What are the Limits and Conditions for Claiming Depreciation in India? (A Complete Guide for FY 2023-24)
Meta Description:
Discover the essential limits and conditions for claiming depreciation in India. Our detailed guide covers depreciation rules for small businesses and salaried individuals, asset types, rates, and key conditions under the Income Tax Act. Maximize your tax benefits with TaxRobo.
Introduction
As a small business owner or a professional in India, are you making the most of your asset-related tax deductions? One of the most significant yet often misunderstood deductions is depreciation. In simple terms, depreciation is a non-cash business expense that allows you to deduct the cost of a business asset over its useful life, which in turn reduces your taxable income. This is a fundamental concept within the broader framework of Taxation 101 for Small Business Owners. This article will provide a clear and comprehensive overview of the limits and conditions for claiming depreciation under the Indian Income Tax Act. We will break down the rules for both businesses and salaried individuals, giving you the knowledge on claiming depreciation in India to make informed financial decisions.
Understanding the Basics: What is Depreciation under the Income Tax Act?
The Core Concept of Depreciation
The rules governing depreciation in India are laid out in Section 32 of the Income Tax Act, 1961. It is crucial to understand that depreciation is not an expense you actually pay out of pocket; rather, it’s an allowance granted by the tax authorities to account for the natural wear and tear or obsolescence of an asset used for your business. This allowance helps you recover the cost of the asset over time by reducing your taxable profits each year. For tax purposes in India, the primary method used for calculation is the ‘Written Down Value (WDV)’ method, where the depreciation is calculated on the reduced balance of the asset year after year.
Who is Eligible to Claim Depreciation?
The benefit of claiming depreciation is available to any taxpayer who uses assets for their business or profession. The primary eligible entities include:
- Individuals/Proprietors with business or professional income.
- Hindu Undivided Families (HUF).
- Partnership Firms & LLPs (Limited Liability Partnerships).
- Companies (both Private Limited and Public Limited).
While depreciation is predominantly a business expense, this guide will also clarify the specific depreciation rules for salaried individuals and the limited scenarios where they might be eligible.
What Assets Can You Claim Depreciation On?
Depreciation can be claimed on a wide range of assets, which are broadly categorized into two types. Understanding which of your assets qualify is the first step in correctly claiming depreciation benefits in India.
- Tangible Assets: These are physical assets that you can see and touch. Common examples include:
- Buildings (including factory, office, and residential buildings used for business)
- Plant & Machinery
- Furniture & Fixtures
- Motor Vehicles (cars, trucks, etc.)
- Intangible Assets: These are non-physical assets that hold value. Examples include:
- Patents, copyrights, and trademarks
- Licenses and franchises
- Any other commercial right of a similar nature
Important Note: It is vital to remember that land is a non-depreciable asset. You cannot claim depreciation on the cost of land because it is generally considered to have an unlimited useful life and does not wear out.
The 3 Essential Conditions for Claiming Depreciation in India
To successfully claim depreciation, it’s not enough to simply own an asset. The taxpayer must satisfy three fundamental conditions stipulated by the Income Tax Act. Meeting these conditions for claiming depreciation in India is mandatory for your claim to be considered valid by the tax authorities.
Condition 1: Ownership of the Asset
The most basic requirement is that the taxpayer must be the owner of the asset, either wholly or partly. The law distinguishes between ‘legal ownership’ (whose name is on the title deed) and ‘beneficial ownership’. For tax purposes, what matters is beneficial ownership. The beneficial owner is the person who actually uses the asset, bears the risks associated with it, and enjoys the rewards it generates. This means even if the legal paperwork is pending, the person who has taken possession and is using the asset for their business can claim depreciation.
For example, if you purchase a machine on a hire-purchase agreement, you become the beneficial owner from the moment you start using it for your business. Therefore, you are eligible to claim depreciation on it, even though the legal title may only transfer to you after the final installment is paid.
