Depreciation means the loss of value of asset due to its usage over the time. Depreciation under the Income Tax Act is a deduction allowed for the decrease in the value of an asset used by a taxpayer. Through this, an assessee can decrease the net income liable to be taxed for Income Tax. Depreciation can be claimed for both tangible and Intangible assets under Income Tax Act, 1961.
Tangible asset
The tangible asset will include buildings, furniture and fittings, plant and machinery, etc. Hereby, the amount of buildings should not include the cost of land for the purpose of depreciation.
Intangible asset
The intangible asset includes goodwill, know-how, patents, copyrights, trademarks, licenses, franchises or any other commercial rights of similar nature.
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Conditions for claiming depreciation deduction:
- Assets must be owned by assessee.
- It must be used for the purpose of business or profession carried on by the assessee.
- It should actually used (or ready to use) during the previous year.
- Asset may be tangible or intangible.
- If the the asset has been put to use for 180 days or more during the relevant previous year then full depreciation is allowed.
- If the asset has been put to use for less than 180 days during the year then 50% depreciation is allowed.
- Additional depreciation is allowed in case any new machinery or plant acquired and installed after 31.3.2005 for the business of manufacture or production, @20% of the actual cost.
Method of calculating depreciation
Depreciation is allowed on written down value of Block of asset at the prescribed rates.
Exception: In case of assets of an undertaking involved in generation or distribution of power, depreciation may be calculated at prescribed rates on the actual cost i.e. Straight line method.
How to calculate depreciation under Income Tax?
| Particular | Amount in Rs |
| Opening WDV as on 1st April of the relevant PY | XXXX |
| Add: actual cost of assets purchased during the year | XXXX |
| Less: sale value of assets sold/ insurance claim in case of assets destroyed/ scrap value in case of asset discarded | (XXXX) |
| Written down value of block of assets for the purpose of charging depreciation | XXXX |
| Less: depreciation for the relevant PY | (XXXX) |
| Closing WDV as at the end of the year | XXXX |
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What do you mean by block of assets?
Block of asset refers to a group of assets which belong to the similar class of asset and carry the same rate of depreciation. These rates are provided in the income tax law.
Lets take an example. Mr. BabaTax is a proprietor engaged in manufacturing business. Information related to Business assets are-
| Particulars | Rs | |
| (1) | Opening WDV of plant and machinery as on 1.4.2019 | 30,00,000 |
| (2) | New plant and machinery purchased and put to use on 08.06.2019 | 20,00,000 |
| (3) | New plant and machinery acquired and put to use on 15.12.2019 | 8,00,000 |
| (4) | Computer acquired and installed in the office premises on 02.01.2020 | 3,00,000 |
Computation of depreciation and additional depreciation
| Particulars | Plant and Machinery @15% (Rs) | Computer @40% (Rs) |
| Normal depreciation @ 15% on Rs 50,00,000 [See Working Notes 1 & 2] | 7,50,000 | – |
| @ 7.5% (50% of 15%, since put to use for less than 180 days) on Rs 8,00,000 | 60,000 | – |
| @ 20% (50% of 40%, since put to use for less than 180 days) on Rs 3,00,000 | – | 60,000 |
| Additional Depreciation @ 20% on Rs 20,00,000 (new plant and machinery put to use for more than 180 days) | 4,00,000 | – |
| @10% (50% of 20%, since put to use for less than 180 days) on Rs8,00,000 | 80,000 | – |
| Total depreciation | 12,90,000 | 60,000 |
Working Notes:
- Computation of written down value as on 31.03.2020
| Particulars | Plant & Machinery (Rs) | Computer (Rs) |
| Written down value as on 01.04.2019 | 30,00,000 | – |
| Add: Plant & Machinery purchased on 08.6.2019 | 20,00,000 | – |
| Add: Plant & Machinery acquired on 15.12.2019 | 8,00,000 | – |
| Computer acquired and installed in the office premises | – | 3,00,000 |
| Written down value as on 31.03.2020 | 58,00,000 | 3,00,000 |
- Composition of plant and machinery included in the WDV as on 31.3.2020
| Particulars | Plant & Machinery (Rs) | Computer (Rs) |
| Plant and machinery put to use for 180 days or more [Rs 30,00,000 (Opening WDV) + Rs 20,00,000 (purchased on 8.6.2019)] | 50,00,000 | – |
| Plant and machinery put to use for less than 180 days | 8,00,000 | – |
| Computers put to use for less than 180 days | – | 3,00,000 |
| Total | 58,00,000 | 3,00,000 |
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Notes:
- Where an asset acquired during the previous year is put to use for less than 180 days in that year, the amount of deduction allowable as normal depreciation and additional depreciation would be restricted to 50% of amount.
- Therefore, normal depreciation on plant and machinery acquired and put to use on 15.12.2019 and computer acquired and installed on 02.01.2020, is restricted to 50% of 15% and 40%, respectively. The additional depreciation on the plant and machinery is restricted to Rs 80,000, being 10% (i.e., 50% of 20%) of Rs 8 lakh.
- The balance additional depreciation of Rs 80,000 being 50% of Rs 1,60,000 (20% of Rs 8,00,000) would be allowed as deduction in the A.Y.2021-22.
However, additional depreciation shall not be allowed in respect of, any machinery or plant installed in office premises, residential accommodation or in any guest house. Accordingly, additional depreciation is not allowable on computer installed in the office premises
Click here for Depreciation Rates : Section 32 of Income Tax Act, 1961
Important Points to remember :
- If the asset has been acquired during one previous year and has been subsequently put to use during a different year then depreciation shall be calculated at the full rate in the year in which the asset has been put to use.
- Interest on money borrowed for acquiring a capital asset shall be required to be added to the actual cost till the asset is put to use. After the asset is put to use, such interest can be claimed as revenue expenditure.
- If any asset is acquired and the same is paid in cash of more than Rs. 10,000 in a day then such cost will not form the actual cost of the asset and hence depreciation cannot be claimed on the part of the asset which is paid in cash.
For any questions, you may reach us at Discussion Forum
The author of the above article Shruti Jain.
Disclaimer:The article or blog or post (by whatever name) in this website is based on the writer’s personal views and interpretation of Act. The writer does not accept any liabilities for any loss or damage of any kind arising out of information and for any actions taken in reliance thereon.
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