Introduction<\/p>\n
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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
Therefore, businesses need to maintain a proper reconciliation between:<\/p>\n
Depreciation as per Books of Accounts \u2192 Tax Adjustments \u2192 Depreciation as per Income-tax Law<\/p>\n
What is Depreciation?<\/p>\n
Depreciation represents the systematic allocation of the depreciable amount of a tangible asset over its estimated useful life.<\/p>\n
For accounting purposes, depreciation reflects the consumption or utilisation of an asset’s economic benefits over its useful life.<\/p>\n
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.<\/p>\n
Depreciation under the Companies Act, 2013<\/p>\n
Under the Companies Act, depreciation is primarily governed by Schedule II, along with applicable accounting standards.<\/p>\n
Companies generally determine depreciation by considering:<\/p>\n
Cost of the asset<\/p>\n
Estimated useful life<\/p>\n
Residual value<\/p>\n
Date the asset is available for use<\/p>\n
Depreciation method<\/p>\n
Component accounting, where applicable<\/p>\n
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.<\/p>\n
Examples of indicative useful lives<\/p>\n The exact useful life should always be checked against the applicable category and Schedule II requirements.<\/p>\n Depreciation under Income-tax Law<\/p>\n Tax depreciation follows a fundamentally different approach.<\/p>\n 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.<\/p>\n For 2026, the Income-tax Department’s notified return schedules continue to show prescribed depreciation categories and rates, including:<\/p>\n Plant and machinery \u2013 commonly 15%<\/p>\n Certain plant and machinery \u2013 higher prescribed rates depending on the asset<\/p>\n Building \u2013 5%, 10% or 40%, depending on the category<\/p>\n Furniture and fittings \u2013 10%<\/p>\n Intangible assets \u2013 25%<\/p>\n Computers and certain computer software \u2013 40%<\/p>\n The applicable rate depends on the specific asset\/block and the relevant tax provisions.<\/p>\n Major Difference Between Book and Tax Depreciation<\/p>\n The most important difference is the basis of calculation.<\/p>\n Companies Act<\/p>\n Depreciation is generally calculated based on:<\/p>\n Asset cost \u2013 residual value \u00f7 useful life<\/p>\n subject to the applicable accounting framework.<\/p>\n Income-tax Law<\/p>\n Depreciation is generally calculated using:<\/p>\n Written Down Value (WDV) of the relevant block \u00d7 prescribed depreciation rate<\/p>\n This difference alone can result in different depreciation amounts in the financial statements and tax computation.<\/p>\n Companies Act vs Income-tax Act \u2013 Key Comparison<\/p>\n Why Does Reconciliation Become Necessary?<\/p>\n Suppose a company purchases machinery for \u20b910,00,000.<\/p>\n The company may depreciate the machinery over its estimated useful life for accounting purposes.<\/p>\n For tax purposes, however, the machinery may fall into a block attracting a prescribed depreciation rate.<\/p>\n As a result:<\/p>\n Book Depreciation \u2260 Tax Depreciation<\/p>\n The difference needs to be adjusted while calculating taxable business income.<\/p>\n Example of Depreciation Reconciliation<\/p>\n Suppose:<\/p>\n Cost of machinery: \u20b910,00,000<\/p>\n Book depreciation for the year: \u20b91,00,000<\/p>\n Tax depreciation allowable: \u20b91,50,000<\/p>\n The company’s Profit & Loss Account contains depreciation of \u20b91,00,000.<\/p>\n For tax computation:<\/p>\n Step 1 \u2013 Add back book depreciation<\/p>\n \u20b91,00,000 is added back because the accounting depreciation is not itself the amount used for tax depreciation computation.<\/p>\n Step 2 \u2013 Deduct tax depreciation<\/p>\n \u20b91,50,000 is deducted as the depreciation allowable under the income-tax provisions.<\/p>\n Net tax adjustment<\/p>\n Taxable profit is reduced by an additional:<\/p>\n \u20b950,000<\/p>\n Therefore:<\/p>\n Book Profit<\/strong><\/p>\n Book Depreciation<\/p>\n \u2013 Tax Depreciation<\/p>\n = Taxable Business Profit<\/strong><\/p>\n Simple Reconciliation Format<\/p>\n Businesses can maintain a depreciation reconciliation schedule like this:<\/p>\n This reconciliation helps the tax team and auditor understand the difference between accounting profit and taxable profit.