Under the Income Tax Act depreciation is a deduction for the reduction in original amount of tangible or intangible assets used by the taxpayer. The conception of depreciation is used to depreciate the cost of an asset over its useful life. Here you will learn more about depreciation as per income tax act. Let’s dive into it.
Depreciation is a mandatory deduction on a company’s income statement that uses depreciable assets, and the law allows removal using the straight-line method or WDV (Written Down Value) method.
The WDV method of calculating depreciation is generally used. However, if your company is engaged in power generation or its generation and distribution, you have the option of choosing the straight-line method.
How Is Depreciation Calculated as per Income Tax Act
Depreciation is calculated using the WDV of the asset block. “Block of Assets” means a group of assets contained in an asset class that includes: tangible assets i.e. buildings, machinery, equipment, or furniture (ii); Intangible assets that are know-how, patents, copyrights, trademarks, licenses, concessions, or other business or commercial rights of a similar nature subject to the same rate of depreciation.
To classify assets into blocks, the percentage of depreciation within the asset class must be considered. Each class of assets with the same depreciation rate is identified as a block of assets.
The depreciation method and useful life of depreciable assets can vary from asset to asset. Accounting and tax considerations may also differ depending on the type of asset and industry. The most commonly used depreciation methods are the straight-line method and written down-value Method.
The basic difference in depreciation calculation as per the income tax and companies act is the method used for depreciation calculation.
Depreciation method under the Companies Act 1956 (Based on Specified Rates):
- Straight Line Method
- Written Down Value Method
Under Companies Act 2013 (based on the useful life of assets):
- Straight Line Method
- Written Down Value Method
- Unit of Production Method
Depreciation method under Income Tax Act 1961 (based on specified rate):
- Written Down Value Method (block-wise)
- Straight Line Method for Power Generating Units
What Is Depreciation and How Is It Charged under Income Tax Act
Depreciation is mentioned in Section 32 of the Income Tax Act of 1961. Depreciation is characterized as a lower value of an object caused by wear and tear. People declare depreciation deductions simplest for accounting or taxation purposes.
The Income Tax Act 1961 presents for the deduction of all actual and intangible properties. In the case of a capital asset, it is able to be deducted from the price of the home, factory, and equipment. In the case of an intangible possession, a deduction may be claimed in opposition to patents, trademarks, copyright, warrant, franchise, or some other associated company or contractual privilege.
How Do You Calculate More than 180 Days Depreciation
The additional depreciation rate is 20% of the actual cost of purchasing the asset and using it for more than 180 days. the rate will be 10% if the period is less than 180 days, but a total of 10% is allowed for the previous year.
What Is Depreciation as per Chart U S 32
Under Section 32(1)(iia) of the Income Tax Act 1961, factory and machinery used in the manufacture of goods are entitled to an additional depreciation charge of 20% in the year of acquisition.
Depreciation on Office Equipment as per Income Tax Act
Equipment is considered a capital good. You can deduct the cost of assets, but not all at once. You typically depreciate an asset by deducting a portion of the tax return expense over the years. Depreciation allowance as a percentage of the actual cost for Office equipment is 12.77
What Are the 3 Methods to Calculate Depreciation
The depreciation method and useful life of depreciable assets can vary from asset to asset. Accounting and tax considerations may also differ depending on the type of asset and industry. The most commonly used depreciation methods are the straight-line method and written down-value Method.
- Straight Line Method
- Written Down Value Method
- Unit of Production Method
What Is the Rate of Depreciation as per Income Tax Act
Prices have changed since 2017-18. Currently, the maximum depreciation rate is 40%.
| S. No | Asset Class | Asset Type | Rate of Depreciation |
| 1 | Building | Houses other than hotels and guesthouses | 5% |
| Hotels and guesthouses | 10% | ||
| 2 | Furniture | Purely temporary buildings such as wooden buildings | 40% |
| Furniture – All furnishings/fixtures including electrical and air conditioning | 10% | ||
| Automobiles, motorcycles, bicycles, scooters other than for rental business, mobile phones | 15% | ||
| 3 | Plant & Machinery | Cars, motorcycles, bicycles, scooters purchased on or after August 23, 2019, but before April 1, 2020, and used before April 1, 2020, and not used in the rental business. | 30% |
| Buses/Taxis/Trucks are used as part of a commercial rental business. | 30% | ||
| Buses/Taxis/Trucks used in the rental business were purchased after 23 August 2019 but before 1 April 2020 and used before 1 April 2020. | 45% | ||
| Plant & Machinery | Computers, laptops, computer software, printers, scanners, UPS and other peripherals. | 40% | |
| A non-annual publication, a book that practices the profession owned by the assessee. | 40% | ||
| Books owned by the beneficiary who manages the lending library | 40% | ||
| 4 | Intangible Assets | know-how, patents, copyrights, trademarks, licenses, franchises, or other business or commercial rights of a similar nature | 25% |
Frequently Asked Questions (FAQs):-
What is the depreciation rate on mobile?
The depreciation rate for plant & machinery is 13.91% according to the Companies Act (mobile devices are recorded as machinery and equipment) and 15% according to the Income Tax Act.
What is the formula for calculating depreciation rate?
1. Straight line depreciation rate = (original price – residual value) / useful life x 100
2. Depreciation cost = original price x SLM depreciation rate (calculated in (1))
Conclusion
Depreciation as per income tax act. Depreciation is defined as the process by which the value of an asset decreases due to the depreciation of the asset. This is especially true for long-term assets such as computers, buildings, vehicles, factories, and machinery that provide long-term returns.