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One of the allowable deductions under the Income Tax Act is depreciation. This is a way of accounting for the decrease in the actual worth of a taxpayer's tangible or intangible asset over time.
Depreciation is a way of spreading the cost of an asset over its useful life or the period it is used for. Depreciation reduces the value of an asset due to usage, wear, and tear, or obsolescence. Depreciation is a non-cash expense that lowers the taxable income of a business. There are different methods of calculating depreciation depending on the needs of a business.
In some cases, the business can also claim additional depreciation in the year of purchase.
A block of assets is a collection of assets belonging to a category of assets with the same depreciation rate. A category of assets can include:
The life span, nature, and usage determine the block of assets. Moreover, the depreciation percentage for each category of assets is used to classify the assets into blocks. The depreciation is calculated on the book of assets as a whole, not on individual assets. i.e., individual assets lose their identity under Income Tax Act for the purpose of depreciation.
As per the Income Tax Act, the prescribed percentage on the WDV of the asset determines the depreciation amount. The WDV of the asset depends on its actual cost. We need to know what ‘WDV’ and ‘Actual Cost’ mean to calculate the depreciation.
The Income Tax Act defines WDV as:
Part A: Tangible Asset
| Asset Class | S. No. | Block of Assets | Rate of Depreciation (%) |
|---|---|---|---|
| Building | 1 | Building Primarily used for residential purposes but not as Hotel or boarding houses | 5 |
| 2 | Buildings (Not used for residential purposes) and not covered under sub-items | 10 | |
| 3 | Buildings bought after 01/09/2002 to set up water supply or treatment equipment that is part of infrastructure facilities under section 80-IA, Installed them for installing machinery and plant. | 40 | |
| 4 | Purely temporary erection, for instance, Wooden structure | 40 | |
| Furniture | 1 | Furniture and fittings, including electrical fittings | 10 |
| Plant & Machinery | 1 | Machinery & Plants but not those covered under sub-items (2), (3), and (8) | 15 |
| 2(i) | Motor cars, But not those used in a business of running them on hire, procured or put to use on or after April 1, 1990, | 15% | |
| 2(ii) | Motor cars, but not those used in a business of running them on hire, are acquired on or after the 23rd day of August 2019 but before the 1st day of April 2020 and are put to use before the 1st day of April 2020. | 30% | |
| 3(i) | Aeroplanes, Aero Engines | 40% | |
| (ii)(a) | Motor taxis, motor buses, and motor lorries are used in the business of running them on hire | 30% | |
| (b) | Motor buses, motor lorries, and motor taxis used in the business of running them on hire were acquired on or after the 23rd day of August 2019 but before the 1st day of April 2020 and put to use before the 1st day of April 2020. | 45% | |
| 3(iii) | Commercial vehicles acquired by the taxpayer on or after 1st October 1998 but before 1st April 1999 are used up to 1st April 1999 for the business and profession in agreement with the third proviso to clause (ii) of sub-Sec. (1) of Sec. 32 | 40% | |
| 3(iv) | A new commercial vehicle acquired on or after 1st October 1998, but before 1st April 1999, in replacement of the condemned vehicle (life of vehicle more than 15 years), is used prior to 1st April 1999, for the purpose of profession or business in pact with the third proviso to clause (ii) of sub-Sec. (1) of Sec. 32. | 40% | |
| 3(v) | New commercial vehicle acquired on or after 1st April 1999, but prior to 1st April 2000, in replacement of condemned vehicle (life of more than 15 years), is put to use prior to 1st April 2000, for profession or business in pact with the 2nd proviso to clause (ii) of sub-sec(1) of sec.32 | 40 | |
| 3(vi) | New commercial vehicle acquired on or after 1st April 2001, but prior to 1st April 2002, and is put to use prior to 1st April 2002, for the purpose of business and profession. | 40 | |