Condition 2: Asset Must be Used for Business or Profession
The second crucial condition is that the asset must be actively used for the taxpayer’s business or professional activities during the financial year. An asset sitting idle in a warehouse without being put into operation does not qualify. The term used in the Act is “put to use”, which is a more stringent requirement than simply being “ready to use.” An asset is considered “put to use” when it is actually employed in the business operations.
- Partial Use Rule: What if an asset, like a car, is used for both business and personal purposes? In such cases, the depreciation claim must be proportionate. You can only claim depreciation on the portion attributable to business use. The assessing officer has the right to disallow the portion of the claim that relates to personal use.
- “Ready to Use” vs. “Put to Use”: For instance, if you install a new machine in your factory in March but only start trial production runs in April (the next financial year), you cannot claim depreciation for it in the year of installation. It must be actively used in the business process during the financial year for which you are claiming the deduction.
Condition 3: The 180-Day Rule (A Critical Limit)
This is one of the most important limits for claiming depreciation in India that taxpayers often overlook, especially for assets purchased in the second half of the financial year. The 180-day rule states that if a new asset is acquired and put to use for less than 180 days in the financial year of its acquisition, the taxpayer is only allowed to claim 50% of the normal depreciation rate for that particular year.
Let’s take a clear example: Suppose your business buys a new laptop for ₹1,00,000 on November 15, 2023. The financial year ends on March 31, 2024. Since the laptop was used for less than 180 days in FY 2023-24, you can only claim half of the applicable depreciation. The normal rate for computers is 40%. Therefore, your depreciation claim for the first year would be (40% / 2) = 20% of ₹1,00,000, which is ₹20,000. From the next year onwards, you can claim the full depreciation on its written-down value.
Depreciation Limit Guidelines India: Rates and Calculations
Now that we understand the conditions, let’s delve into the actual calculation process and the depreciation limit guidelines India has set. The calculation is not performed on individual assets but on a collective group.
The “Block of Assets” Concept
For income tax purposes, depreciation is calculated on a “Block of Assets.” A block is defined as a group of assets that fall within the same class (e.g., buildings, furniture, machinery) and, most importantly, have the same depreciation rate prescribed for them. This method simplifies calculations significantly. Instead of tracking the value of each individual chair or table, all furniture is grouped into one block.
The Written Down Value (WDV) of the block is calculated as follows:
WDV = Opening WDV of the block at the start of the year (+) Actual cost of assets acquired during the year (-) Money received from the sale of any asset from the block during the year.
Depreciation is then calculated on this final WDV amount.
Prescribed Depreciation Rates as per Income Tax Rules
The Income Tax Rules have prescribed specific depreciation rates for different blocks of assets. Sticking to these rates is a non-negotiable part of the limits and conditions for claiming depreciation. Below is a table with some of the most common asset blocks and their corresponding WDV rates for your reference.
| Block of Assets | Depreciation Rate (%) |
|---|---|
| Residential Buildings | 5% |
| General Buildings (Office, Factory) | 10% |
| Furniture & Fittings (including electrical fittings) | 10% |
| General Plant & Machinery | 15% |
| Motor Cars (General) | 15% |
| Computers & Computer Software | 40% |
| Books (for professional use) | 40% |
| Intangible Assets (Patents, Copyrights, Trademarks) | 25% |
For a complete and updated list of all asset classes and their specific rates, it is always advisable to refer to the official Income Tax Department website.
Special Limit: Additional Depreciation for Businesses
To encourage industrial growth, the Income Tax Act provides a special benefit known as “Additional Depreciation.” This is a significant tax break available to businesses engaged in manufacturing, production, or power generation/distribution.
- Rate: An additional depreciation of 20% is allowed on the actual cost of new plant and machinery acquired and installed.
- Eligibility: This is an “additional” deduction over and above the normal depreciation.
- Exclusions: It’s important to note that additional depreciation is not available on second-hand machinery, ships, aircraft, office appliances, or vehicles.
