Depreciation is the reduction in the value of an asset over time due to wear and tear, aging, or obsolescence. Under the Income Tax Act of India, businesses and individuals are allowed to claim depreciation on assets used for business purposes. This depreciation reduces taxable income, providing tax relief. Depreciation is claimed as a deduction from profits and gains of business or profession and helps reduce the tax burden.
Key Features of Depreciation as per Income Tax Act
- Block of Assets Concept: Depreciation is calculated on a block of assets, not on individual assets. A block of assets is a group of assets falling within a class and subjected to the same rate of depreciation.
- Written Down Value (WDV) Method: Under the Income Tax Act, depreciation is generally calculated using the WDV method, except for assets like power-generating units, where the straight-line method (SLM) is used. In the WDV method, depreciation is applied to the reduced value of the asset after accounting for depreciation from previous years.
- Assets Eligible for Depreciation: Depreciation can be claimed on tangible assets like buildings, machinery, vehicles, and furniture, and intangible assets such as patents, trademarks, and goodwill.
- Depreciation Rate: The rate of depreciation varies depending on the type of asset. Common rates include:
- Buildings: 5% to 10%
- Furniture and fittings: 10%
- Plant and machinery: 15%
- Motor vehicles: 15% to 30%
- Computers: 40%
- Intangible assets (e.g., patents): 25%
- Additional Depreciation: Manufacturing companies can claim an additional depreciation of 20% in the first year of purchase of new machinery and equipment (if the machinery is put into use for less than 180 days in the first year, 10% depreciation is allowed).
- Half-Year Rule: Depreciation is allowed at half the rate if an asset is used for business for less than 180 days during the financial year.
Steps for Using a Depreciation Calculator as per Income Tax Act
A depreciation calculator helps to determine the exact depreciation amount based on the cost of the asset, its nature, and the applicable depreciation rate. Here’s how to calculate depreciation:
- Input Cost of Asset: Enter the actual cost of the asset, including purchase price, taxes, and expenses incurred to bring the asset to its usable condition.
- Select Asset Category: Choose the relevant block of assets to which the asset belongs (e.g., building, machinery, furniture, etc.).
- Apply Depreciation Rate: Based on the selected asset category, the calculator will apply the appropriate depreciation rate as per the Income Tax Act.
- Consider Usage Period: If the asset is used for less than 180 days in the first year, the calculator will apply the half-year rule and compute depreciation at 50% of the normal rate.
- Calculate Depreciation: The calculator will provide the depreciation amount for the financial year based on the inputs.
- Determine Written Down Value (WDV): After applying depreciation, the written-down value of the asset will be calculated, which becomes the opening balance for the next year.
Depreciation Rates Under Income Tax Act (Schedule II)
Here’s a summary of common depreciation rates for various assets:
| Asset Class | Depreciation Rate (%) |
|---|---|
| Buildings (Residential) | 5% |
| Buildings (Factory/Non-Residential) | 10% |
| Plant and Machinery | 15% |
| Motor Cars | 15% |
| Computers | 40% |
| Furniture and Fittings | 10% |
| Intangible Assets (Patents, Trademarks) | 25% |
Additional Points to Consider
- Assets Acquired via Hire Purchase: In cases of assets acquired on hire purchase, depreciation is allowed on the capital portion of the payment made towards the asset, not on the interest portion.
- Depreciation on Leased Assets: If the business leases out an asset, it can still claim depreciation, provided the ownership of the asset remains with the business.
- Assets Sold or Discarded: When assets are sold or discarded during the year, the depreciation is calculated up to the date of sale or disposal. The block of assets is adjusted accordingly.
- Unabsorbed Depreciation: If there is a loss after applying depreciation, the unabsorbed depreciation can be carried forward and set off against profits in future years without any time limit.
Benefits of Using a Depreciation Calculator
- Accuracy: The calculator ensures accurate computation of depreciation as per the prescribed rates, eliminating manual errors.
- Time-Saving: Using a calculator automates the process and saves time compared to manual calculations.
- Compliance: Ensures that the depreciation is calculated in accordance with the Income Tax Act, helping businesses stay compliant.
- Financial Planning: Helps businesses and individuals plan their tax liabilities by estimating depreciation and understanding its impact on taxable income.
Conclusion
Depreciation is a vital part of financial accounting and tax planning for businesses. Understanding how depreciation is calculated under the Income Tax Act helps businesses optimize their tax liability. The Depreciation Calculator ensures accurate calculations and simplifies the process, providing a clear picture of tax savings and asset value reduction.