<\/p>\n What Happens When Book Depreciation is Higher?<\/p>\n Suppose:<\/p>\n Book depreciation = \u20b92,00,000<\/p>\n Tax depreciation = \u20b91,20,000<\/p>\n The reconciliation would be:<\/p>\n In this situation, taxable profit is higher than accounting profit by \u20b980,000 because the tax deduction is lower than the book depreciation charged.<\/p>\n Deferred Tax Impact<\/p>\n Differences between book depreciation and tax depreciation can also create temporary differences for accounting purposes.<\/p>\n For example:<\/p>\n Book carrying amount of an asset may differ from its tax base.<\/p>\n This difference can result in a Deferred Tax Asset (DTA) or Deferred Tax Liability (DTL), depending on the circumstances.<\/p>\n Companies following applicable accounting standards should evaluate the deferred tax implications of depreciation differences.<\/p>\n Example<\/p>\n If tax depreciation is higher than book depreciation in the early years, taxable income may be lower initially.<\/p>\n In later years, the position may reverse.<\/p>\n This timing difference may create a deferred tax liability, subject to the applicable accounting standard and recognition requirements.<\/p>\n Half-Year Rule for Tax Depreciation<\/p>\n One important difference arises when an asset is acquired and put to use during the year.<\/p>\n 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.<\/p>\n 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.<\/p>\n For example, if normal tax depreciation is \u20b91,00,000 but the asset is used for less than 180 days, the allowable depreciation may be \u20b950,000, subject to the applicable rules.<\/p>\n Block of Assets Concept<\/p>\n For income-tax purposes, depreciation is generally calculated on a block of assets rather than asset-by-asset.<\/p>\n For example, a business may have several assets falling within the same depreciation block.<\/p>\n The calculation broadly considers:<\/p>\n Opening WDV of the block<\/p>\n Additions during the year<\/p>\n Assets sold or transferred<\/p>\n Assets acquired and used for less than the prescribed period<\/p>\n Applicable depreciation rate<\/p>\n Closing WDV<\/p>\n The 2026 tax-return schedules illustrate this block-based approach through separate depreciation schedules for plant and machinery and other depreciable assets.<\/p>\n Important: Sale of Assets and Tax Depreciation<\/p>\n The treatment of asset sales can differ significantly between accounting and tax records.<\/p>\n Under tax depreciation, the sale proceeds of assets are adjusted against the relevant block.<\/p>\n If the block continues to exist, depreciation may be calculated on the resulting WDV, subject to the applicable provisions.<\/p>\n If the block ceases to exist, the tax law may trigger short-term capital gain or loss under the applicable provisions.<\/p>\n Therefore, simply comparing individual book depreciation with tax depreciation without considering asset additions and disposals can lead to incorrect reconciliation.<\/p>\n Common Reasons for Differences<\/p>\n The most common reasons for differences between book and tax depreciation include:<\/p>\n The accounting depreciation rate may differ from the prescribed tax rate.<\/p>\n Companies may depreciate assets over their estimated useful lives, whereas tax depreciation follows prescribed rates.<\/p>\n Tax depreciation is generally calculated at block level.<\/p>\n Tax depreciation may be restricted to 50% of the normal rate.<\/p>\n Significant components of an asset may have separate useful lives for accounting purposes.<\/p>\n Book accounting and tax treatment of asset sales can differ.<\/p>\n Certain eligible taxpayers\/assets may qualify for additional depreciation under the applicable tax provisions.