The provision for allowing depreciation is contained in Section 32 of the Income Tax Act, 1961. 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. People claim depreciation deductions only for accounting or taxation purposes.
What is Depreciation?
Depreciation is used for the purpose of writing off the cost of an asset over its useful life. 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.
Income Tax Act of 1961 allows the depreciation of tangible assets and intangible assets. In the case of a tangible asset, claim the deduction against building, plant, and machinery. In the case of an intangible asset, claim a deduction against the patents, trademark, copyright, license, franchise or any other business or commercial right of similar nature. The deduction of depreciation claim on those assets which have been used by the assessee for the purpose of business or profession during the previous year.
If any asset which has been used for more than 180 days then 50% of depreciation is allowable in that year. For availing the benefit of deduction under depreciation, it is not mandatory that assets should be used by the assessee in the previous year. If an assessee purchases an asset and then leases it to a lessee, the assessee may seek depreciation under the Act. For example , A Machine was bought and put to use on 21 th December 2020 then the depreciation rate will be 15/2=7.5%.
Block of assets
Depreciation is calculated on the WDV of a Block of assets. “Block of asset” means a group of assets falling within a class of assets comprising –
(i). Tangible assets, being buildings, machinery, plant or furniture,
(ii). Intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed.
For the purpose of classification of assets into blocks, the percentage of depreciation within the class of assets needs to be considered. Each such class of asset with the same percentage of depreciation will be identified as a block of the asset.
Calculation of WDV (Written Down Value) of block of asset
Different Methods of Depreciation Calculation
Methods of Depreciation and the useful life of depreciable assets may vary from asset to asset. Based on asset type and industry, it can differ for taxation and accounting purposes also. Most commonly employed methods of depreciation are the Straight Line Method and the Written down Value Method. One of the basic differences in income tax depreciation calculation and companies act depreciation other than rates of depreciation is the method of calculation.
On Depreciation as per Companies Act, 1956
On Depreciation as per Income Tax Act, 1961
Depreciation Rates as per the Income Tax Act
PART A
TANGIBLE ASSETS
I. BUILDING
II. FURNITURE AND FITTINGS
III. MACHINERY AND PLANT
