Depreciation rate list as per income tax act
Introduction:
Depreciation is a critical aspect of income tax compliance for businesses, as it allows them to account for the wear and tear of assets over time. The Income Tax Act provides specific depreciation rates for different categories of assets, which businesses must adhere to when preparing their tax returns. In this blog, we’ll explore the concept of depreciation rates as per the Income Tax Act, highlighting key considerations and implications for businesses.
What is Depreciation?
Depreciation refers to the gradual decrease in the value of an asset over time due to various factors such as wear and tear, obsolescence, or usage. It is a fundamental concept in accounting and finance, reflecting the reduction in the economic utility or usefulness of an asset as it is used or as it ages.
There are several methods used to calculate depreciation, each based on different assumptions about how an asset loses value over time.
Depreciation serves several purposes in business and financial management:
- Expense Allocation: Depreciation allows businesses to allocate the cost of an asset over its useful life rather than expensing it all at once. This helps in matching expenses with revenues in the periods when the asset is generating income.
- Asset Valuation: Depreciation helps in maintaining accurate financial statements by reflecting the true value of assets on the balance sheet. As assets depreciate, their book value decreases, providing a more realistic representation of their worth.
- Tax Deduction: Depreciation expense is typically tax-deductible, allowing businesses to reduce their taxable income and lower their tax liability. By depreciating assets, businesses can defer some of their tax payments to future periods.
- Capital Budgeting: Depreciation plays a crucial role in capital budgeting decisions by helping businesses assess the cost and benefits of investing in new assets. Understanding the depreciation schedule of existing assets is essential for evaluating the financial feasibility of future investments.
Written Down Value (WDV) of Assets – Meaning:
According to Section 32(1) of the Income Tax Act, depreciation should be computed at the prescribed percentage on the Written Down Value (WDV) of the asset, which is calculated with reference to the actual cost of the assets. Understanding the terms ‘WDV’ and ‘Actual Cost’ is essential in the context of computing depreciation.
WDV under the Income Tax Act is defined as follows:
- For assets acquired in the current previous year, the actual cost of the asset is considered as the WDV.
- For assets acquired in earlier years, the WDV is calculated by deducting the depreciation actually allowed under the Act from the actual cost incurred.
Amount of Depreciation Allowed:
Depreciation is calculated using the WDV method, with depreciation rates provided in Appendix 1 of the Income Tax Act. However, in the case of undertakings engaged in power generation or its generation and distribution, there is an option to claim depreciation using either the WDV method or the Straight-Line method, provided this option is exercised before the due date of filing the return.
In the event of amalgamation or demerger, the aggregate depreciation allowance is apportioned between the companies involved based on the number of days the assets were used by each company, as if the amalgamation or demerger had not occurred.
For finance lease transactions, where the lessee capitalises the assets as per Accounting Standard AS-19 on Leases, the lessee is entitled to take depreciation as they can exercise the rights of the owner in their own right.
Understanding the principles of WDV and the rules governing depreciation calculation is crucial for businesses to accurately determine their tax liabilities and comply with income tax regulations.
The depreciation rates for commonly used assets for the financial year 2023-24:
| Sl. No | Asset Class | Asset Type | Rate of Depreciation |
| 1 | Building | Residential buildings not including boarding houses and hotels | 5% |
| 2 | Building | Boarding houses and hotels | 10% |
| 3 | Building | Purely temporary constructions like wooden structures | 40% |
| 4 | Furniture | Any fittings / furniture including electrical fittings | 10% |
| 5 | Plant and machinery | Motor cars excluding those used in a business of running them on hire | 15% |
| 6 | Plant and machinery | Motor cars excluding those used in a business of running them on hire purchased on or after 23 August 2019 but before 1 April 2020 and is put to use before 1 April 2020 | 30% |
| 7 | Plant and machinery | Lorries/taxis/motor buses used in a business of running them on hire | 30% |
| 8 | Plant and machinery | Lorries/taxis/motor buses used in a business of running them on hire purchased on or after 23 August 2019 but before 1 April 2020 and is put to use before 1 April 2020 | 45% |
| 9 | Plant and machinery | Computers and computer software | 40% |
| 10 | Plant and machinery | Books owned by assessee carrying on a profession being annual publications | 100% |
| 11 | Plant and machinery | Books owned by assessee carrying on profession not being annual publications | 60% |
| 12 | Plant and machinery | Books owned by assessee carrying on business in running lending libraries | 100% |
| 13 | Intangible assets | Franchise, trademark, patents, licence, copyright, know-how or other commercial or business rights of similar nature | 25% |
These rates can be used for computing depreciation for the financial year 2023-24 in accordance with the Income Tax Act.