<\/p>\n How to Prepare a Depreciation Reconciliation<\/p>\n A company should ideally maintain two separate depreciation schedules:<\/p>\n Schedule 1 \u2013 Books<\/p>\n Include:<\/p>\n Asset description<\/p>\n Asset category<\/p>\n Purchase date<\/p>\n Cost<\/p>\n Useful life<\/p>\n Residual value<\/p>\n Opening accumulated depreciation<\/p>\n Current-year depreciation<\/p>\n Closing WDV<\/p>\n Schedule 2 \u2013 Tax<\/p>\n Include:<\/p>\n Tax block<\/p>\n Opening WDV<\/p>\n Additions<\/p>\n Date put to use<\/p>\n Assets sold<\/p>\n Sale consideration<\/p>\n Applicable tax depreciation rate<\/p>\n Full-rate depreciation<\/p>\n Half-rate depreciation<\/p>\n Closing WDV<\/p>\n The two schedules can then be reconciled.<\/p>\n Practical Reconciliation Template<\/p>\n A practical working paper may look like this:<\/p>\n The difference between the two closing balances should be carried forward and reconciled in subsequent years.<\/p>\n Impact on Tax Audit and Tax Computation<\/p>\n Where applicable, the depreciation reconciliation becomes an important part of the tax computation and audit documentation.<\/p>\n The business should maintain:<\/p>\n Fixed asset register<\/p>\n Purchase invoices<\/p>\n Sale\/disposal documents<\/p>\n Capitalisation records<\/p>\n Date of put-to-use evidence<\/p>\n Book depreciation schedule<\/p>\n Tax depreciation schedule<\/p>\n Reconciliation statement<\/p>\n Supporting calculations for special depreciation rates<\/p>\n Proper documentation becomes particularly important where the business has significant capital expenditure.<\/p>\n Depreciation and the New Income-tax Act, 2025<\/p>\n 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.<\/p>\n 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.<\/p>\n Accordingly, businesses should be careful when preparing depreciation schedules around the transition period.<\/p>\n For example:<\/p>\n FY 2025-26 \/ AY 2026-27 \u2192 governed by the earlier framework for that tax year.<\/p>\n Tax Year 2026-27 onwards \u2192 governed by the Income-tax Act, 2025.<\/p>\n 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.<\/p>\n Common Mistakes in Depreciation Reconciliation<\/p>\n Businesses should avoid the following errors:<\/p>\n Mistake 1 \u2013 Claiming Book Depreciation as Tax Depreciation<\/p>\n Book depreciation should be appropriately adjusted while calculating taxable business income.<\/p>\n Mistake 2 \u2013 Applying Accounting Rates for Tax<\/p>\n Tax depreciation rates are prescribed separately and should not simply be copied from the books.<\/p>\n Mistake 3 \u2013 Ignoring the 180-Day Rule<\/p>\n New assets used for less than the prescribed period can attract restricted depreciation.<\/p>\n Mistake 4 \u2013 Not Accounting for Asset Sales<\/p>\n Disposals affect the tax block and must be properly considered.<\/p>\n Mistake 5 \u2013 Not Maintaining Separate Registers<\/p>\n A single fixed asset register may not be sufficient for accurate accounting and tax reconciliation.<\/p>\n Mistake 6 \u2013 Ignoring Deferred Tax<\/p>\n Significant temporary differences may have an impact on deferred tax accounting.<\/p>\n Best Practices for 2026<\/p>\n Businesses should:<\/p>\n Maintain separate book and tax depreciation schedules.<\/p>\n Reconcile the schedules every year.<\/p>\n Verify the correct tax block for each asset.<\/p>\n Check the applicable depreciation rate.<\/p>\n Track the date each asset is put to use.<\/p>\n Maintain supporting purchase and disposal documents.<\/p>\n Review the treatment of assets acquired during the year.<\/p>\n Consider deferred tax implications.<\/p>\n Review the transition from the Income-tax Act, 1961 to the Income-tax Act, 2025.<\/p>\n Reconcile depreciation before finalising the annual tax computation.<\/p>\n Conclusion<\/p>\n Depreciation under the Companies Act and depreciation under income-tax law serve different purposes and therefore do not necessarily produce the same amount.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n","protected":false},"excerpt":{"rendered":" Understand the difference between depreciation under the Companies Act and Income-tax law in 2026. Learn about useful life, tax depreciation rates, block of assets, 180-day rule, deferred tax.