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Last updated: November 15th, 2024 12:21 PM

Different Depreciation Rates under Companies & Income Tax Act

Depreciation is a key concept in finance and accounting. It helps us manage how the value of assets changes over time. Think of it as a way to spread out the cost of an asset over its useful life. We use depreciation to account for things like wear and tear, obsolescence, or new technology. In this guide, we'll break down depreciation, its purpose, types of assets, how to calculate it, and the differences between accounting and tax rules. Whether you're a business owner, finance pro, or just curious about finance, this article will help you understand how depreciation impacts a company's financial performance and reporting.

What is Depreciation?

Depreciation is a measure of the reduction in the value of a depreciable asset. This decline in value can occur due to various factors such as usage, the passage of time, or becoming obsolete because of technological or market changes. Depreciation is allocated fairly and systematically to account for this reduction in value. This allocation is done over the expected useful life of the asset. Each accounting period sees a portion of the depreciable amount being charged as depreciation. Since almost all assets lose value over time, we treat depreciation as an expense in financial accounting. This is advantageous to the company that owns the depreciable assets, as it allows for a more accurate representation of the asset's value over time.

The Purpose of Depreciation

Depreciation can be a complex concept in accounting, primarily because it does not involve actual cash flow. The primary purpose of depreciation is to allocate a portion of an asset's cost to the Profit & Loss Account. This allocation is based on the "matching principle," where revenues and expenses are recorded in the Profit & Loss Account within the same reporting period. This principle provides a more accurate view of a company's performance during a specific reporting period.

The Importance of Depreciation

Without the practice of charging depreciation, businesses would be required to expense the entire cost of their assets immediately upon acquisition. This would result in substantial losses in the months of purchase, followed by unusually high profitability in the periods when corresponding revenue is recognized without any matching expenses. Consequently, a company that doesn't implement depreciation would experience highly variable financial results. Depreciation, therefore, provides a more balanced and accurate representation of a company's financial performance over time.

Recording Depreciation in Financial Statements

The depreciation charged on depreciable assets is recorded as an expense in the Profit & Loss Account. This accounting practice helps recognise the reduction in asset value over time. The depreciation expense listed in the Profit & Loss Account compensates the company for the value lost on its depreciable assets. It helps maintain transparency and accuracy in financial reporting.

Block of Assets - Concept Explained

Under the Income Tax Act, depreciation is calculated based on the written down value (WDV) of a block of assets rather than on individual assets. A block of assets is a group of assets that share similar characteristics and fall within the same category. It includes:

Tangible Assets: Building, machinery, plant, or furniture.
Intangible Assets: Know-how, patents, copyrights, trademarks, licenses, franchises, or other business or commercial rights of a similar nature.

The classification of a block of assets is determined by their life, nature, and use. Additionally, assets within the same class must have an identical depreciation rate to qualify as a block. For example, all machinery attracting the same depreciation rate will be treated as one block. Once grouped into a block of assets, individual assets lose their separate identity for depreciation purposes. Depreciation is applied uniformly to the entire block, streamlining the process and reducing complexity in tax compliance.

Conditions to Claim Depreciation

To claim depreciation under the Income Tax Act, the following conditions must be met:

Ownership: The asset must be owned, either wholly or partly, by the assessee.
Usage: The asset must be used for the taxpayer’s business or profession. If the asset is partly used for non-business purposes, depreciation is allowed only to the extent it is used for business purposes. Under Section 38 of the Act, the Income Tax Officer has the authority to determine the proportionate depreciation.
Co-ownership: In the case of co-owned assets, depreciation can be claimed by each co-owner based on their ownership share in the asset.
Exclusions: Depreciation cannot be claimed on certain assets, such as goodwill and the cost of land.
Mandatory Allowance: From Assessment Year 2002-03, depreciation is mandatory and is deemed to have been allowed, even if not explicitly claimed in the taxpayer’s profit and loss account. The Written Down Value (WDV) of the asset must be carried forward after reducing the depreciation amount.
Presumptive Taxation: For taxpayers opting for the presumptive taxation scheme, the deemed profit is considered to already account for depreciation.
Rate of Depreciation: The depreciation rates prescribed under the Income Tax Act must be followed, even if different rates are used in the financial statements under the Companies Act, 1956.

