Section 32 Of Income Tax Act (Complete Information)

Many people in India are not aware of tax planning. By the name of tax planning, you end up doing tax evasion leading to hefty penalties. Chartered accountants go through every single transaction. There are many possibilities they may hide hacks through which you can save tax. This article helps you know about tax benefits on depreciation assets under section 32.

Section 32 of Income Tax Act and Rule 5 of the Income Tax Rules deal with the tax advantages on the depreciation of assets. Depreciation refers to a reduction in the valuation of an asset over time due to wear and tear. 

Let us know more about Section 32 and its benefits.

You can claim a tax deduction when there is a drop in the valuation of an intangible or a tangible asset after its usage. 

In the case of a tangible asset, the deduction is applicable against machinery, plant, and building. On the other hand, you can claim the deduction against the franchise, license, copyright, trademark, patent, or any other commercial or business ownership for the intangible asset.

You can claim a deduction on depreciation on meeting the following terms and conditions:

• You must have utilized the asset in the preceding year.
• You must have used it for professional or business purposes.
• You must own that asset (not a registered owner.

What are the conditions for claiming depreciation as per Section 32 of the Income Tax Act?

Section 32 of the Income Tax Act allows depreciation as expenditure based on the block of assets. Here a block of assets means an asset group falling under an asset class that is under the same depreciation rate. The Income Tax Department calculates the deduction on depreciation using WDV (Written Down Value) method.  

You are eligible to claim depreciation under Section 32 of the Income Tax Act on meeting the following conditions:

• Your Land and charity do not qualify for depreciation. 
• Depreciation will apply to the owner and not to the tenant. However, if the tenant constructs furniture or any portion, the tenant is eligible for depreciation.  
• If you purchase a property through a hire purchase contract, you are eligible to claim depreciation. 
• If an asset involves co-owners, then a deduction on depreciation will be acceptable in the ratio of their ownership. 
• If you do not claim the depreciation amount as a deduction, the sum of the Written Down Value brought forward to the next year will be reduced by the amount of depreciation.
• Depreciation under the Companies Act of 1956 differs from that of the IT Act. So, the IT Department specifies the depreciation rates, regardless of the depreciation chargeable under the books of accounts.
• If there are spare machines/parts that you haven’t utilized, depreciation will apply to them. 
• You can claim depreciation at a lower rate. However, the tax authority will consider the WDV as decreased by the depreciation percentage specified for the succeeding year. 
• Depreciation does not apply to the GST (Goods and Services Tax) component if you wish to avail of the Input Tax Credit (ITC) of the GST payable. 

When is an additional depreciation claimed?

You can claim an additional depreciation in the following cases:

• You can claim additional depreciation to new plants or machinery, excluding aircraft and ships. The asset must be bought and installed post-March 31, 2005. 
• You have to be involved in the business of distribution and generation of power.  
• If you install a plant or machinery in any residential property (including a guest house) or office premises
• For a road transport vehicle or an office appliance
• Second-hand machinery and plant
• Few cases for which depreciation isn’t allowable 
• Depreciation at 20% of the cost of assets will be permissible as an additional depreciation.
• You have to take care of the production and manufacturing of the business.

What if depreciation is not claimed?

Depreciation was optional earlier until the Government inserts explanation 5 to section 32(1). It says that depreciation is mandatory to claim. 

• If you fail to claim depreciation, it will never enter into the block of assets. The gains arising from the sale of such assets will be long-term or short-term depending upon the period of holding.
• If your asset enters the block and later if the block ceases to exist, the gains will always be Short term Capital Gains taxable at 30%.

Thus, claiming your depreciation is mandatory and it helps you save your tax.

On which assets depreciation is not allowed?

You cannot claim depreciation on Goodwill and expense of land. As you cannot claim depreciation to land, you need to allocate the original purchase price between the land and the building. You can compute a ratio of the value of the same. 

Depreciation is mandatory from Annual Year 2002-03 and allows a deduction irrespective of your claim in the profit & loss account.

FAQs :  Section 32 of income tax act

1. What is WDV?

If you acquire an asset during the preceding year, you can treat that asset’s actual cost as WDV.

 WDV = Actual cost – Depreciation applicable.

2. How to claim Depreciation during Successive Years?

You can claim depreciation during the succeeding years by following the below things:

• In case you didn’t use an asset during the year of its purchase or has been in use for below 180 days, 100% depreciation will be allowable during the successive years.
• Even if you use a single asset from a block of assets in a year, depreciation will apply to the entire block. 

3. What comes under Section 32 under the head of business or profession?

Tangible and intangible assets come under the head of business or profession of section 32. 

Tangible assets:

Buildings, machinery, plants, or furniture.

Intangible assets:

Patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature.

4. What is Section 32 of the Income Tax Act, a block of assets? 

As per Section 32 of the Income Tax Act, a block of assets means an asset group consisting of intangible and tangible assets. These blocks have the same depreciation rate. The Income Tax Department has categorized blocks based on the nature, life, and usage of an asset.  

Bottomline

As you see from the above article, you can claim tax deductions for your depreciation assets under Section 32 of Income Tax Act for AY 2021-22. That said, you can claim deductions after the fulfillment of certain conditions. This depreciation helps save your tax amount by showing either profit or loss. Don’t forget to make the best use of section 32 and contact us in case of any doubts regarding this section.

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