<\/p>\n","protected":false},"author":8,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_kad_post_transparent":"","_kad_post_title":"","_kad_post_layout":"","_kad_post_sidebar_id":"","_kad_post_content_style":"","_kad_post_vertical_padding":"","_kad_post_feature":"","_kad_post_feature_position":"","_kad_post_header":false,"_kad_post_footer":false,"_kad_post_classname":"","footnotes":""},"categories":[5],"tags":[],"class_list":["post-930","post","type-post","status-publish","format-standard","hentry","category-income-tax"],"_links":{"self":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/930","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/comments?post=930"}],"version-history":[{"count":5,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/930\/revisions"}],"predecessor-version":[{"id":1549,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/930\/revisions\/1549"}],"wp:attachment":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/media?parent=930"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/categories?post=930"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/tags?post=930"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n\n
\n \nAsset<\/th>\n Indicative useful life under Schedule II<\/th>\n<\/tr>\n<\/thead>\n \n Buildings \u2013 RCC structure<\/td>\n 60 years<\/td>\n<\/tr>\n \n Buildings \u2013 other than RCC<\/td>\n 30 years<\/td>\n<\/tr>\n \n General Plant & Machinery<\/td>\n 15 years<\/td>\n<\/tr>\n \n Furniture & Fixtures<\/td>\n 10 years<\/td>\n<\/tr>\n \n Office Equipment<\/td>\n 5 years<\/td>\n<\/tr>\n \n Computers & Data Processing Equipment<\/td>\n 3 years<\/td>\n<\/tr>\n \n Motor Vehicles<\/td>\n Generally 6 years, subject to category<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n \n\n
\n \nParticulars<\/th>\n Companies Act \/ Books<\/th>\n Income-tax Law<\/th>\n<\/tr>\n<\/thead>\n \n Basic approach<\/td>\n Useful-life based<\/td>\n Block-of-assets based<\/td>\n<\/tr>\n \n Depreciation basis<\/td>\n Individual asset\/component<\/td>\n Block of assets<\/td>\n<\/tr>\n \n Useful life<\/td>\n Relevant for calculation<\/td>\n Generally not the primary calculation basis<\/td>\n<\/tr>\n \n Rate<\/td>\n Based on useful life<\/td>\n Statutory prescribed rate<\/td>\n<\/tr>\n \n Residual value<\/td>\n Generally considered<\/td>\n Tax rules determine tax WDV mechanism<\/td>\n<\/tr>\n \n Asset-wise depreciation<\/td>\n Yes<\/td>\n Generally block-wise<\/td>\n<\/tr>\n \n Half depreciation for new assets<\/td>\n Accounting depends on available-for-use policy<\/td>\n Specific statutory rule applies<\/td>\n<\/tr>\n \n Component accounting<\/td>\n Applicable where required<\/td>\n Generally not applied in the same manner<\/td>\n<\/tr>\n \n Purpose<\/td>\n Financial reporting<\/td>\n Tax computation<\/td>\n<\/tr>\n \n Result<\/td>\n Book depreciation<\/td>\n Tax depreciation<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n \n\n
\n \nParticulars<\/th>\n Amount<\/th>\n<\/tr>\n<\/thead>\n \n Profit Before Tax as per Books<\/td>\n \u20b920,00,000<\/td>\n<\/tr>\n \n Add: Book Depreciation<\/td>\n \u20b91,00,000<\/td>\n<\/tr>\n \n Less: Tax Depreciation<\/td>\n \u20b91,50,000<\/td>\n<\/tr>\n \n Taxable Business Profit<\/td>\n \u20b919,50,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n \n\n
\n \nParticulars<\/th>\n Amount<\/th>\n<\/tr>\n<\/thead>\n \n Profit Before Tax<\/td>\n \u20b920,00,000<\/td>\n<\/tr>\n \n Add: Book Depreciation<\/td>\n \u20b92,00,000<\/td>\n<\/tr>\n \n Less: Tax Depreciation<\/td>\n \u20b91,20,000<\/td>\n<\/tr>\n \n Taxable Business Profit<\/td>\n \u20b920,80,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n Different depreciation rates<\/h2>\n
Different useful lives<\/h2>\n
Block-of-assets mechanism<\/h2>\n
Asset used for less than 180 days<\/h2>\n
Component accounting<\/h2>\n
Asset disposals<\/h2>\n
Additional depreciation<\/h2>\n
\n\n
\n \nParticulars<\/th>\n Books<\/th>\n Tax<\/th>\n<\/tr>\n<\/thead>\n \n Opening WDV<\/td>\n \u20b915,00,000<\/td>\n \u20b912,00,000<\/td>\n<\/tr>\n \n Additions<\/td>\n \u20b95,00,000<\/td>\n \u20b95,00,000<\/td>\n<\/tr>\n \n Disposals<\/td>\n \u20b91,00,000<\/td>\n \u20b91,00,000<\/td>\n<\/tr>\n \n Depreciation<\/td>\n \u20b91,50,000<\/td>\n \u20b92,10,000<\/td>\n<\/tr>\n \n Closing WDV<\/td>\n \u20b917,50,000<\/td>\n \u20b913,80,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n