Types of Depreciable Assets

Depreciable assets are those used for business purposes that can be depreciated over time. These assets encompass both tangible and intangible categories.

Tangible assets include buildings, machinery, vehicles, furniture, fixtures, computers, and equipment.
Intangible assets subject to depreciation include patents, copyrights, and computer software.

Depreciation is a vital tool in managing and accounting for the value of these assets over their useful lifespan.

Depreciation Rates for FY 2023-24 for Most Commonly Used Assets

Sl. No	Asset Class	Asset Type	Rate of Depreciation
1	Building	Residential buildings (excluding 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 (purchased on or after 23 August 2019 but before 1 April 2020 and 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 (purchased on or after 23 August 2019 but before 1 April 2020 and put to use before 1 April 2020)	45%
9	Plant and machinery	Computers and computer software	40%
10	Plant and machinery	Books owned by assesses carrying on a profession (annual publications)	100%
11	Plant and machinery	Books owned by assesses carrying on a profession (not annual publications)	60%
12	Plant and machinery	Books owned by assesses carrying on business in running lending libraries	100%
13	Intangible assets	Franchise, trademark, patents, license, copyright, know-how, or other commercial or business rights of similar nature	25%

Depreciation Rates as per the Income Tax Act (Comprehensive Chart)

These rates are applicable for the fiscal year 2023-24 and can be used to calculate depreciation for various asset classes. This depreciation rate chart is divided into two sections:

