Depreciation Rates as per the Income Tax Act, 1961
This article delves into the depreciation provisions as per the Income Tax Act, focusing on the rates applicable to various assets, the method of calculation, and other essential aspects.
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What is Depreciation?
In the context of taxation, depreciation refers to the reduction in the value of an asset over time due to wear and tear, obsolescence, or usage. The Income Tax Act permits businesses to deduct this decrease in value as an expense, thereby lowering their taxable profits.
Legal Framework Governing Depreciation
- Section 32: Provides for depreciation allowance on tangible and intangible assets used for business or professional purposes.
- Rule 5 of the Income Tax Rules, 1962: Specifies the rates of depreciation for different classes of assets.
Block of Assets Concept
The Act introduces the concept of "block of assets," grouping assets of similar nature and depreciation rates into a single block. Depreciation is calculated on the written down value (WDV) of each block, simplifying the process.
Categories of Assets
- Tangible Assets: Includes buildings, machinery, plant, and furniture.
- Intangible Assets: Includes know-how, patents, copyrights, trademarks, licenses, franchises, and other similar rights.
Depreciation Rates for Various Assets
Below is a table summarizing the depreciation rates applicable to different blocks of assets:
| Asset Block | Depreciation Rate (WDV Method) |
|---|---|
| Buildings (used mainly for residential purposes) | 5% |
| Buildings (other than residential) | 10% |
| Furniture and fittings | 10% |
| Plant and machinery (general) | 15% |
| Motor vehicles (other than those used in a business of running them on hire) | 15% |
| Motor vehicles (used in a business of running them on hire) | 30% |
| Computers and computer software | 40% |
| Books owned by assesses carrying on a profession | 60% |
| Intangible assets (e.g., patents, trademarks) | 25% |
Additional Depreciation
Under Section 32(1)(iia), additional depreciation is allowed for new machinery or plant (excluding ships and aircraft) acquired and installed by manufacturing businesses:
- 20% of the actual cost of new machinery or plant.
- If the asset is used for less than 180 days in the year of acquisition, only 10% is allowed in the first year, with the remaining 10% in the subsequent year.
Conditions for Claiming Depreciation
- The asset must be owned, wholly or partly, by the assesses.
- It should be used for the purposes of the business or profession.
- Depreciation is allowed even if the asset is not used throughout the year; however, if used for less than 180 days, only 50% of the depreciation is permitted.
Method of Calculation
- Determine the opening WDV of the block.
- Add the actual cost of assets acquired during the year.
- Subtract the sale consideration of assets sold during the year.
- Apply the prescribed depreciation rate to the resultant WDV.
- Opening WDV: ₹1,00,000
- Additions: ₹50,000
- Deletions: ₹10,000
- Closing WDV before depreciation: ₹1,40,000
- Depreciation @15%: ₹21,000
Carry Forward of UN-Absorbed Depreciation
If the full depreciation cannot be absorbed due to insufficient profits, the unabsorbed depreciation can be carried forward indefinitely and set off against any income (except salary) in subsequent years.
Frequently Asked Questions (FAQs)
Can depreciation be claimed on assets not used during the year?
No, depreciation is allowed only on assets that are used for business or professional purposes during the financial year.
Is it mandatory to claim depreciation?
Yes, as per the Income Tax Act, claiming depreciation is mandatory. If not claimed, the WDV of the asset block will still be reduced by the allowable depreciation.
Can additional depreciation be claimed by all businesses?
Additional depreciation under Section 32(1)(iia) is available only to manufacturing businesses acquiring new machinery or plant.
Are there any assets on which depreciation is not allowed?
Yes, depreciation is not allowed on land, goodwill, and assets not used for business or professional purposes.
How is depreciation treated in case of asset sale?
When an asset is sold, the sale consideration is deducted from the WDV of the block. If the entire block is sold, and no asset remains, the resulting gain or loss is treated as a short-term capital gain or loss.
Understanding depreciation under the Income Tax Act is vital for accurate tax computation and compliance. Always consult the latest provisions or a tax professional for specific scenarios.