Depreciation as per Income Tax Act

Depreciation chart as per Income Tax Act: A Comprehensive Guide

Depreciation is a key element in calculating taxable income under the Income Tax Act, 1961. It refers to the decline in the value of an asset due to wear and tear, usage, or obsolescence over time. The Income Tax Act allows businesses to claim depreciation as a deduction, which reduces their taxable profits. This post will delve into the depreciation rates, rules, and methods prescribed under the Income Tax Act.

Depreciation as per the Income Tax Act

Depreciation under the Income Tax Act is governed by Section 32, which allows taxpayers to claim depreciation on various tangible and intangible assets used for business or profession. The Act specifies two methods of calculating depreciation:

  1. Written Down Value (WDV) Method: This is the most commonly used method, where depreciation is calculated on the reduced balance of the asset’s value every year.
  2. Straight Line Method (SLM): In this method, a fixed percentage of depreciation is applied every year on the original cost of the asset.

Under the Income Tax Act, the WDV method is primarily used except for undertakings engaged in generating or distributing power, where both WDV and SLM can be used.

Depreciation rates as per Income Tax Act

The Income Tax Act prescribes specific rates for different types of assets. These rates are based on the nature of the asset and its expected useful life. Depreciation is calculated on the assumption that assets have a particular useful life, which affects the depreciation rates. Let’s explore depreciation rates along with the indicative useful life of various assets:

Buildings

Residential and business buildings have a longer useful life, while temporary structures are short-lived, leading to a higher depreciation rate.

  • Residential buildings: 5%
  • Buildings used for business purposes: 10%
  • Temporary structures: 40%

Furniture and Fittings

Furniture and fixtures have a longer useful life and are depreciated at a steady 10% rate.

  • Furniture, fixtures, and fittings: 10%

Machinery and Plant

  • General machinery and plant: 15%
  • Pollution control equipment: 40%
  • Energy-saving devices: 40%
  • Computers and computer software: 40%
  • Motor cars (used for business): 15%
  • Motor cars (used in business of hire): 30%
  • Aircraft, ships: 40%

Intangible Assets

Intangible assets have a shorter useful life than tangible ones, so they depreciate faster at 25%.

  • Goodwill, patents, trademarks, copyrights, licenses, franchises, or any other business or commercial rights: 25%

Depreciation Chart as per Income Tax Act

Asset CategoryAsset TypeDepreciation
Rate
Useful Life
BUILDINGSResidential Buildings5%60 years
BUILDINGSBuildings used for business purposes10%30 years
BUILDINGSTemporary structures40%Up to 3 years
Furniture & FittingsFurniture, fixtures, and fittings10%10 years
Machinery & PlantGeneral machinery and plant15%15 years
Machinery & PlantPollution control equipment40%5 years
Machinery & PlantEnergy-saving devices40%5 years
Machinery & PlantComputers and computer software40%3 years
Machinery & PlantMotor cars (used for business)15%8 years
Machinery & PlantMotor cars (used in business of hire)30%5 years
Machinery & PlantAircraft, ships40%5 years
Intangible AssetsGoodwill, patents, trademarks,
copyrights, licenses, franchises, or
any other business or commercial rights:
25%4 years

Conditions to Claim Depreciation

To claim depreciation, taxpayers must meet certain conditions:

  • Ownership: The asset must be owned or co-owned by the taxpayer.
  • Business Use: It should be used for business or profession.
  • Depreciation is available on both tangible and intangible assets.

Additional Depreciation

Under Section 32(1)(iia), manufacturers and certain other businesses can claim an additional depreciation of 20% on the cost of new machinery or plant. This additional depreciation is available in the year of purchase.

Important Points to Remember

  • Depreciation cannot be claimed on land.
  • No depreciation is allowed if the asset is used for personal purposes.
  • If the asset is used for business for only a part of the year, depreciation is proportionately reduced.
  • In the case of block of assets, depreciation is computed on the entire block of assets instead of individual assets.

Impact of Depreciation on Tax Planning

Depreciation plays a vital role in tax planning as it reduces taxable income and lowers the tax burden. By correctly applying depreciation rates and ensuring compliance with provisions, businesses can optimize their tax liabilities while adhering to the law.

Conclusion

Understanding the depreciation rates and methods under the Income Tax Act is essential for businesses and professionals. Accurate depreciation calculations can result in significant tax savings. Make sure to consult with a tax professional to navigate the complexities and ensure compliance.

This guide gives a clear overview of the depreciation rates as per the Income Tax Act. For further details and tailored advice, it’s advisable to refer to the Income Tax Rules, 1962, or consult with a qualified tax consultant.

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