Depreciation under Income Tax Act

What is Depreciation?

The meaning of depreciation is a reduction in the value of an asset over a period of time. A taxpayer can claim it as a valid business expense. Depreciation as per the Income Tax Act is a decrease in the value of the asset over its useful life. It can be claimed as an expense and reduced from the taxable income of the taxpayer. A taxpayer can claim it on both tangible assets and intangible assets as per the prescribed rates in the Income Tax Act.

The calculation of depreciation under Income Tax Act is different than the Companies Act. In the case of a Company, it is calculated as per the prescribed rates and methods under the Companies Act, 2013. Thus, in the case of a Company, the depreciation as per the books of accounts would be different than the amount as per the Income Tax Return.

Block of Assets

Block of Assets mean a group of assets falling under the same category and having the same depreciation rate. Gross Block is the sum of gross value of each asset as on the beginning of the financial year. Net Block is the sum of net value of each asset at the end of the financial year after reducing the depreciation.

Gross Block – Depreciation = Net Block

The Block of Assets comprises of the following types of assets:

  • Tangible Assets – It includes the assets that exist in physical form such as land, building, furniture, car, plant & machinery, etc.
  • Intangible Assets – It includes the assets that do not exist in physical form such as goodwill, patent, copyright, license, franchise, etc.

Calculation of Gross Block of Assets is as per the table below:

  Particulars Amount
  Opening WDV as on 1st April XXXX
Add Cost of Assets purchased XXXX
Less Sale Value of Assets sold (XXXX)
  WDV of Block of Assets XXXX
Less Depreciation (XXXX)
  Closing WDV at the end of year XXXX

Conditions to claim Depreciation

The taxpayer must fulfill the following conditions to claim depreciation.

  • Taxpayer should own the asset either wholly or partially
  • The taxpayer should use the asset for the purpose of business or profession and not for personal purpose
  • The asset should be actually used in the financial year
  • Each co-owner can claim it to the extent of the asset owned by them

Depreciation Rate & Method of Calculation

The rate of depreciation for different block of assets is prescribed under the Income Tax Act.

  • If the asset is used for 180 days or more during the financial year, calculate using full rate.
  • If the asset is used for less than 180 days during the financial year, calculate using half rate.

Interest paid on money borrowed for buying a capital asset should be added to the cost of the asset till the time the asset is put to use. Once the asset is put to use, the taxpayer can claim the interest as revenue expenditure.

Income Tax Depreciation Rates for AY 2019-20

The Income Tax Department has prescribed rates as on the incometaxindia.gov.in. These rates are applicable AY 2003-04 onwards. You can refer to the rates as prescribed by the Income Tax Department here – Income Tax Depreciation Rates.

Additional Depreciation

In addition to the normal depreciation, you can also claim Additional Depreciation at the rate 20% if the following conditions are satisfied:

  • Taxpayer is in the manufacturing business
  • There is purchase of new plant or machinery installed after 31st March, 2005

The rate of additional depreciation would be 20% of the actual cost if the asset is used for 180 days or more. If the asset is used for less than 180 days, the rate would be 10%.

Example for Depreciation Calculation

Shaurya is in the business of manufacturing. Here is the data of the capital assets of his business.

Particulars Amount
Opening WDV of Plant & Machinery as on 1st April 2019 40,00,000
New machine purchased & put to use on 30th June 2019 15,00,000
New machine purchased & put to use on 1st February 2020 10,00,000
Computer purchased on 25th January 2020 2,00,000

Solution

Particulars Amount
Normal Depreciation  
Dep at the full rate of 15% on P&M of 40 lacs 6,00,000
Dep at the full rate of 15% on P&M of 15 lacs used for more than 180 days 2,25,000
Dep at half rate of 7.5% on P&M of 10 lacs used for less than 180 days 75,000
Dep at the full rate of 40% on Computer of 2 lacs 80,000
Additional Depreciation  
Dep at the full rate of 20% on new P&M of 15 lacs used for more than 180 days 3,00,000
Dep at half rate of 10% on P&M of 10 lacs used for less than 180 days 1,00,000
Total Depreciation 13,80,000

Block of Assets

  Particulars P&M Computer
  Opening WDV as on 1st April 40,00,000 NIL
Add Cost of Assets purchased 25,00,000 2,00,000
Less Sale Value of Assets sold NIL NIL
  WDV of Block of Assets 65,00,000 2,00,000
Less Depreciation 13,00,000 80,000
  Closing WDV at the end of year 52,00,000 1,20,000

Got Questions? Ask Away!

  1. Hi @Dixita

    Not all the tax payers have to disclose their assets and liabilities. Only the individuals or HUFs having total income exceeding INR 50 lakh should fill in Schedule AL. Your total income is calculated by subtracting Chapter VI A deductions from Gross Total Income.

    Hope this helps

  2. Hey @Sreeraag_Gorty

    Schedule AL has to be mandatorily filled up in case of tax payer’s income exceeds INR 50 lakhs for particular financial year.

    For your doubt, you can read below article for more insights:

    Hope, it helps!

  3. Hey @Sreeraag_Gorty

    There is no such requirements to mandatory report in ITR immovable property even if tax payer doesn’t own in particular financial year.

    Other assets such as financial assets viz. bank deposits, shares and securities, insurance policies, loans and advances given, cash in hand, movable assets viz. jewellery, bullion, vehicles should be disclosed in AL schedule.

    Hope, it helps!

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