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DEPRICIATION

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DEPRICIATION

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Depreciation is a method used in accounting and taxation to allocate the cost of a fixed asset

over its useful life. It reflects the gradual wear and tear, obsolescence, or decrease in value of an
asset as it is used over time.

In India, depreciation is governed by the Income Tax Act, 1961, and businesses are allowed to
claim depreciation on capital assets to reduce their taxable income. This helps in lowering the tax
burden on businesses and individuals.

Types of Depreciation in India:

1. Straight Line Method (SLM):


o Under this method, the depreciation expense is the same amount each year.
o Depreciation is calculated by dividing the cost of the asset by its useful life.

Formula:

Annual Depreciation=Cost of AssetUseful Life of Asset\text{Annual Depreciation} = \


frac{\text{Cost of Asset}}{\text{Useful Life of
Asset}}Annual Depreciation=Useful Life of AssetCost of Asset

2. Written Down Value Method (WDV):


o Depreciation is calculated on the reducing balance of the asset value each year,
i.e., on the value after subtracting the depreciation of the previous year.
o This method is more common in India and is applicable for tax purposes.

Formula:

Depreciation=W.D.V. at the beginning of the year×Depreciation Rate\text{Depreciation}


= \text{W.D.V. at the beginning of the year} \times \text{Depreciation
Rate}Depreciation=W.D.V. at the beginning of the year×Depreciation Rate

Depreciation under the Income Tax Act:

Under Section 32 of the Income Tax Act, taxpayers can claim depreciation on assets like
buildings, machinery, plant, vehicles, furniture, etc., based on a block of assets.

1. Block of Assets:

 A block of assets refers to a group of similar assets, such as machinery, furniture, etc.,
that are categorized under different classes.
 The depreciation is calculated based on the total value of assets in a block, not on
individual assets.

2. Depreciation Rates:

 Buildings: 10% (if not used for residential purposes).


 Furniture and Fixtures: 10% per annum (using WDV method).
 Vehicles: 15% per annum.
 Plant and Machinery: 15% per annum.
 Computers/Software: 40% per annum (using WDV method).

These rates may vary for specific industries and types of assets.

3. Additional Depreciation:

 Section 32(1)(iia) allows an additional depreciation of 20% on the cost of new plant and
machinery (other than ships and aircraft) if the machinery is used for business purposes.

4. Depreciation on Intangible Assets:

 For intangible assets like patents, copyrights, trademarks, etc., a depreciation of 25% per
annum is allowed under Section 32.

Important Points:

 No Depreciation on Land: Land is not depreciable since it does not have a limited
useful life.
 Block of Assets: Depreciation is calculated on the total value of assets in the block, and
the same rate is applied to all assets in that block.
 Adjustments in case of Sale: If an asset is sold, the sale proceeds are deducted from the
block, and depreciation is adjusted accordingly.

Example of Depreciation Calculation (WDV method):

Let’s assume you purchased machinery worth ₹100,000, and the depreciation rate is 15% under
the WDV method. Here’s how depreciation would work:

 Year 1:
Depreciation = ₹100,000 × 15% = ₹15,000
WDV at the end of Year 1 = ₹100,000 - ₹15,000 = ₹85,000
 Year 2:
Depreciation = ₹85,000 × 15% = ₹12,750
WDV at the end of Year 2 = ₹85,000 - ₹12,750 = ₹72,250

This process continues until the asset’s WDV reduces to zero or its useful life ends.

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