Depreciation under Income Tax Act in India - Kanakkupillai
Income Tax

Depreciation under Income Tax Act

Depreciation under Income Tax Act in India
Depreciation under Income Tax Act in India

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  Posted on October 13, 2021

Depreciation under Income Tax Act

Depreciation as per slab rates mentioned in the Income Tax Act are allowable expenditure against the profits or gains from the business or profession. Depreciation under the Income Tax Act is a deduction allowed for the reduction in the real value of a tangible or intangible asset used by a taxpayer.

Depreciation

Depreciation refers to reduction in the value of asset over a period of time. The main causes of depreciation are the usage, wear and tear and obsolescence of the asset. Since assets are used in the business/profession therefore some amount of such asset can be logically debited to the Profit and Loss Account as a non cash expenditure and is an allowable expense.

Depreciation is allowable as expense in Income Tax Act, 1961 on basis of block of assets on Written Down Value (WDV) method. Depreciation on Straight Line Method (SLM) is not allowed. Block of assets means group of assets falling within a class of assets for which same rate of depreciation is prescribed.

Which Depreciation Method Is Used for Tax Purposes?

The financial depreciation is calculated using the straight-line method which results in an even distribution of the expense over the life of the asset, tax depreciation is calculated using the Modified Accelerated Cost Recovery System, or MACRS. You divide the cost of an asset, minus its salvage value, over its useful life. That determines how much depreciation you deduct each year.

Conditions for claiming depreciation

  • Condition 1 :Asset must be owned by the assessee. (If partly owned , proportionate depreciation is allowed as deduction)
  • Condition 2 :It must be used for the purpose of business or profession.
  • Condition 3 :It should be used during the relevant previous year.If asset is not put to use in the year of purchase or put to use for less than 180 days even then full depreciation is allowed in the subsequent years if Depreciation is allowed on whole block of asset even if only a single asset in that block is used during the year at any point of time.
  • Condition 4 :Depreciation is available on tangible as well as intangible assets (Note:Goodwill and land is not eligible for depreciation)

Methods of Depreciation

Depreciation is a mandatory deduction in the profit and loss statements of an entity and the Act allows deduction either in Straight-Line method or Written Down Value (WDV) method.(WDV is widely used mechanism except in the power generation units)

  • Straight-Line Depreciation.
  • Declining Balance Depreciation.
  • Sum-of-the-Years’ Digits Depreciation.
  • Units of Production Depreciation.

Block of assets concept 

Depreciation is calculated on the WDV of a Block of assets. Block of assets is a group of assets falling within a class of assets comprising of:

  • Tangible asset
  • Intangible asset

These may be further classified based on the similar use , life of the asset ,and nature of the asset.

Written Down Value –Meaning

In the context of computing depreciation, it is important to understand the meaning of the term ‘WDV’ & ‘Actual Cost. WDV under the Income tax return filing:

Where the asset is acquired in the previous year, the actual cost of the asset shall be treated as WDV

Where the asset is acquired in an earlier year, the WDV shall be equal to the actual cost incurred less depreciation actually allowed underthe Act

Calculation of Depreciation

Particulars Amount
Aggregate of WDV of all the assets falling within
that block at the beginning of the year
XXX
Add: Actual cost of any assets falling within block
acquired during the previous year
XXX
Less: Money received or receivable in respect of any
asset in the block which is sold, discarded, demolished
or destroyed during the previous year
XXX
WDV at the end of the year XXX
Less: Depreciation at block rate (if WDV at the end of year is positive) XXX
Closing value of the block of the asset at the end of the year XXX

If the amount of WDV comes at a negative amount then no depreciation is allowed and the amount will be considered as capital gain and the closing WDV will be zero.

If such amount is positive and no asset exists in the block then such amount will be treated as short term capital loss and no depreciation is allowed.

