Complete Guide on Depreciation as per Income Tax – Section 32

If you don’t know what is depreciation then you can read about it here – What is depreciation and common methods/types of depreciation.

Basics of Depreciation

• Depreciation is allowable as expense in Income Tax Act, 1961 on basis of block of assets on Written Down Value (WDV) method. Depreciation on Straight Line Method (SLM) is not allowed.
• Block of assets means group of assets falling within a class of assets for which same rate of depreciation is prescribed.
• GOODWILL & LAND is not eligible for depreciation.
• Depreciation is allowable only to the owner of the asset.
  > A lessee is not the owner of the property therefore depreciation is allowed only to lessor. If furniture or any part is constructed by the lessee then depreciation on that is allowed to lessee.
  > If property purchased under hire purchase contract then depreciation is allowed to the purchaser.
  > In case of co-ownership, depreciation is allowable in ratio of their ownership.

• Asset must be used for the purpose of business or profession.
• If the assesse doesn’t claim the amount of depreciation as deduction, even then the amount of WDV carried forward to next year is reduced by the depreciation amount.
• If profit is calculated on presumptive basis under section 44AD or 44AE then such reported profit is considering after all the expenses and depreciation allowable under section 32.
• Depreciation under Income Tax Act is different from that of Companies Act, 1956. Therefore dedpreciation rates prescribed under income tax is only allowable whatever the depreciation is charged in books of accounts.
• If a new addition is made in a existing asset then it is consider as an asset if it increase the capacity of the existing asset or reduce per unit cost otherwise it should be treated as an expense.
• If there are some spare parts/machines and they are not actually used, depreciation is allowable on them because they are used for purpose of business/profession.
• Lower Depreciation – Depreciation can be claimed at lower rate as per income tax act. But for the next year your wdv will be considered as reduced by the percentage of depreciation prescribed. For eg if an asset is of Rs. 1 lakh and 80% depreciation is prescribed for the asset and you charge only rs. 30,000 as depreciation, in this case next year wdv will be considered as rs. 20,000 only not rs. 70,000.
• Depreciation is not allowed on GST component if the person wants to claim Input Tax Credit of such GST paid.

Also Read – Meaning of Depreciation

Depreciation in the year in which asset is purchased

• Deprecation is allowed only if the asset is put to use in the year of purchase.
• Degree of utilisation of assets will not be considered while determining whether the asset is put to use or not. For example if the asset is used for trial run then it is considered the asset is put to use.
• If asset is put to use for less than 180 days then amount equal to 50% of the amount calculated using normal depreciating rates is allowed as depreciation.
  i.e Asset put to use on or before 3rd oct of the year (4th oct in case of leap year) then 100% depreciation is allowed, otherwise 50%.
• Deprecation will be allowed on the basis of block of asset method.

Depreciation in subsequent years

• If asset is not put to use in the year of purchase or put to use for less than 180 days even then full depreciation is allowed in the subsequent years if the below condition satisfies.
• Depreciation is allowed on whole block of asset even if only a single asset in that block is used during the year at any point of time.

Calculation of Depreciation

Use our depreciation calculator.

• WDV of an asset = Actual cost to the assesse – All depreciation actually allowed to him (included unabsorbed depreciation, if any)
• WDV of Block of Assets

Aggregate of WDV of all the assets falling within
that block at the beginning of the year                                                                           XXX

Add: Actual cost of any assets falling within block
acquired during the previous year                                                                                   XXX

Less: Money received or receivable in respect of any
asset in the block which is sold, discarded, demolished
or destroyed during the previous year                                                                            XXX

WDV at the end of the year                                                                                               XXX

Less: Depreciation at block rate (if WDV at the end of year is positive)                XXX

Closing value of the block of the asset at the end of the year                                     XXX

If the amount of WDV comes at a negative amount then no depreciation is allowed and the amount will be considered as capital gain and the closing WDV will be zero.

If such amount is positive and no asset exists in the block then such amount will be treated as short term capital loss and no depreciation is alllowed.

Calculation of purchase cost of an asset

Calculation of capital gain on sale of depreciable asset

The capital gain/loss from depreciable assets is always treated as short term irrespective of the fact that asset is held for more than 3 years or not.

