How is Depreciation Claimed Under the Income Tax Act? A Guide for 2023-24

As a small business owner or a professional in India, are you looking for legitimate ways to reduce your taxable income? One of the most effective yet often misunderstood deductions is depreciation. In simple terms, depreciation is the natural reduction in the value of an asset over time due to wear and tear, usage, or obsolescence. The Income Tax Act, 1961, recognizes this loss in value and allows you to claim it as a business expense, thereby lowering your taxable profit. Understanding how depreciation is claimed under the Income Tax Act is not just a good accounting practice; it is a crucial strategy for accurate tax filing and maximizing your financial savings. This comprehensive article will break down the essential rules, methods, and rates for claiming depreciation, providing clear guidance for both businesses and individuals in India.

Understanding Depreciation as per the Income Tax Act, 1961

It is essential to understand that depreciation allowed under the Income Tax Act is a statutory deduction governed by specific rules, which may differ from the depreciation calculated for your accounting books. While accounting depreciation aims to reflect the actual useful life of an asset, tax depreciation is a notional allowance provided to taxpayers to account for the asset’s value reduction. The Income Tax Act 1961 depreciation guidelines are mandatory and must be followed precisely to ensure compliance and avoid any discrepancies during tax assessments. These guidelines provide a standardized framework for all taxpayers, defining which assets are eligible, the conditions for the claim, and the specific rates at which the deduction can be calculated, ensuring uniformity in tax treatment across different businesses and professions.

Key Conditions for Claiming Depreciation

To successfully claim depreciation, you must satisfy a few fundamental conditions laid out in the Act. These prerequisites form the bedrock of your claim, and failing to meet even one can lead to its disallowance by the tax authorities. Here are the three primary conditions you must fulfill:

Condition 1: Ownership of the Asset: The taxpayer (assessee) must be the owner of the asset, either wholly or partly. This means that if you have co-ownership in an asset, you can claim depreciation proportional to your share. It is important to note that ownership, not possession, is the key criterion. For instance, even if an asset is leased out, the owner is the one who can claim depreciation, not the user (lessee).
Condition 2: Usage of the Asset: The asset must be actively used for the purpose of the taxpayer’s business or profession during the financial year. If an asset is purchased but not put to use, depreciation cannot be claimed. Furthermore, if an asset is used partly for business and partly for personal purposes, depreciation is only allowed on a proportional basis, corresponding to its usage for the business.
Condition 3: Types of Assets: Depreciation is available on both tangible and intangible assets. Tangible assets include physical items like buildings, machinery, plant, vehicles, and furniture. Intangible assets are non-physical assets that hold value, such as patents, copyrights, trademarks, licenses, franchises, or any other commercial or business right of a similar nature.

The ‘Block of Assets’ Concept: A Core Principle

One of the most significant distinctions between depreciation for accounting purposes and for income tax purposes in India is the ‘Block of Assets’ concept. While in financial accounting you might calculate depreciation on each individual asset, the Income Tax Act mandates a different approach. For tax purposes, depreciation is not calculated on single assets but rather on a consolidated group known as a ‘block of assets’. This method simplifies calculations and streamlines the process for both taxpayers and tax authorities. Understanding this concept is fundamental to correctly computing your tax liability and ensuring you are compliant with the prescribed tax laws.

A ‘block of assets’ is officially defined as a group of assets that fall under the same class and have the same prescribed rate of depreciation. All assets of a similar nature are pooled together into a single block. For example, all office furniture, including desks, chairs, and cabinets, would be grouped into the ‘Furniture & Fittings’ block, which has a depreciation rate of 10%. Similarly, all computers, laptops, and printers would form another block, ‘Computers & Laptops’, which is depreciated at a much higher rate of 40%. This pooling system means you track the value of the entire block, not each individual item within it, for tax depreciation purposes.

How to Calculate and Claim Depreciation: The WDV Method

The Income Tax Act, 1961, mandates a specific method for calculating depreciation on a block of assets. This method is known as the Written Down Value (WDV) Method, also referred to as the diminishing balance method. With the exception of certain undertakings in the power sector which may use the Straight Line Method (SLM), all other businesses and professionals must use the WDV method. This approach calculates depreciation on the reduced balance of the asset block year after year, meaning the depreciation amount is higher in the initial years and gradually decreases as the value of the block diminishes. This is the primary mechanism that dictates how to claim depreciation tax benefit India, as the calculated depreciation amount is directly deducted from your business income to reduce your tax outgo.

