Depreciation under Income Tax Act - Depreciation Rate and Calculation (2024)

What is Depreciation in the Income Tax Act?

Depreciation is discussed in Section 32 of the Income Tax Act of 1961. Depreciation is characterised as a decrease in the value of an object caused by wear and tear. People claim depreciation deductions only for accounting or taxation purposes.

The Income Tax Act 1961 provides for the deduction of all real and intangible properties. In the case of a capital asset, it can be deducted from the cost of the home, factory, and equipment. In the case of an intangible possession, a deduction can be claimed against patents, trademarks, copyright, warrant, franchise, or any other related corporate or contractual privilege.

Block of Assets

Depreciation is calculated using the WDV of a Block of assets. A block of assets is a collection of assets from the same asset class that includes-

• Buildings, machinery, plants, and furnishings are examples of tangible assets.
• Intangible assets include know-how, patents, copyrights, trademarks, licences, franchises, and any other comparable business or commercial rights.

The asset block is identified based on its life, type, and similar use. Furthermore, for asset classification, the depreciation percentage within the asset class must be addressed. Each such asset class with the same depreciation rate will be identified as a block of the asset.

Individual assets lose their individuality under the Income Tax Act because depreciation is calculated on a group of assets rather than individual assets.

Rates of Depreciation

Rates of depreciation on assets-

Claiming Depreciation as Per Income Tax Act

An assessee must meet certain requirements to claim the depreciation deduction. Below are the conditions:

• Assets Classifications

The owner of the asset must be an assessee to benefit from depreciation. The asset can be both real and intangible. In terms of a tangible asset, it can be a home, equipment, factory, or furniture. Intangible properties may be patent rights, copyrights, trademarks, licences, franchises, or something of a similar type gained on or after April 1, 1998.

The income tax department estimates only the depreciation on the house when estimating depreciation. They may not factor in the expense of the property on which the building is built. The justification for not incorporating the cost of the property in the house is that the land does not depreciate due to wear and tear or use.

• Lease Vs Ownership

An assessee can seek depreciation only on capital assets that he owns. If the assessee wishes to take advantage of the allowance for property depreciation, the assessee must be the owner of such properties. An assessee doesn't need to be the owner of the property. Where an assessee constructs a house but the property belongs to someone else, he is entitled to a credit for depreciation on houses.

The assessee cannot seek the deduction if he is a resident who uses the house. Where an assessee has taken a mortgage on the property and built a dwelling on that land, he is entitled to depreciation allowances. In the case of hire and buy, if an assessee contracts the equipment for a brief amount of time, he cannot demand the deduction.

However, in the event of a loan, if an assessee acquires the property and becomes the purchaser, he is eligible to receive the deduction.

• Used for Professions or Business

The commodity may have been used for a company or occupation to qualify for the credit for depreciation. However, it is not required to claim the credit on depreciation, for which an assessee must use the asset during the fiscal year.

Thus, if the assessee uses the asset for a short amount of time within an accounting year, he is entitled to depreciation deductions. Take, for example, every seasonal factory.

• On Sold Assets

Depreciable assets cannot be deducted by an assessee. If an object is sold, removed, or damaged in the same year that it was bought, the assessee is not eligible to receive the deduction.

• Co-ownership

If an asset has a co-owner, the co-owner may report depreciation on the asset as well.

What are the Conditions for Claim Depreciation?

• You cannot depreciate goodwill or the cost of land.
• Depreciation is mandatory beginning with the fiscal year 2002-03 and must be allowed or presumed to have been permitted as a deduction regardless of a claim made by a taxpayer in the profit and loss account. That is, after deducting the depreciation amount, the taxpayer can carry forward the WDV.
• If the presumptive taxation plan is used, the deemed profit is said to have taken depreciation into account.
• Depreciation under the Companies Act of 1956 differs from that under the Income Tax Act. As a result, depreciation rates established by the Income Tax Act are only permitted regardless of the depreciation rates charged in the books of accounts.
• The assessee must own the assets entirely or partially.
• The assets must be used in connection with the taxpayer's business or profession. If the assets are used for purposes other than business, the allowable depreciation will be proportionate to the amount of time the assets are used for business. Section 38 of the Act also empowers the Income Tax Officer to calculate the proportionate share of depreciation.
• Co-owners can claim depreciation up to the value of their co-assets. owners.

Different Methods of Depreciation Calculation

Methods of Depreciation and the useful life of depreciable assets may vary from asset to asset. Based on asset type and industry, it can differ for accounting and taxation purposes also.

The most commonly employed methods of depreciation are the Straight Line Method and the Written Down Value Method. One of the basic differences between income tax depreciation calculation and companies' act depreciation other than rates of depreciation is the method of calculation.

- On Depreciation as per Companies Act, 1956

• Straight Line Method
• Written Down Value Method

- On Depreciation as per Companies Act, 2013

• Straight Line Method
• Written Down Value Method
• Unit of Production Method

- On Depreciation as per Income Tax Act, 1961

• Written Down Value Method (Block wise)
• Straight Line Method for Power Generating Units