Income Tax Depreciation

The applicability, rate and concept of depreciation vary between Companies Act and Income Tax Act in India. Under the Income Tax Act, an assessee has to fulfill the following conditions to claim depreciation expense:

The asset should be owned by the assessee. If an assessee carries on business or profession in a building that is taken on lease, he/she is entitled to depreciation in respect of the capital expenditure incurred after 31st March 1970 on the construction of any structure or any work in relation to the building by way of improvement, renovation or extension.
The asset must have been used for the purpose of busienss. If the asset is used partly for business and partly for private or personal purposes, a reasonable proportion of the depreciation attributable to the business user of the asset is allowed.

In case of hire-purchase, if the following conditions are satisfied, depreciation can be claimed by the hirer and not by the seller:

The hire purchase agreement must show that as long as hirer discharges his/her obligation, the hirer has an uninterrupted right over the asset for all practical purposes.
The seller will eventually lose all rights, title and interest in asset if the hirer discharges his/her obligation.

Also read: Income Tax Deduction from Salary 2019-2020

Disallowance of Depreciation

If an assessee incurs any expenditure for acquisition of a depreciable asset in respect of which a payment, otherwise than by an account payee cheque/draft or bank transfer, exceeds Rs.10,000 such payment shall not be eligible for normal/additional depreciation (applicable from AY2018-19)

Block of Assets

The term block of assets has been defined to mean a group of assets falling within a class of assets in respect of which the same depreciation rate is prescribed.

Depreciation Rates

There were 13 different blocks of assets till AY2017-18. From AY2018-19, the maximum rate of depreciation has been reduced to 40% and the number of blocks of assets has been reduced to 9. The depreciation rates applicable from AY2018-19 are as follows:

Block	Asset Type	Depreciation Rate
Block 1	Buildings - Residential buildings other than hotels and boarding houses	5%
Block 2	Buildings - Office, factory, godowns, or buildings which are not mainly used for residential purpose	10%
Block 3	Buildings: a. Acquired on or after 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 business of providing infrastructure facilities under Section 80-IA. b. temporary erections such as wooden structures	40%
Block 4	Furniture - Any furniture/fittings including electrical fittings	10%
Block 5	Plant & machinery - Any plant or machinery and motor cars (other than those used in a business of running them on hire) acquired or put to use on or after April 1, 1990	15%
Block 6	Ocean-going ships, vessels ordinarily operating on inland waters including speed boats.	20%
Block 7	Plant and machinery - Buses, lorries and taxies used in the business of running them on hire, machinery used in semi-conductor industry, moulds used in rubber and plastic goods factories.	30%
Block 8	Plant and machinery - a. Aeroplanes, aeroengines, life saving medical equipment and plant and machinery which satisfy conditions of rule 5(2) b. Containers made of glass or plastic used as refills and the following: New commercial vehicle put to use for the purpose of business or profession. Plant and machinery used in weaving, processing and garment sector of textile industry which is purchased under TUFS scheme. Computers including computer software. Gas cylinders, plant used in field operations by mineral oil concerns; direct fire glass melting furnaces. Energy saving devices; renewal energy devices; rollers in flour mills, sugar works and steel industry, which run on windmills installed between FY2013-14. Air pollution control equipment, water pollution control equipment, solid waste control equipment, recycling and resource recovery systems. Machinery acquired and installed on or after September 1st 2002 in a water supply project or water treatment system or for the purpose of providing infrastructure facility. Wooden parts used in artificial silk manufacturing machinery Cinematography films, bulbs of studio lights Wooden match frames Some plants used in mines, quarries and salt works Books owned by assessee carrying on a profession or books owned by a person carrying on business in running lending libraries.	40%
Block 9	Intangible assets - Know-how, patents, copyrights, trademarks, licenses, franchise and any other business or commercial rights of similar nature	25%

Written Down Value (WDV) Computation

Written down value of an asset can be calculated for an asset as follows: Step 1: Find the depreciated value of the block of assets on April 1, 2018. Step 2: To this value, add actual cost of the asset acquired during the previous year relevant for the assessment year. Step 3: Deduct money received, receivable in respect of asset which is sold, discarded, demolished or destroyed during the previous year. The amount deducted cannot exceed the value of block of assets under step 2.

Calculating Depreciation

Depreciation expense under the Income Tax Act is calculated on the basis of written down value and depreciation rate as mentioned in the table above. For example, if the written down value of a building is Rs.10 lakhs in the previous year and 10% depreciation rate is applicable, then Rs.1 lakh will be the depreciation expense and the depreciated value of the asset at the end of year would be Rs.9 lakhs. The above method of depreciation calculation is not applicable in the cases mentioned below:

If the assessee incurs any expenditure for acquisition of a depreciable asset in respect of which a payment of more than Rs.10,000 given in cash.
If the written down value of a block of asset is empty or ceases to exist on the last day of the previous year.
If the written down value of a block of asset is reduced to zero through the block is not empty.
In the case of imported cars.
In the case of succession or amalgamation or business re-organisation.
If in the first year in which an asset is acquired and it is put to use for less than 180 days.

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Frequently Asked Questions

Common questions about Income Tax Depreciation: Rates & Rules in India.

Under the Income Tax Act, the depreciation rate and the method of calculation are prescribed, whereas the Companies Act allows more flexibility in determining the useful life and depreciation method for assets. Additionally, the Income Tax Act has specific conditions for claiming depreciation, such as the asset being used for business purposes.

To claim depreciation under the Income Tax Act, the asset must be owned by the assessee, used for business purposes, and if partly used for personal purposes, only a reasonable proportion attributable to business use is allowed. In case of hire-purchase, specific conditions related to the hirer's rights over the asset must be met.

A "block of assets" refers to a group of assets falling within a class of assets in respect of which the same depreciation rate is prescribed under the Income Tax Act. This concept is used for calculating depreciation and maintaining written down value (WDV) of assets.

Depreciation is computed based on the written down value (WDV) of the block of assets and the prescribed depreciation rate for that block. The WDV of a block is calculated by adding the cost of assets acquired during the year to the opening WDV and deducting the proceeds from assets sold or discarded during the year.

The Income Tax Act prescribes different depreciation rates for various blocks of assets, ranging from 5% for residential buildings to 40% for certain plant and machinery, intangible assets, and other assets specified under Block 8.

Yes, if an assessee incurs expenditure for acquisition of a depreciable asset and makes a cash payment exceeding Rs.10,000, such payment shall not be eligible for normal or additional depreciation from the assessment year 2018-19 onwards.

Yes, depreciation can be claimed on assets used partly for business and partly for personal purposes. However, only a reasonable proportion of the depreciation attributable to the business use of the asset is allowed as a deduction.

In the first year, if an asset is put to use for less than 180 days, the prescribed depreciation rate is reduced by 50%. This is an exception to the general method of calculating depreciation based on the written down value and the prescribed rate.

Yes, an assessee is entitled to claim depreciation on capital expenditure incurred after 31st March 1970 on the construction of any structure or any work in relation to a rented building by way of improvement, renovation, or extension.

The prescribed depreciation rate for intangible assets like know-how, patents, copyrights, trademarks, licenses, franchise, and other similar business or commercial rights is 25%.