Step-by-Step WDV Calculation

The calculation of depreciation using the WDV method is a systematic, year-end process. It involves tracking the opening balance of your asset block, accounting for any new additions or sales during the year, and then applying the prescribed rate. Here is a simplified breakdown of the steps involved:

Start with the Opening WDV: Begin with the closing Written Down Value of the block of assets from the previous financial year. This becomes the opening WDV for the current year.
Add New Purchases: Add the actual cost of any new assets that fall into the same block and were purchased during the current financial year.
Subtract Asset Sales: From this total, subtract the money received or receivable from the sale, discard, or destruction of any asset belonging to that block during the year.
Calculate Depreciation: The resulting figure is the value on which depreciation for the year is calculated. Apply the prescribed depreciation rate for that specific block to this value. The amount you get is your depreciation expense for the year.
Determine Closing WDV: Subtract the depreciation expense from the value calculated in step 4 to arrive at the closing WDV for the block, which will become the opening WDV for the next year.

Example:
Let’s say the opening WDV of your ‘General Plant & Machinery’ block (15% rate) is ₹5,00,000.

You purchased a new machine for ₹1,50,000 on May 1st.
You sold an old machine from the block for ₹50,000.
Calculation:
- Opening WDV: ₹5,00,000
- Add: New Machine Cost: + ₹1,50,000
- Less: Sale Proceeds: – ₹50,000
- Value for Depreciation: ₹6,00,000
- Depreciation for the year (@ 15%): ₹6,00,000 * 15% = ₹90,000
- Closing WDV for next year: ₹6,00,000 – ₹90,000 = ₹5,10,000

Prescribed Depreciation Rates Under the Income Tax Act

The rates at which depreciation can be claimed are not arbitrary; they are specifically prescribed in Appendix I of the Income Tax Rules, 1962. These rates are categorized based on the class of asset, creating the various ‘blocks of assets’ we discussed earlier. Knowing these rates is essential for accurate calculation and claiming the correct tax deductions for depreciation in India. Each block has a distinct percentage assigned to it, reflecting the general nature and expected life of the assets within that category. For instance, assets with a shorter useful life, like computers, are allowed a higher depreciation rate, enabling businesses to recover their cost faster.

Common Depreciation Rates (as per Block of Assets)

While the complete list is extensive, here is a table covering some of the most common asset blocks that small businesses and professionals encounter. It is crucial to correctly classify your assets into these blocks to apply the right rate.

Block of Asset	Depreciation Rate (%)
Residential Buildings	5%
General Buildings (Offices, Factories)	10%
Furniture & Fittings	10%
General Plant & Machinery	15%
Motor Cars (used for business)	15%
Computers & Laptops (including software)	40%
Intangible Assets (Patents, Copyrights, Trademarks)	25%

Actionable Tip: The rates and classifications can be subject to amendments by the government. For a comprehensive and updated list of all assets and their prescribed rates, it is always advisable to refer to the official Income Tax Department website.

Special Rules and Conditions You Must Know

Beyond the basic framework of asset blocks and the WDV method, the Income Tax Act includes several special rules and conditions that can significantly impact the amount of depreciation you can claim in a given year. These nuances are designed to address specific scenarios, such as the timing of an asset’s purchase or the nature of the business activity. Ignoring these provisions can lead to incorrect tax calculations and potential issues with the tax department. Therefore, it is vital for every taxpayer to be aware of these specific rules to ensure full compliance and optimize their tax benefits.

The 180-Day Rule (Half-Rate Depreciation)

This is one of the most critical rules affecting new assets. If you acquire a new asset during a financial year and it is put to use for less than 180 days in that same year, you are only entitled to claim 50% of the normal depreciation rate for that asset in its first year. The full depreciation rate can be applied from the subsequent year onwards. This rule prevents taxpayers from claiming full-year depreciation on assets purchased late in the financial year.

Example: Suppose you buy a new laptop for your business on December 1, 2023, for ₹80,000. The normal depreciation rate is 40%. Since it was used for less than 180 days in the financial year 2023-24 (ending March 31, 2024), you can only claim depreciation at half the rate (20%). Your depreciation claim for that year would be ₹80,000 * 20% = ₹16,000, instead of the full ₹32,000.

Additional Depreciation for Businesses

To encourage investment in the manufacturing sector, the Income Tax Act provides an additional benefit. Businesses engaged in manufacturing, production, or the generation/distribution of power can claim an additional depreciation of 20% on the cost of new plant and machinery acquired and installed. This deduction is over and above the normal depreciation allowed on the asset. The same 180-day rule applies here as well; if the new machinery is used for less than 180 days, the additional depreciation is restricted to 10% for the first year.