Part A for Tangible Assets
Part B for Intangible Assets

Part A - Tangible Assets

Asset Class	Sr. No.	Asset Type	Rate of Depreciation
Building	1	Buildings used primarily for residential purposes (excluding boarding houses and hotels)	5%
Building	2	Buildings other than those used primarily for residential purposes and not covered by subitems 1 and 3 below	10%
Building	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 business purposes as per section 80-IA	40%
Building	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%
Plant and machinery	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%
Plant and machinery	3	Motor cars (other than those used in a business of running them on hire) acquired between August 23, 2019, and April 1, 2020, and put to use before April 1, 2020	30%
Plant and machinery	3(i)	Aeroplanes, Aero Engines	40%
Plant and machinery	3(ii) (a)	Motor taxis, motor buses, and motor lorries used in a business of running them on hire	30%
Plant and machinery	3(ii) (b)	Motor buses, motor lorries, and motor taxis used in a business of running them on hire, acquired between August 23, 2019, and April 1, 2020, and put to use before April 1, 2020	45%
Plant and machinery	3(iii)	Commercial vehicles procured on or after October 1, 1998, but before April 1, 1999, and used for profession or business prior to April 1, 1999, as per section 32	40%
Plant and machinery	3(iv)	New commercial vehicles procured on or after October 1, 1998, but prior to April 1, 1999, in replacement of condemned vehicles over 15 years old and used for business or profession prior to April 1, 1999, as per section 32	40%
Plant and machinery	3(v)	New commercial vehicles procured on or after April 1, 1999, but before April 1, 2000, in replacement of condemned vehicles over 15 years old and put to use prior to April 1, 2000, for profession or business as per section 32	40%
Plant and machinery	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 profession or business	40%
Plant and machinery	3(vi)	New commercial vehicles acquired between January 1, 2009, and October 1, 2009, and put to use before October 1, 2009, for business or profession	40%
Plant and machinery	3(vii)	Moulds used in plastic and rubber goods factories	30%
Plant and machinery	3(viii)	Air pollution control equipment, including Felt-filer systems, Electrostatic precipitation systems, Scrubbers, Counter current/packed bed / venture / cyclonic scrubbers, Dust collector systems, Evacuation systems, and ash handling systems	40%
Plant and machinery	3(ix)	Water pollution control equipment, including Aerated detritus chambers (including air compressors), Mechanical screen systems, Mechanically skimmed grease and oil removal systems, Flash mixing equipment and chemical feed systems, Mechanical reactors, and mechanical flocculation, 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 columns, Bio Disc or rotating biological contractors, Ion exchange resin columns, Centrifuges for dewatering sludge	40%
Plant and machinery	3(x) (a)	Solid waste control equipment (Cryolite/mineral / lime / caustic / chrome recovery systems)	40%
Plant and machinery	3(x) (b)	Resource recovery and solid waste recycling systems	40%
Plant and machinery	3(xi)	Plant and machinery used in the semiconductor 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 well as discrete semiconductor devices like diodes, triacs, thyristors, transistors, etc., except those covered by entries (viii), (ix), (x) of this sub-item and sub-item (8) below	30%
Plant and machinery	3(xi)a	Life-saving medical equipment, including D.C. Defibrillators for pacemakers and internal use, Colour Dopplers, Haemodialysis machines, Cobalt therapy units, Vascular Angiography Systems including Digital subtraction Angiography, Heart-lung machines, Spect Gamma Cameras, Magnetic Resonance Imaging Systems, Ventilators used with anaesthesia apparatus, Ventilators (except those used with anaesthesia), Surgical lasers, Gamma knives, Fibre optic endoscopes, including audit resectoscopes/paediatric resectoscopes, arthroscopes, peritoneoscopes, fibreoptic flexible nasal pharyngoscopes, microaryngoscopes, video laryngoscopes, fiberoptic flexible laryngo bronchoscopes, bronchoscopes, video esophago gast...	40%
Plant and machinery	4	Containers made of plastic or glass used as refills	40%
Plant and machinery	5	Computers, including computer software	40%
Plant and machinery	6	Plant and machinery used in the processing, weaving, and garment sector of the textile industry, bought under TUFS between April 1, 2001, and April 1, 2004, and put to use before April 1, 2004	40%
Plant and machinery	7	Plant and machinery procured and installed on or after September 1, 2002, in a water treatment system or a water supply project and put to use to provide infrastructure facilities under clause (i) of sub-section (4) of section 80-IA	40%
Plant and machinery	8	Wooden parts used in artificial silk manufacturing machinery, Match factories (wooden match frames), Cinematograph films, bulbs of studio lights, Salt works, condensers, reservoirs, salt pans, etc., made of clayey, sandy, or earthy material, Quarries and mines, Sand stowing pipes, winding ropes, tubs, and haulage ropes, Safety lamps, Flour mills (rollers), Sugar works (rollers), Steel and iron industry (rolling mill rolls), Energy-saving devices, including (A) Furnaces and specialized boilers, (B) Instrumentation and monitoring systems for monitoring energy flows, (C) Waste heat recovery equipment, (D) Co-generation systems, (E) Electrical equipment, (F) Burners, (G) Other equipment, Gas cylinders including regulators and valves, Glass manufacturing concerns (Direct fire glass melting furnaces), Mineral oil concerns, including (i) Plant used in field operations (above ground) distribution, returnable packages, (ii) Plant used in field operations (below ground), but not including kerbside pumps, (iii) Oil wells not covered in (i) and (ii) above, Renewable energy devices, including (i) Pipe type and concentrating solar collectors, (ii) Flat plate solar collectors, (iii) Solar cookers, (iv) Air/fluid/gas heating systems, (v) Solar water heaters and systems, (vi) Solar crop drivers and systems, (vii) Solar steels and desalination systems, (viii) Solar refrigeration, air conditioning systems, and cold storages, (ix) Solar pumps based on solar-photovoltaic and solar-thermal conversion, (x) Solar power generating systems, (xi) Solar-photovoltaic panels and modules for water pumping and other applications, Wind mills and any other specially designed devices that operate on wind mills (installed on or after April 1, 2014), Any special devices including electric pumps and generators operating on wind energy (installed on or after April 1, 2014), Books owned by assessees carrying on a profession, including (i) Books, being annual publications, (ii) Books (excluding those covered by entry (i) above), (iii) Books owned by assessees carrying on business in running lending libraries	40% or 15% as applicable
Ships	4(i)	Ocean-going ships, including tugs, survey launches, dredgers, barges, and other similar ships used primarily for dredging purposes and sighing vessels with wooden hull	20%
Ships	4(ii)	Vessels ordinarily operating on inland waters, not covered by sub-item (iii) below	20%
Ships	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, license, copyright, know-how, or other commercial or business rights of similar nature	25%

Please note that these rates are subject to change per amendments to the Income Tax Act, and it's advisable to refer to the latest official documents or consult a tax professional for the most up-to-date information.