The comprehensive chart of depreciation rates as per the Income Tax Act for the financial year:
Part A: Tangible Assets
| Asset Class | Sr. No. | Asset Type | Rate of Depreciation |
| Building | 1 | Buildings used primarily for residential reasons (excluding boarding houses and hotels) | 5% |
| 2 | Buildings apart from those used primarily for residential reasons and not covered by subitems 1 and 3 | 10% | |
| 3 | Buildings procured on or after September 1, 2002, for installing plant and machinery forming part of water treatment system or water supply project and used for the purpose of business of providing infrastructure facilities under clause (i) of subsection (4) of section 80-IA | 40% | |
| 4 | Purely temporary erections like wooden structures | 40% | |
| Furniture and fittings | Furniture and fittings including electrical fittings | 10% | |
| Plant and machinery | 1 | Plant and machinery excluding those covered by sub-items (2), (3), and (8) below | 15% |
| 2 | Motor cars, excluding those used in a business of running them on hire, procured or put to use on or after April 1, 1990 | 15% | |
| 3 | Motor cars, other than those used in a business of running them on hire, acquired on or after August 23, 2019 but before April 1, 2020 and is put to use before April 1, 2020 | 30% | |
| 3(i) | Aeroplanes, Aero Engines | 40% | |
| 3(ii) | (a) Motor taxis, motor buses, and motor lorries used in a business of running them on hire | 30% | |
| (b) Motor buses, motor lorries, and motor taxis used in a business of running them on hire, acquired on or after August 23, 2019 but before April 1, 2020 and is put to use before April 1, 2020 | 45% | ||
| 3(iii) | Commercial vehicles procured by the assessee on or after October 1, 1998, but before April 1, 1999, and used for any period of time prior to April 1, 1999, for the purpose of profession or business in agreement with the third proviso to clause (ii) of sub-section (1) of section 32 | 40% | |
| 3(iv) | New commercial vehicles procured on or after October 1, 1998, but prior to April 1, 1999, in replacement of condemned vehicles of more than 15 years of age and used for any period of time prior to April 1, 1999, for the purpose of business or profession in agreement with the third proviso to clause (ii) of sub-section (1) of section 32 | 40% | |
| 3(v) | New commercial vehicles procured on or after April 1, 1999, but before April 1, 2000, in replacement of condemned vehicles of more than 15 years of age and put to use prior to April 1, 2000, for the purpose of profession or business in agreement with the second proviso to clause (ii) of sub-section (1) of section 32 | 40% | |
| 3(vi) | New commercial vehicles procured on or after April 1, 2001, but before April 1, 2002, and put to use before April 1, 2002, for the purpose of profession or business | 40% | |
| New commercial vehicles acquired on or after January 1, 2009 but before October 1, 2009 and put to use before October 1, 2009 for the purposes of business or profession | 40% | ||
| 3(vii) | Moulds used in plastic and rubber goods factories | 30% | |
| 3(viii) | Air pollution control equipment | 40% | |
| Felt-filter system | |||
| Electrostatic precipitation systems | |||
| Scrubber | |||
| Counter current / packed bed / venture / cyclonic scrubbers | |||
| Dust collector systems | |||
| Evacuation system and ash handling system | |||
| 3(ix) | Water pollution control equipment | 40% | |
| Aerated detritus chambers (including air compressor) | |||
| Mechanical screen systems | |||
| Mechanically skimmed grease and oil removal systems | |||
| Flash mixing equipment and chemical feed systems | |||
| Mechanical reactors and mechanical flocculators | |||
| Mechanically aerated activated sludge / diffused air systems | |||
| Biofilters | |||
| Aerated lagoon systems | |||
| Air floatation systems | |||
| Methane recovery anaerobic digester systems | |||
| Steam/air stripping systems | |||
| Marine outfall systems | |||
| Urea Hydrolysis systems | |||
| Activated carbon column | |||
| Bio Disc or rotating biological contactor | |||
| Marine outfall systems | |||
| Ion exchange resin column | |||
| Centrifuge for dewatering sludge | |||
| 3(x) | (a) Solid waste control equipment Cryolite / mineral / lime / caustic / chrome recovery system | 40% | |
| (b) Resource recovery and solid waste recycling systems | |||
| 3(xi) | Plant and machinery used in semiconductor industry covering all integrated circuits (ICs) | 30% | |
| 3(xi)a | Life-Saving medical equipment | 40% | |
| D.C Defibrillators for pacemakers and internal use | |||
| Colour Doppler | |||
| Haemodialysis | |||
| Cobalt therapy unit | |||
| Vascular Angiography System including Digital subtraction Angiography | |||
| Heart lung machine | |||
| Spect Gamma Camera | |||
| Magnetic Resonance Imaging System | |||
| Ventilator used with anaesthesia apparatus | |||
| Ventilator except those used with anaesthesia | |||
| Surgical laser | |||
| Gamma knife | |||
| Fibre optic endoscopes including audit resectoscope/paediatric resectoscope, arthroscope, peritoneoscopy, fiberoptic flexible nasal pharyngo, microlaryngoscope, video laryngo, fiberoptic flexible laryngo bronchoscope. | |||
| Bronchoscope, video oesophago gastroscope, video oesophago bronchoscope, fiberoptic flexible oesophago gastroscope | |||
| Ships | 4(i) | Ocean-going ships including tugs, survey launches, dredgers, barges and other similar ships used primarily for dredging purposes and sighting vessels with a wooden hull | 20% |
| 4(ii) | Vessels ordinarily operating on inland waters, not covered by sub-item (iii) below | 20% | |
| 4(iii) | Vessels ordinarily operating on inland waters being speed boats | 20% |
Part B: Intangible Assets
| Asset Class | Asset Type | Rate of Depreciation |
| Intangible Assets | Franchise, trademark, patents, licence, copyright, know-how, or other commercial or business rights of similar nature | 25% |
This comprehensive chart provides the depreciation rates for both tangible and intangible assets as per the Income Tax Act.
An example illustrating the computation of depreciation:
| Name of Asset | Block 1 (Machine – 15%) | Block 2 (Furniture – 10%) | Block 3 (Car – 15%) |
| Opening Value | 0 | 0 | 0 |
| Add – Purchases
(>= 180 days) (< 180 days) |
5,00,000 | 20,000 | 3,00,000 |
| Less – Sold during the year | 0 | 0 | 0 |
| Closing value of block before depreciation | 5,40,000 | 20,000 | 3,00,000 |
| Depreciation | 78,000 <br> (5,00,000 x 15%) + (40,000 x 15% x 1/2) | 2,000 <br> 20,000 x 10% | 22,500 <br> 3,00,000 x 15% x 1/2 |
| Closing WDV after depreciation | 4,62,000 | 18,000 | 2,77,500 |
Methods of Calculating Depreciation
Depreciation calculation methods can vary depending on the type of asset, industry standards, and regulatory requirements. The two most commonly used methods are the Straight Line Method and the Written Down Value Method.
Under the Companies Act, depreciation calculation methods have evolved over time:
For the Companies Act, 1956, depreciation is calculated based on specified rates, and the methods include:
- Straight Line Method
- Written Down Value Method
With the Companies Act, 2013, depreciation calculation is based on the useful life of assets. The methods prescribed include:
- Straight Line Method
- Written Down Value Method
- Unit of Production Method
In contrast, the Income Tax Act, 1961, employs specific depreciation calculation methods:
- Written Down Value Method (Block wise): This method involves calculating depreciation based on the reducing balance of the asset’s written down value.
- Straight Line Method for Power Generating Units: In cases involving power generating units, depreciation can be calculated using the straight-line method.
These methods provide different approaches to depreciating assets for accounting and taxation purposes, ensuring compliance with regulatory standards while accurately reflecting the wear and tear of assets over time.
Calculating Depreciation by Straight-Line Method
- Straight-Line Method Rate of Depreciation =
[ (Original Cost – Residual Value) / Useful Life ] x 100
- Depreciation =
Original Cost x Rate of Depreciation under SLM (as calculated in (a))
Conclusion:-
In conclusion, the methods of calculating depreciation play a crucial role in determining the financial health and tax liabilities of businesses. The Straight Line Method and the Written Down Value Method are commonly employed techniques, each offering distinct advantages and considerations.
Under the Companies Act, both the 1956 and 2013 versions prescribe depreciation calculation methods based on specified rates or the useful life of assets. These methods ensure consistency and transparency in financial reporting, aligning with evolving accounting standards.