| A new commercial vehicle acquired on or after the 1st of January 2009 but before the 1st of October 2009 is set to use before the 1st of October 2009 for profession or business. | 40 | ||
| 3(vii) | Moulds used in plastic & rubber goods manufacturing unit | 30 | |
| 3(viii) | Air pollution control equipment like electrostatic precipitation systems, dust collector systems, felt-filter, ash handling systems, and systems scrubber systems | 40 | |
| 3(ix) | Ion exchange resin column, Activated carbon column, Rotating biological contractor or bio-disc, Marine outfall systems, Centrifuge for dewatering sludge, Air floatation systems, Urea Hydrolysis systems, Air/steam stripping systems, Aerated lagoon systems, Methane-recovery anaerobic digester systems, Diffused air/mechanically aerated activated sludge systems, Biofilters, Chemical feed systems and flash mixing equipment, Mechanical reactors, and Mechanical flocculators, grease removal systems, and Mechanically skimmed oil and, Water pollution control tools include Mechanical screen systems, and Aerated detritus chambers (including air compressor). | 40 | |
| 3(x) | Equipment for controlling the solid waste, like a system for recovering caustic, chrome, lime, cryolite, or mineral and a system for recycling and recovering resources from solid waste | 40 | |
| 3(xi) | Machinery and plant used in the semiconductor industry manufacturing all integrated circuits (ICs) excluded hybrid integrated circuits) the range between SSI to LSI/VLSI (small-scale integration to large-scale integration/ very large-scale integration, and discrete semiconductor devices such as diodes, triacs, transistors, thyristors, etc., excluding covered by entries (viii), (xi), (x) of this subitem and sub-item (8). | 30 | |
| 3(xi)a | Life-saving medical equipment, Heart-lung machine, SPECT Ga, mma Camera, Ventilator used with anaesthesia apparatus, Ventilators other than those used with anesthesia, Bone Marrow Transplant Equipment including silastic long-standing intravenous catheters for chemotherapy, Peritoneoscopes, Fibreoptic endoscopes including Paediatric resectoscope/audit resectoscope, Fibreoptic Flexible Laryngo Bronchoscope, Stroboscope, Fibreoptic Flexible Oesophago Gastroscopeand Laparoscope (single incision), inclides D.C. Defibrillators for internal use and pacemakers, Haemodialysors, Cobalt Therapy Unit, Colour Doppler, Vascular Angiography System including Digital subtraction Angiography, Magnetic Resonance Imaging System, Surgical Laser, Gamma knife, Arthoscope, Microlaryngoscope, Fibreoptic Flexible Nasal Pharyngo Bronchoscope, Video Laryngo Bronchoscope, and Video Oesophago Gastroscope. | 40 | |
| 4 | Containers of plastic or glass used as refills | 40 | |
| 5 | Computers, including computer software | 40 | |
| 6 | Weaving and garment sector of the textile industry, Plant and machinery used in the processing, which is bought under TUFS on or after April 1, 2001, but before April 1, 2004, and is put to use before April 1, 2004 | 40 | |
| 7 | Plant and machinery installed and acquired on or after September 1, 2002, in a water treatment system or a water supply project and put to use for the 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 | |
| 8(ii) | Match factories, wooden match frames | 40 | |
| 8(iii) | Cinematograph films, bulbs of studio lights | 40 | |
| 8(iv) | Saltworks, reservoirs, condensers, salt pans, etc., made of, sandy, clayey or earthy material or any other similar material | 40 | |
| 8(v) | Quarries and mines, winding ropes, Sand stowing pipes, tubs, haulage ropes, and Safety lamps | 40 | |
| 8(vi) | Flour mills, rollers | 40 | |
| 8(vii) | Sugar works, rollers | 40 | |
| 8(viii) | Steel and iron industry, rolling mill rolls | 40 | |
| 8(ix) | Energy-saving devices include— A. Specialised boilers and furnaces: (i) Ignifluid/fluidized bed boilers (ii) Flameless furnaces and continuous pusher type furnaces (iii) Fluidized bed type heat treatment furnaces (iv) High-efficiency boilers (thermal efficiency higher than 75 percent in case of coal-fired and 80 percent in case of oil/gas fired boilers) | 40 | |
