Depreciation Rates under Income Tax

Depreciation is the diminution in the value of an asset due to normal wear and tear and due to the passing of time or obsolescence. Normally, depreciation for financial statements is calculated under the straight-line method or written down value method. However, for income tax purposes, depreciation can be claimed in a different method than the normal allowance for wear and tear. The higher depreciation rate allowed for income tax purposes helps businesses reduce their tax liability while incentivising capital expenditure. Depreciation rates vary according to the legally specified useful life mentioned in the Income Tax Act for each category of asset. For example, the depreciation rate which is applicable to

Type of Depreciation Allowed under Income Tax Act

The following types of depreciation allowance are allowed under the

1. Normal depreciation for a block of assets.
2. Additional depreciation in case of any eligible new machinery or plant (other than ship and aircraft) which has been acquired and installed:
   • After 31.3.2005 by an assessee engaged in the business of manufacture or production of any article or things or in the business of generation, transmission or distribution of power.
   • After 31.3.2015 but before 1.4.2020 by an assessee engaged in the business of manufacture or production of any article or things which is set up in a notified backward area in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in the State of West Bengal.
3. Normal asset-wise depreciation for an undertaking engaged in generation or generation and distribution of power.

In case of normal depreciation for the block of assets, depreciation is allowed on the basis of the written down value method. In case additional depreciation is allowed, depreciation at 20% or 35% of the cost of the eligible plant and machinery acquired and installed in the previous year is allowed in the first year in which asset is acquired and installed.

Conditions for Claiming Depreciation

The following conditions must be satisfied by the assessee for claiming depreciation allowance under the Income Tax Act.

1. The asset must be owned by the assessee who claims the depreciation. However, the asset could also be partially owned by the assessee to be eligible for depreciation.
2. The asset must have been used for the purpose of a business or profession carried on by the assessee.
3. The asset should have been used during the relevant year in which depreciation allowance is claimed.

Block of Assets

The following types of assets are eligible for depreciation and classified under blocks of asset:

1. Buildings, machinery, plant and furniture - being tangible assets.
2. Know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature being intangible assets acquired on or after 1.4.1998.

Depreciation Rate for Various Asset Class under Income Tax

Assets eligible for depreciation can be classified into five different classes:

• Building
• Furniture
• Plant and Machinery
• Ships
• Intangible assets acquired on or after 1.4.1998

Intangible assets have a standard depreciation rate of 25%. All other types of assets have different depreciation rates based on the class of asset. To know the exact depreciation rate which should be applied to each class of asset, please refer the table given below: