Depreciation Rate for Building

Depreciation allowance is provided under the Income Tax Act for building. The word building has however not been defined under the Income Tax Act and must be construed based on the ordinary grammatical sense, together with the available judicial interpretations. According to the Oxford English Dictionary, the word ‘building’ means “a structure with a roof and walls, such as a house or factory”. In this article, we look at the depreciation rate for buildings.

Depreciation for Building

Under the Income Tax Act, a building is a structure with a roof and walls, such as a house or factory. However, based on various case laws and notifications, the following items can also be classified under buildings for the purpose of charging depreciation allowance under the Income Tax Act.

1. Road laid within factory premises as links or providing an approach to the buildings.
2. Fencing or walls.
3. Process warehouses.
4. Driveways and compound walls.
5. Landscaping.
6. Toll road constructed by an assessee.
7. Hoarding structures used in outdoor advertising.
8. Wells and tube wells.

A building does not include land since land does not depreciate. Hence, any expenditure incurred by an assessee for land cannot be aa part of the cost of construction of a building. Further, depreciation is also not allowed in respect of premium paid for leasehold land, as such amount does not constitute part of the cost of land.

Depreciation Rate for Building

The depreciation rate for building falls under three rates as under:

Residential Premises – 5% Depreciation Rate

Buildings which are mainly used for residential purposes except for hotels and boarding houses can be charged a 5% depreciation rate under the Income Tax Act.

Buildings – 10% Depreciation Rate

All types of buildings with are not used for residential purposes can be charged with a 10% depreciation rate. A building would be deemed to be a building used mainly for residential purposes if the built-up floor area used for residential purposes is not less than 66.66%.

Building for Water Treatment Facilities – 100% Depreciation Rate

Buildings acquired on or after the 1st September 2002 for installing machinery and plant forming part of water supply project or water treatment system and which is put to use for the purpose of the business of providing infrastructure facilities under Section 80-IA can be charged with a special 100% depreciation rate.

Wooden Structures – 100% Depreciation Rate

100% depreciation rate is allowable on temporary wooden structure and tin shed as these are purely temporary erections.

Calculating Depreciation for Building

While calculating depreciation for building under Income Tax, the following above blocks can be formed for the building based on the classes of assets and depreciation rate. Depreciation for income tax is calculated based on the written down value of a block of assets. If an asset was acquired in the previous year (new asset), the actual cost to the assessee would be taken for calculating depreciation. If the asset was acquired before the previous year, then the actual cost to the assessee less all depreciation charged would be used for calculating depreciation.