Rates of Depreciation as per Income Tax ACT

Block of assets Rate applicable from A.Y.2018-19 Onwards
PART A
TANGIBLE ASSETS
I. BUILDING
(1) Buildings which are used mainly for residential purposes except hotels and boarding houses 5
(2) Buildings other than those used mainly for residential purposes and not covered by sub-items (1) above and (3) below 10
(3) Buildings acquired on or after the 1st day of 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 infra- structure facilities under clause (i) of sub-section (4) of section 80-IA 40
(4) Purely temporary erections such as wooden structures 40
II. FURNITURE AND FITTINGS
Furniture and fittings including electrical fittings 10
III. MACHINERY AND PLANT
(1)  Machinery and plant other than those covered by sub-items (2), (3) and (8) below 15
(2)  (i) Motor cars, other than those used in a business of running them on hire, acquired or put to use on or after the 1st day of April, 1990 except those covered under entry (ii); 15
(ii) Motor cars, other than those used in a business of running them on hire, acquired on or after the 23rd day of August, 2019 but before the 1st day of April, 2020 and is put to use before the 1st day of April, 2020. 30
(3) (i) Aeroplanes – Aeroengines 40
(ii)  (a) Motor buses, motor lorries and motor taxis used in a business of running them on hire other than those covered under entry (b). 30
(b) Motor buses, motor lorries and motor taxis used in a business of running them on hire, acquired on or after the 23rd day of August, 2019 but before the 1st day of April, 2020 and is put to use before the 1st day of April, 2020. 45
(iii) Commercial vehicle which is acquired by the assessee on or after the 1st day of October, 1998, but before the 1st day of April, 1999 and is put to use for any period before the 1st day of April, 1999 for the purposes of business or profession in accordance with the third proviso to clause (ii) of sub-section (1) of section 32 [See Note 6 below the Table] 40
(iv)  New commercial vehicle which is acquired on or after the 1st day of October, 1998, but before the 1st day of April, 1999 in replacement of condemned vehicle of over 15 years of age and is put to use for any period before the 1st day of April, 1999 for the purposes of business or profession in accordance with the third proviso to clause (ii) of sub-section (1) of section 32 [See Note 6 below the Table] 40
(v)  New commercial vehicle which is acquired on or after the 1st day of April, 1999 but before the 1st day of April, 2000 in replacement of condemned vehicle of over 15 years of age and is put to use before the 1st day of April, 2000 for the purposes of business or profession in accordance with the second proviso to clause (ii) of sub-section (1) of section 32 [See Note 6 below the Table] 40
(vi)  New commercial vehicle which is acquired on or after the 1st day of April, 2001 but before the 1st day of April, 2002 and is put to use before the 1st day of April, 2002 for the purposes of business or profession [See Note 6 below the Table] 40
(via) New commercial vehicle which is acquired on or after the 1st day of January, 2009 but before the 1st day of October, 2009 and is put to use before the 1st day of October, 2009 for the purposes of business or profession [See paragraph 6 of the Notes below this Table] 40
(vii)  Moulds used in rubber and plastic goods factories 30
(viii)  Air pollution control equipment, being—
(a) Electrostatic precipitation systems
(b) Felt-filter systems
(c) Dust collector systems 40
(d) Scrubber-counter current/venturi/packed bed/cyclonic scrubbers
(e) Ash handling system and evacuation system
(ix) Water pollution control equipment, being—
(a) Mechanical screen systems
(b) Aerated detritus chambers (including air compressor)
(c) Mechanically skimmed oil and grease removal systems
(d) Chemical feed systems and flash mixing equipment
(e) Mechanical flocculators and mechanical reactors
(f) Diffused air/mechanically aerated activated sludge systems
(g) Aerated lagoon systems 40
(h) Biofilters
(i) Methane-recovery anaerobic digester systems
(j) Air floatation systems
(k) Air/steam stripping systems
(l) Urea Hydrolysis systems
(m) Marine outfall systems
(n) Centrifuge for dewatering sludge
(o) Rotating biological contractor or bio-disc
(p) Ion exchange resin column
(q) Activated carbon column
 (x) (a) Solidwaste control equipments being – caustic/ lime/ chrome /mineral /cryolite recovery systems 40
(b) Solidwaste recycling and resource recovery systems
(xi) Machinery and plant, used in semi-conductor industry covering all integrated circuits (ICs) (excluding hybrid integrated circuits) ranging from small scale integration (SSI) to large scale integration/very large scale integration (LSI/VLSI) as also discrete semi-conductor devices such as diodes, transistors, thyristors, triacs, etc., other than those covered by entries (viii), (ix) and (x) of this sub-item and sub-item (8) below 30
(xia) Life saving medical equipment, being—
(a)  D.C. Defibrillators for internal use and pace makers
(b) Haemodialysors
(c) Heart lung machine
(d) Cobalt Therapy Unit
(e) Colour Doppler
(f) SPECT Gamma Camera
(g) Vascular Angiography System including Digital subtraction Angiography
(h) Ventilator used with anaesthesia apparatus
(i) Magnetic Resonance Imaging System
(j) Surgical Laser [See Note 5B] 40
(k) Ventilators other than those used with anaesthesia
(l) Gamma knife
(m) Bone Marrow Transplant Equipment including silastic long standing intravenous catheters for chemotherapy
(n) Fibreoptic endoscopes including Paediatric resectoscope/audit resectoscope, Peritoneoscopes, Arthoscope, Microlaryngoscope, Fibreoptic Flexible Nasal Pharyngo Bronchoscope, Fibreoptic Flexible Laryngo Bronchoscope, Video Laryngo Bronchoscope and Video OesophagoGastroscope, Stroboscope, Fibreoptic Flexible OesophagoGastroscope
(o) Laparoscope (single incision)
(4) Containers made of glass or plastic used as re-fills 40
(5) Computers including computer software 40
(6) Machinery and plant, used in weaving, processing and garment sector of textile industry, which is purchased under TUFS on or after the 1st day of April, 2001 but before the 1st day of April, 2004 and is put to use before the 1st day of April, 2004 40
