20,00,000
Add: Book Depreciation	₹1,00,000
Less: Tax Depreciation	₹1,50,000
Taxable Business Profit	₹19,50,000

This reconciliation helps the tax team and auditor understand the difference between accounting profit and taxable profit.

What Happens When Book Depreciation is Higher?

Suppose:

Book depreciation = ₹2,00,000

Tax depreciation = ₹1,20,000

The reconciliation would be:

Particulars	Amount
Profit Before Tax	₹20,00,000
Add: Book Depreciation	₹2,00,000
Less: Tax Depreciation	₹1,20,000
Taxable Business Profit	₹20,80,000

In this situation, taxable profit is higher than accounting profit by ₹80,000 because the tax deduction is lower than the book depreciation charged.

Deferred Tax Impact

Differences between book depreciation and tax depreciation can also create temporary differences for accounting purposes.

For example:

Book carrying amount of an asset may differ from its tax base.

This difference can result in a Deferred Tax Asset (DTA) or Deferred Tax Liability (DTL), depending on the circumstances.

Companies following applicable accounting standards should evaluate the deferred tax implications of depreciation differences.

Example

If tax depreciation is higher than book depreciation in the early years, taxable income may be lower initially.

In later years, the position may reverse.

This timing difference may create a deferred tax liability, subject to the applicable accounting standard and recognition requirements.

Half-Year Rule for Tax Depreciation

One important difference arises when an asset is acquired and put to use during the year.

Under the tax depreciation framework, where an asset is put to use for less than 180 days during the tax year, depreciation is generally restricted to 50% of the otherwise allowable depreciation, subject to the applicable provisions.

The notified 2026 tax-return schedules specifically provide separate calculations for additions used for 180 days or more and those used for less than 180 days.

For example, if normal tax depreciation is ₹1,00,000 but the asset is used for less than 180 days, the allowable depreciation may be ₹50,000, subject to the applicable rules.

Block of Assets Concept

For income-tax purposes, depreciation is generally calculated on a block of assets rather than asset-by-asset.

For example, a business may have several assets falling within the same depreciation block.

The calculation broadly considers:

Opening WDV of the block

Additions during the year

Assets sold or transferred

Assets acquired and used for less than the prescribed period

Applicable depreciation rate

Closing WDV

The 2026 tax-return schedules illustrate this block-based approach through separate depreciation schedules for plant and machinery and other depreciable assets.

Important: Sale of Assets and Tax Depreciation

The treatment of asset sales can differ significantly between accounting and tax records.

Under tax depreciation, the sale proceeds of assets are adjusted against the relevant block.

If the block continues to exist, depreciation may be calculated on the resulting WDV, subject to the applicable provisions.

If the block ceases to exist, the tax law may trigger short-term capital gain or loss under the applicable provisions.

Therefore, simply comparing individual book depreciation with tax depreciation without considering asset additions and disposals can lead to incorrect reconciliation.

Common Reasons for Differences

The most common reasons for differences between book and tax depreciation include:

Different depreciation rates

The accounting depreciation rate may differ from the prescribed tax rate.

Different useful lives

Companies may depreciate assets over their estimated useful lives, whereas tax depreciation follows prescribed rates.

Block-of-assets mechanism

Tax depreciation is generally calculated at block level.

Asset used for less than 180 days

Tax depreciation may be restricted to 50% of the normal rate.

Component accounting

Significant components of an asset may have separate useful lives for accounting purposes.

Asset disposals

Book accounting and tax treatment of asset sales can differ.

Additional depreciation

Certain eligible taxpayers/assets may qualify for additional depreciation under the applicable tax provisions.

How to Prepare a Depreciation Reconciliation

A company should ideally maintain two separate depreciation schedules:

Schedule 1 – Books

Include:

Asset description

Asset category

Purchase date

Cost

Useful life

Residual value

Opening accumulated depreciation

Current-year depreciation

Closing WDV

Schedule 2 – Tax

Include:

Tax block

Opening WDV

Additions

Date put to use

Assets sold

Sale consideration

Applicable tax depreciation rate

Full-rate depreciation

Half-rate depreciation

Closing WDV

The two schedules can then be reconciled.

Practical Reconciliation Template

A practical working paper may look like this:

Particulars	Books	Tax
Opening WDV	₹15,00,000	₹12,00,000
Additions	₹5,00,000	₹5,00,000
Disposals	₹1,00,000	₹1,00,000
Depreciation	₹1,50,000	₹2,10,000
Closing WDV	₹17,50,000	₹13,80,000

The difference between the two closing balances should be carried forward and reconciled in subsequent years.

Impact on Tax Audit and Tax Computation

Where applicable, the depreciation reconciliation becomes an important part of the tax computation and audit documentation.

The business should maintain:

Fixed asset register

Purchase invoices

Sale/disposal documents

Capitalisation records

Date of put-to-use evidence

Book depreciation schedule

Tax depreciation schedule

Reconciliation statement

Supporting calculations for special depreciation rates

Proper documentation becomes particularly important where the business has significant capital expenditure.

Depreciation and the New Income-tax Act, 2025

A major legislative change relevant to 2026 is that the Income-tax Act, 2025 replaced the Income-tax Act, 1961 with effect from 1 April 2026.

The Income-tax Department has clarified that the 1961 Act continues to govern tax years beginning before 1 April 2026, while tax years beginning on or after that date are governed by the new Act.

Accordingly, businesses should be careful when preparing depreciation schedules around the transition period.

For example:

FY 2025-26 / AY 2026-27 → governed by the earlier framework for that tax year.

Tax Year 2026-27 onwards → governed by the Income-tax Act, 2025.

The Income-tax Department has also clarified that certain earlier choices can continue under the new Act where there is a corresponding provision and no inconsistency.

Common Mistakes in Depreciation Reconciliation

Businesses should avoid the following errors:

Mistake 1 – Claiming Book Depreciation as Tax Depreciation

Book depreciation should be appropriately adjusted while calculating taxable business income.

Mistake 2 – Applying Accounting Rates for Tax

Tax depreciation rates are prescribed separately and should not simply be copied from the books.

Mistake 3 – Ignoring the 180-Day Rule

New assets used for less than the prescribed period can attract restricted depreciation.

Mistake 4 – Not Accounting for Asset Sales

Disposals affect the tax block and must be properly considered.

Mistake 5 – Not Maintaining Separate Registers

A single fixed asset register may not be sufficient for accurate accounting and tax reconciliation.

Mistake 6 – Ignoring Deferred Tax

Significant temporary differences may have an impact on deferred tax accounting.

Best Practices for 2026

Businesses should:

Maintain separate book and tax depreciation schedules.

Reconcile the schedules every year.

Verify the correct tax block for each asset.

Check the applicable depreciation rate.

Track the date each asset is put to use.

Maintain supporting purchase and disposal documents.

Review the treatment of assets acquired during the year.

Consider deferred tax implications.

Review the transition from the Income-tax Act, 1961 to the Income-tax Act, 2025.

Reconcile depreciation before finalising the annual tax computation.

Conclusion

Depreciation under the Companies Act and depreciation under income-tax law serve different purposes and therefore do not necessarily produce the same amount.

The Companies Act approach is primarily based on useful life and financial reporting principles, while the tax approach uses prescribed depreciation rates and blocks of assets.

For businesses, the key is not to force the two calculations to match. Instead, a clear and well-documented depreciation reconciliation should be maintained between book depreciation and tax depreciation.

For 2026, businesses should also consider the transition to the Income-tax Act, 2025, which applies to tax years beginning on or after 1 April 2026.