Determining When to Stop Depreciating

Depreciation ceases when one of two conditions is met:

The business disposes of the asset.
The asset reaches the end of its useful life.

Two Methods of Depreciation Calculation

Depreciation calculation is an annual practice that follows specific methods outlined in statutory regulations. The Companies Act guides two distinct methods for calculating depreciation:

Straight Line Method (SLM):

The straight-line method allocates an equal portion of an asset's cost as depreciation each year. This method offers a straightforward approach to depreciation calculation.

Written Down Value Method (WDV):

As specified in the Companies Act and the Income Tax Act of 1961, the Written Down Value Method calculates depreciation based on the block of assets criteria. This method typically results in a declining balance of depreciation over time. Know more about ITR Filing in India: Your Complete Guide

Impact of Depreciation Method

The choice of depreciation method directly impacts a company's profit and the carrying value of its assets. It influences how the expense is recognized over time and the presentation of asset values in the financial statements. Careful consideration of the chosen method is essential to accurately represent a company's financial performance and asset values.

Depreciation under the Income Tax Act, 1961

Under the Income Tax Act, 1961, depreciation is calculated following the Block of Assets criteria. The Written Down Value (WDV) Method is typically followed for tax purposes.

Rate of Depreciation under the Companies Act 2013

The Indian Companies Act, 2013, outlines the useful life of various classes of assets in Schedule II. This schedule serves as the basis for determining the rate of depreciation under the Straight Line Method (SLM), Written Down Value Method (WDV), or Unit of Production (UOP) method.

Different Methods of Calculating Depreciation

Different methods are employed to calculate depreciation, which can vary depending on the type of asset and the industry. These methods also differ when it comes to accounting and taxation purposes. The two most commonly used depreciation methods are the Straight-Line and Written Down Value Method. Depreciation calculations under the Income Tax Act and the Companies Act mainly differ in the method used for depreciation calculation. Depreciation Methods as per Companies Act, 1956 (Based on Specified Rates):

Straight Line Method
Written Down Value Method

Depreciation Methods as per Companies Act, 2013 (Based on Useful Life of Assets):

Straight Line Method
Written Down Value Method
Unit of Production Method

Depreciation Methods as per Income Tax Act, 1961 (Based on Specified Rates):

Written Down Value Method (Block-wise)
Straight Line Method (specifically for Power Generating Units)

Formula for Calculating Depreciation by Straight-Line Method For the Straight-Line Method, you can calculate the rate of depreciation and the actual depreciation using the following formulas:

Straight-Line Method Rate of Depreciation = [(Original Cost – Residual Value) / Useful Life] x 100
Depreciation = Original Cost x Rate of Depreciation under Straight-Line Method (as calculated in formula 'a')

Differences in Depreciation between the Income Tax Act and Companies Act

Depreciation serves two distinct purposes in accounting and taxation, leading to variations in how it is calculated under the Income Tax Act and the Companies Act.

Accounting Purpose

Depreciation in accounting involves two aspects: reducing the value of assets and allocating asset costs over their useful life. Under the Companies Act, 2013, depreciation is calculated based on the useful life of assets rather than predetermined rates. This approach aims to represent the value decline of assets over time accurately. The Companies Act provides a reference chart of useful lives.

Taxation Purpose

Depreciation in taxation aims to reduce a company's net taxable income and, consequently, the tax payable. Under the Income Tax Act, 1961, depreciation on assets is treated as an expense when calculating income under the "Income from Business and Profession" category. Depreciation rates are specified in the Income Tax Act based on the block of assets. This method is used to determine tax liability.

Differences in Methods Lead to Varied Depreciation Amounts

Because of these differences in depreciation methods between taxation and accounting purposes, the depreciation amounts calculated under the Income Tax Act and the Companies Act may not align. This results in a timing difference that must be quantified in the company's financial statements. This quantification takes the form of deferred tax liability or deferred tax asset.

Deferred Tax Considerations

The timing difference in depreciation between the two acts leads to deferred tax considerations. A deferred tax liability or asset is recognized in the financial statements to account for the temporary variance in depreciation amounts. This recognition ensures that the company's financial reporting accurately reflects its tax obligations and financial position.