(7) Machinery and plant, acquired and installed on or after the 1st day of September, 2002 in a water supply project or a water treatment system and which is put to use for the purpose of business of providing infrastructure facility under clause (i) of sub-section (4) of section 80-IA 40
(8) (i) Wooden parts used in artificial silk manufacturing machinery 40
(ii) Cinematograph films – bulbs of studio lights 40
(iii) Match factories – Wooden match frames 40
(iv) Mines and quarries :
(a) Tubs, winding ropes, haulage ropes and sand stowing pipes 40
(b) Safety lamps
(v) Salt works – Salt pans, reservoirs and condensers, etc., made of earthy, sandy or clayey material or any other similar material 40
(vi) Flour mills – Rollers 40
(vii) Iron and steel industry – Rolling mill rolls 40
(viii) Sugar works – Rollers 40
(ix) Energy saving devices, being—
A. Specialised boilers and furnaces:
(a)  Ignifluid/fluidized bed boilers
(b)  Flameless furnaces and continuous pusher type furnaces
(c)  Fluidized bed type heat treatment furnaces 40
(d)  High efficiency boilers (thermal efficiency higher than 75 per cent in case of coal fired and 80 per cent in case of oil/gas fired boilers)
B. Instrumentation and monitoring system for monitoring energy flows:
(a)  Automatic electrical load monitoring systems
(b)  Digital heat loss meters
(c)  Micro-processor based control systems
(d)  Infra-red thermography 40
(e)  Meters for measuring heat losses, furnace oil flow, steam flow, electric energy and power factor meters
(f)  Maximum demand indicator and clamp on power meters
(g)  Exhaust gases analyser
(h)  Fuel oil pump test bench
C. Waste heat recovery equipment:
(a)  Economisers and feed water heaters
(b)  Recuperators and air pre-heaters 40
(c)  Heat pumps
(d)  Thermal energy wheel for high and low temperature waste heat recovery
D. Co-generation systems:
(a)  Back pressure pass out, controlled extraction, extraction-cum-condensing turbines for co-generation along with pressure boilers 40
(b)  Vapour absorption refrigeration systems
(c)  Organic rankine cycle power systems
(d)  Low inlet pressure small steam turbines
E. Electrical equipment:
(a)  Shunt capacitors and synchronous condenser systems
(b)  Automatic power cut off devices (relays) mounted on individual motors
(c)  Automatic voltage controller
(d)  Power factor controller for AC motors
(e)  Solid state devices for controlling motor speeds
(f)  Thermally energy-efficient stenters (which require 800 or less kilocalories of heat to evaporate one kilogram of water)
(g)  Series compensation equipment
(h)  Flexible AC Transmission (FACT) devices – Thyristor controlled series compensation equipment 40
(i)  Time of Day (ToD) energy meters
(j)  Equipment to establish transmission highways for National Power Grid to facilitate transfer of surplus power of one region to the deficient region
(k)  Remote terminal units/intelligent electronic devices, computer hardware/software, router/bridges, other required equipment and associated communication systems for supervisory control and data acquisition systems, energy management systems and distribution management systems for power transmission systems
(l)  Special energy meters for Availability Based Tariff (ABT)
F. Burners:
(a)  0 to 10 per cent excess air burners
(b)  Emulsion burners 40
(c) Burners using air with high pre-heat temperature (above 300°C)
G. Other equipment:
(a) Wet air oxidation equipment for recovery of chemicals and heat
(b) Mechanical vapour recompressors
(c) Thin film evaporators
(d) Automatic micro-processor based load demand controllers 40
(e) Coal based producer gas plants
(f) Fluid drives and fluid couplings
(g) Turbo charges/super-charges
(h)  Sealed radiation sources for radiation processing plants
(x) Gas cylinders including valves and regulators 40
(xi Glass manufacturing concerns – Direct fire glass melting furnaces 40
(xii) Mineral oil concerns:
(a)  Plant used in field operations (above ground) distribution – Returnable packages
(b) Plant used in field operations (below ground), but not including kerbside pumps including underground tanks and fittings used in field operations (distribution) by mineral oil concerns 40
(c) Oil wells not covered in clauses (a) and (b) (with effect from the assessment year 2016-17) 15
(xiii) Renewal energy devices being—
(a) Flat plate solar collectors
(b) Concentrating and pipe type solar collectors
(c) Solar cookers
(d) Solar water heaters and systems
(e) Air/gas/fluid heating systems
(f) Solar crop driers and systems
(g) Solar refrigeration, cold storages and air-conditioning systems
(h) Solar steels and desalination systems
(i) Solar power generating systems
(j) Solar pumps based on solar-thermal and solar-photovoltaic conversion
(k) Solar-photovoltaic modules and panels for water pumping and other applications 40
(l) Windmills and any specially designed devices which run on wind-mills installed on or before March 31, 2012
(m) Any special devices including electric generators and pumps running on wind energy installed on or before March 31, 2012
(n) Biogas plant and biogas engines
(o) Electrically operated vehicles including battery powered or fuel-cell powered vehicles
(p) Agricultural and municipal waste conversion devices producing energy
(q) Equipment for utilising ocean waste and thermal energy
(r) Machinery and plant used in the manufacture of any of the above sub-items
(9) (i) Books owned by assessees carrying on a profession—
(a) Books, being annual publications 40
(b) Books, other than those covered by entry (a) above 40
(ii) Books owned by assessees carrying on business in running lending libraries 40
IV. SHIPS
(1) Ocean-going ships including dredgers, tugs, barges, survey launches and other similar ships used mainly for dredging purposes and fishing vessels with wooden hull 20
(2) Vessels ordinarily operating on inland waters, not covered by sub-item (3) below 20
(3) Vessels ordinarily operating on inland waters being speed boats [See Note 10 below the Table] 20
PART B
INTANGIBLE ASSETS
Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature not being goodwill of businesss of profession 25