- 180-Day Rule: The 180-day rule also applies here. If the new machinery is used for less than 180 days, the additional depreciation rate is restricted to 10% in the first year.
Depreciation for Salaried Individuals: Myths vs. Reality
A common point of confusion revolves around the depreciation rules for salaried individuals. Many wonder if they can claim depreciation on assets like laptops or vehicles used for work to reduce their taxable salary. Let’s clear up the myths and state the facts.
Can You Claim Depreciation Against Salary Income?
The answer is straightforward: Generally, a salaried individual cannot claim depreciation against their salary income. The reason for this lies in how income is categorized under the Income Tax Act. Salary income is taxed under the head “Income from Salaries.” This income head has its own specific set of deductions allowed, such as the Standard Deduction of ₹50,000, and depreciation is simply not on that list. Your employer already provides you with a salary after considering all business expenses they incur, so you cannot claim their asset depreciation.
The Exception: When a Salaried Person CAN Claim Depreciation
There is, however, a specific scenario where a salaried person can claim depreciation. This is possible only if the individual has another source of income that falls under the head “Profits and Gains from Business or Profession” or “Income from Other Sources.” The depreciation can then be claimed against that specific income, not the salary income.
Here’s an actionable example:
- An IT professional works for a company and earns a salary. She also undertakes freelance web development projects in her spare time.
- She buys a high-end laptop for ₹1,50,000, which she uses exclusively for her freelance work.
- In this case, her freelance work is considered professional income. She can therefore claim depreciation on the laptop (at 40%) against her freelance income when Filing Tax Returns for Freelancers and Consultants. The depreciation claim has no bearing on her salary income.
Conclusion: Mastering the Limits and Conditions for Claiming Depreciation
To wrap up, correctly claiming depreciation is a powerful tool for tax management for any business or professional. The key is to remember the fundamentals. To claim depreciation, you must own the asset, use it for your business or profession, and be acutely aware of the 180-day rule for new acquisitions. The calculation is done on a “Block of Assets” using the rates prescribed by the Income Tax Rules. For salaried individuals, the opportunity to claim depreciation is limited only to income earned from a side business or profession.
Understanding these limits and conditions for claiming depreciation is not just about compliance; it’s about financial prudence and ensuring you are not paying more tax than you are legally required to. This knowledge is vital for maximizing your deductions and improving your business’s cash flow. Navigating tax rules can be complex. If you need expert guidance on claiming depreciation benefits in India or assistance with your business accounting and tax filing, Contact the experts at TaxRobo today!
Frequently Asked Questions (FAQs)
1. Can I claim 100% depreciation on any asset in the first year?
Generally, no. Depreciation is claimed over the useful life of the asset using the WDV method. 100% depreciation is allowed only in very specific and rare cases, such as for certain air or water pollution control equipment, or if the written-down value of an entire block of assets falls below ₹5,000 at the end of the year.
2. What happens if I sell an asset during the year?
When you sell an asset, the sale price (or consideration received) is deducted from the WDV of its corresponding block. You cannot claim depreciation on an asset that is both purchased and sold within the same financial year. If selling an asset makes the entire block’s value zero or negative, the resulting profit is treated as a Short-Term Capital Gain and taxed accordingly, a concept detailed in our guide to Understanding Capital Gains Tax in India.
3. Is depreciation mandatory to claim?
Yes. According to various rulings by the Supreme Court of India, claiming depreciation is mandatory for taxpayers who are eligible for it. You cannot choose to skip claiming depreciation in a low-profit year just to carry forward a higher asset value to the next year. It must be calculated and deducted every year.
4. Can depreciation be claimed on an asset given on rent?
Yes, absolutely. If your primary business is to let assets on hire (e.g., a car rental company), the rental income is taxed under “Profits and Gains from Business or Profession,” and depreciation is fully claimable. If letting out an asset is not your main business activity (e.g., you rent out a spare office machine), the rental income is taxed under “Income from Other Sources,” and you can still claim depreciation as a deduction against that income.