No Depreciation on Land

It is a universally accepted principle in both accounting and taxation that land is a non-depreciable asset. The value of land is generally expected to appreciate over time, not depreciate due to wear and tear. Therefore, the Income Tax Act explicitly disallows any claim for depreciation on the cost of land. If you purchase a property (building and land together), you must segregate the cost of the building from the cost of the land and claim depreciation only on the building component.

Depreciation for Salaried Individuals: Is it Possible?

A common question that arises is, “Can a salaried person claim depreciation?” This is an important query, as many salaried professionals use personal assets like laptops or vehicles for work-related tasks. The depreciation tax rules for individuals in India are quite clear on this matter. A salaried individual cannot claim depreciation as an expense against their salary income. Salary income is computed under its own specific head of income, which allows for standard deductions but does not permit claims for depreciation on personal assets, even if they are used to perform employment duties.

However, there is a significant exception. If a salaried individual also earns income from a business or profession on the side, they are required to report this income under the head “Profits and Gains from Business or Profession” (PGBP). In this scenario, they are absolutely eligible to claim depreciation on any assets that are used for that specific business or professional activity, and may also be able to opt for schemes like Section 44ADA: Presumptive Taxation for Professionals. This allows them to reduce their taxable income from that secondary source.

Example: Consider an architect who works a full-time job (earning salary income) but also takes on freelance design projects in her free time (earning professional income). She buys a high-end computer for ₹1,50,000, which she uses exclusively for her freelance work. She cannot claim depreciation against her salary. However, she can claim depreciation on the computer (at 40%) against her freelance income, thereby reducing the profit on which she has to pay tax. This is a key consideration in Filing Tax Returns for Freelancers and Consultants.

Conclusion

Navigating the rules of depreciation can seem daunting, but it is a powerful tool for effective tax management. By understanding its core principles, you can significantly reduce your taxable business income and improve your financial health. The key takeaways are to remember that depreciation is a valuable tax-saving deduction available for assets used in your business or profession. The Income Tax Act mandates the ‘Block of Assets’ concept and the Written Down Value (WDV) method for calculation, which requires careful tracking of asset values. Always be mindful of special provisions like the 180-day rule for newly purchased assets and the lucrative benefit of additional depreciation for manufacturing businesses. Ultimately, correctly understanding how depreciation is claimed under the Income Tax Act is essential for maintaining tax compliance and achieving financial efficiency for your enterprise.

Managing depreciation schedules, calculating correct values, and staying updated with tax laws can be complex and time-consuming. Don’t leave money on the table or risk non-compliance. Let the experts at TaxRobo handle your accounting and tax filings to ensure you maximize every deduction legally available to you. Contact us today for a consultation!

Frequently Asked Questions (FAQs)

FAQ 1: What happens if I sell an asset for more than the WDV of the entire block?
Answer: If the sale proceeds from one or more assets exceed the total Written Down Value of the entire block (including any new assets added during the year), the block’s value becomes zero or negative. The excess amount is treated as a Short-Term Capital Gain (STCG) and is taxed at the applicable slab rates for your business or profession, which falls under the broader topic of Understanding Capital Gains Tax in India.

FAQ 2: Is it mandatory to claim depreciation under the Income Tax Act?
Answer: Yes, judicial rulings have established that claiming depreciation is mandatory. It is not an optional deduction. The reason is that depreciation affects the calculation of the Written Down Value of the asset block, which is carried forward to subsequent years. Not claiming it would distort the value of the block and impact future tax calculations, so it must be calculated and deducted each year.

FAQ 3: Can I claim depreciation on an asset I bought on an EMI?
Answer: Yes, absolutely. You can claim depreciation on the full actual cost of the asset from the year it is put to use for your business. The mode of financing, whether through a loan, EMI, or full payment, does not affect your eligibility to claim depreciation. The key conditions remain ownership and usage for business purposes.

FAQ 4: What is the difference between depreciation under the Companies Act and the Income Tax Act?
Answer: The primary difference lies in their purpose and method. Depreciation under the Companies Act, 2013, is for financial reporting and aims to present a ‘true and fair’ view of a company’s profits. It is calculated based on the useful life of an asset, often using the Straight Line Method (SLM). In contrast, depreciation under the Income Tax Act, 1961, is solely for calculating tax liability. It uses prescribed rates and the mandatory Written Down Value (WDV) method on a ‘block of assets’ basis. The two amounts are almost always different.