CA RAMAKRISHNA SANJAY
🔍 What is Depreciation?
Depreciation is the systematic reduction in the value of an asset due to usage, wear & tear, or obsolescence over time.
👉 In simple terms:
If you buy a machine for ₹1,00,000, it won’t remain worth the same after 1 year. The reduction in value is called depreciation.
🎯 Why is Depreciation Allowed?
From a tax perspective, depreciation is allowed because:
✔ Assets are used to generate income
✔ Their value reduces over time
✔ True profit must consider this reduction
👉 Objective: To arrive at real taxable income, not inflated profits.
⚖️ How Depreciation is Allowed (Income Tax Act)?
Depreciation is governed by Section 32 of the Income Tax Act, 1961.
Key Principles:
📦 Depreciation is allowed on Block of Assets, not individual assets
📉 Method used: Written Down Value (WDV)
📅 Allowed only if:
Asset is owned (fully/partly)
Asset is used for business/profession
🧱 Concept of Block of Assets (Very Important)
A block = Group of assets with:
Same nature
Same depreciation rate
👉 Example:
All computers → 40% block
All furniture → 10% block
📌 You don’t track individual assets separately once added to a block.
📊 Depreciation Rates (As per Income Tax Act)
🖥️ Commonly Used Rates
| Asset Type | Rate |
|---|---|
| Buildings (Residential) | 5% |
| Buildings (Non-residential) | 10% |
| Furniture & Fittings | 10% |
| Plant & Machinery (General) | 15% |
| Computers & Software | 40% |
| Motor Cars (Business use) | 15% |
| Motor Cars (Hire use) | 30% |
| Intangible Assets (Goodwill, Trademark, etc.) | 25% |
⚡ Special Notes on Rates
💡 Higher depreciation for technology assets (40%) due to rapid obsolescence
🚗 Higher rate for vehicles used in commercial hire business
🧠 Intangible assets also eligible (brand, patents, etc.)
🧮 How to Calculate Depreciation (WDV Method)
Formula:
Depreciation = Opening WDV × Rate
📌 Example:
Opening WDV of Machinery = ₹10,00,000
Rate = 15%
👉 Depreciation = ₹10,00,000 × 15% = ₹1,50,000
👉 Closing WDV = ₹8,50,000
⏳ Half-Year Rule (Very Important for Exams & Practice)
👉 If asset is used for less than 180 days in a year:
➡ Only 50% of depreciation is allowed
Example:
Asset purchased on Jan 1
Rate = 15%
👉 Allowed depreciation = 7.5% only
🚫 When Depreciation is NOT Allowed
❌ Asset not used for business
❌ Personal assets
❌ Land (no depreciation allowed)
❌ Goodwill (post amendments – not allowed)
❓ FAQs on Depreciation
1. Can I claim depreciation if asset is not used?
👉 No. Even if owned, usage is mandatory.
2. Is depreciation compulsory?
👉 Yes. Once you have a block, it is mandatory to claim.
3. Can depreciation create a loss?
👉 Yes. It can increase business loss, which can be carried forward.
4. Can I claim depreciation on second-hand assets?
👉 Yes, if used for business.
5. Is depreciation allowed on land?
👉 ❌ No. Land does not depreciate.
6. What happens if I sell an asset?
👉 Sale value is reduced from block value, not treated individually.