| B. Instrumentation and monitoring system for monitoring energy flows: (i) Automatic electrical load monitoring systems (ii) Digital heat loss meters (iii) Micro-processor based control systems (iv) Infra-red thermography (v) Meters for measuring heat losses, furnace oil flow, steam flow, electric energy and power factor meters (vi) Maximum demand indicator and clamp on power meters (vii) Exhaust gases analyzer (viii) Fuel oil pump test bench | 40 | ||
| C. Waste heat recovery equipment: (i) Economisers and feed water heaters (ii) Recuperators and air pre-heaters (iii) Heat pumps (iv) Thermal energy wheel for high and low-temperature waste heat recovery | 40 | ||
| D. Co-generation systems: (i) Back pressure pass out, controlled extraction, extraction-cum-condensing turbines for co-generation along with pressure boilers (ii) Vapour absorption refrigeration systems (iii) Organic rankine cycle power systems (iv) Low inlet pressure small steam turbines | 40 | ||
| E. Electrical equipment: (i) Shunt capacitors and synchronous condenser systems (ii) Automatic power cut off devices (relays) mounted on individual motors (iii) Automatic voltage controller (iv) Power factor controller for AC motors (v) Solid state devices for controlling motor speeds (vi) Thermally energy-efficient stenters (which require 800 or less kilocalories of heat to evaporate one kilogram of water) (vii) Series compensation equipment (viii) Flexible AC Transmission (FACT) devices - Thyristor controlled series compensation equipment (ix) Time of Day (ToD) energy meters (x) Equipment to establish transmission highways for National Power Grid to facilitate transfer of surplus power of one region to the deficient region (xi) 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 (xii) Special energy meters for Availability Based Tariff (ABT) | 40 | ||
| F. Burners: (i) 0 to 10 percent excess air burners (ii) Emulsion burners (iii) Burners using air with high pre-heat temperature (above 300°C) | 40 | ||
| (x) | Gas cylinders, along with regulators and valves | 40 | |
| (xi) | Glass manufacturing regard, Direct fire glass melting furnaces | 40 | |
| (xii) | Mineral oil concerns (1) Plant used in field operations (above ground) distribution - Returnable packages (2) 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 | |
| (3) Oil wells not covered in clauses (1) and (2) | 15 | ||
| (xiii) | Renewable energy devices including Pipe type and concentrating solar collectors, Solar cookers, Flat plate solar collectors, Air/fluid/gas heating systems, Solar crop drivers and systems, Solar water heaters and systems, Solar steels and desalination systems, Solar pumps based on solar-photovoltaic and solar-thermal conversion, Solar refrigeration, air conditioning systems and cold storages, Solar-photovoltaic panels and modules for water pumping and other applications, Solar power generating systems | 40 | |
| 9(i) | Books owned by assessees carrying on a profession (a) Books being annual publications, (b) Books, except those covered by entry (a) above | ||
| (ii) | Books owned by assessees carrying on business in running lending libraries | 40 | |
| Ships | 1 | (i)Ocean-going ships along with dredgers, barges, tugs, survey launches, and other identical ships used mainly for dredging purposes and fishing vessels with a wooden hull (ii) Vessels ordinarily running on inland waters, not covered by sub-item (iii) below (iii) Vessels ordinarily operating on inland waters being speed boats | 20 |
Part- B
| S. no. | Block of Assets | Rate of Depreciation (%) |
|---|---|---|
| 1 | Trademark, Franchise, license, patents, copyright, know-how, or other commercial or business rights of identical nature | 25 |
The followings are the three depreciation methods:
The most popular and commonly used depreciation method is the Straight Line Method; it is the easiest depreciation method for calculation.
In India, the Ministry of Commerce decides the depreciation rates.