Additional Depreciation as per Income Tax Act

Apart from Normal allowable depreciation, business organisations can claim additional depreciation under clause (iia) of Section 32(1) of the Income Tax Act 1961 in respect to  new machinery or plant other than ships and crafts.

The assesse should be engaged in the following business to avail such depreciation, they are as follows

  • Business or organization or
  • Production of any article or a thing or
  • In the business of generation or generation and distribution of power

The depreciation is eligible for a further sum of 20% of actual cost of such machinery or plant.

Non eligibility for claiming additional depreciation

No deduction under additional depreciation shall beallowed in respect of

  • any machinery or plant which , before its installation by the assessee ,was used either within or outside India by any other person , (second hand or used plant and machinery )or
  • any machinery or plant installed in any office premises or any residential accommodation ,including accommodation in the nature of a guest house ,or
  • any office appliances or road transport vehicles ,or
  • any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and Gains from Business or Profession” of any previous year.
  • 100% Depreciable assets like Pollution Control Equipment

Carry Forward Provisions

Additional depreciation can be carry forward in subsequent year also. (i.e.if the asset is put to use less than 180 days 50% of additional depreciation will be claimed in previous year and remaining 50% of additional depreciation can be claimed in the subsequent year)

No additional depreciation if opting for lower rate of 22% 

Domestic companies which are engaged in the business of manufacture or production of any article or thing or generation, transmission of power and tax audit limit for business and profession of 22%, such companies will not be allowed deduction for additional depreciation as per Section 32(1)(iia) [Section 115BAA(2)(i)].

Further, brought forward additional depreciation will also not be allowed to be adjusted while computing taxable income as per section 115BAA(1). However, if prior to AY 2020-21 any additional depreciation as per Section 32(1)(iia) has not been given full effect to, then it will be allowed to be adjusted in WDV of relevant block of assets as on 1 April 2019, if opted for section 115BAA for AY 2020-21 on or before the due date of filing ITR as specified u/s 139(1) [Proviso to Section 115BAA(3)].

Similar to section 115BAA, in view of section 115BAB(2)(c) if lower rate of 15% is claimed then deduction of additional depreciation will not be allowed.

Impact of section 43A adjustment 

If the actual cost of any asset, which is eligible for additional depreciation, is increased or decreased due to adjustment by application of section 43A, then it seems that the additional depreciation should accordingly be adjusted in the tax computation of said year.

Additional depreciation with respect to setting up unit in backward areas :

As per the proviso to Section 32 (1)(iia)

Additional depreciation shall be allowed on new plant and machinery (other than ships, aircraft, vehicle, office appliances, second hand plant or machinery, etc.) shall be allowed subject to certain conditions.

Such additional depreciation to be allowed to all taxpayers which set up an undertaking or enterprise for production or manufacture of any article or thing in any notified backward area in the state of Andhra Pradesh, Bihar, Telangana or West Bengal.

Note:

  1. Manufacturing unit should be set-up on or after April 1, 2015.
  2. New plant and machinery should be acquired and installed on or after April 1, 2015 but before April 1, 2020.

Thus, Additional depreciation to be allowed at 35 % of actual cost of new plant and machinery.

However, if an asset is acquired and put to use for less than one 180 days during the previous year, 50% of additional depreciation shall be allowed in year of acquisition and balance 50% in next year.

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