Calculation of Capital Gain/Loss

Aggregate of WDV of all the assets falling within
that block at the beginning of the year                                                                                XXX

Add: Actual cost of any assets falling within block
acquired during the previous year                                                                                       XXX

Less: Money received or receivable in respect of any
asset in the block which is sold, discarded, demolished
or destroyed during the previous year                                                                                 XXX

WDV at the end of the year                                                                                              XXX

If the above calculations results in a negative WDV then such amount will be considered as short term capital gains. If such amount is positive and no asset exists in the block then such amount will be treated as short term capital loss.

Rate of depreciation

See this list for all depreciation rates.

Additional depreciation under section 32(1)(iiA)

Additional depreciation shall be allowed if following condition are fulfilled by the assessee:

1. Additional deprecation is allowed only on new machinery or plant excluding ships and aircraft which has been purchased and installed after 31-03-2005
2. The assessee shall be engaged in the business of manufacturing and production of any article or thing (computers used for data processing in industrial premises are eligible for additional depreciation). From financial year 2016-17 additional depreciation is also allowed to assessees engaged in business of generation and distribution of power.
   Printing and Publishing is also considered as manufacturing.
3. Depreciation @ 20% of actual cost of assets is allowed as additional depreciation.
4. If assesse is engaged in production or manufacturer of any article or thing on or after 1st Apr, 2015 in any notified backward area of Andhra Pradesh, Bihar, Telangana, West Bengal and acquires and installs any new machinery or plant during 1st April, 2015 to 31st March 2020 then additional depreciation is allowed at the rate of 35%.
5. However if the asset is put to use for less than 180 days then additional deprecation will be allowed at half of actual rate i.e 10% or 17.5% as the case may be.
   From financial year 2015-16, if additional depreciation is allowed in year of put to use at half of the rate then remaining half depreciation is allowed in the succeeding year.
6. Specific cases in which depreciation is not allowed

• Second hand plant and machinery – Plant and machinery which, before installation by assessee, was used whether inside and outside India by any person.
• Any office appliance or road transport vehicle.
• Any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of guest house
• Any plant and machinery, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing income chargeable under the head “Profits and gains of business or profession” of any on previous year.

Unabsorbed depreciation

If there is a loss under business and profession and the reason for such loss is depreciation, then it is called unabsorbed deprecation and it shall be allowed to be carried forward.

Additional Points

1. The depreciation shall be carried forward even the business/profession to which is relate even of the business/profession not in existence.
2. Return of loss is not required to be submitted for carry forward of unabsorbed depreciation
3. The assesse should set off brought forward losses in the following manner: –
   • First of all current year depreciation will be adjusted.
   • Then brought forward business losses will be set off (speculative or non-speculative)
   • Then unabsorbed depreciation will be set-off against business income.
4. Unabsorbed depreciation can be carried forward for indefinite number of years.
5. Unabsorbed depreciation can be set off from any head of income other than Salary and Capital Gain in any year.

Examples for calculation of unabsorbed depreciation

• Example 1

Profit from business before depreciation                      4,00,000

Depreciation                                                                       6,00,000

Unabsorbed depreciation                                                2,00,000

• Example 2

Profit from business before depreciation                     4,00,000

Depreciation                                                                      6,00,000

Income from house property                                         1,00,000

Unabsorbed depreciation                                               1,00,000

• Example 3

Loss from business before depreciation                      4,00,000

Depreciation                                                                      6,00,000

Income from house property                                         1,00,000

Unabsorbed depreciation                                               6,00,000

Carried forward business loss                                        3,00,000

WDV in case of slum sale

WDV of Block of assets                                                                                           XXX

Less: Deduction on account of slump sale                                                         XXX

WDV of block of assets eligible for depreciation                                              XXX

Deduction on account of slump sale

Actual cost of assets falling in the block, which is transferred by slump sale        XXX

Less: Depreciation that would have been allowed if that asset was the only
One in the block                                                                                                                  XXX

Deprecation on account of slump sale                                                                           XXX

Apportionment in case of succession/amalgamation/demerger of buisness

Depreciation shall be allowed as per the following provision in case of succession of firm or proprietary concern by a company or in case of amalgamation or demerger of a company :-

1. The total amount of depreciation allowed to both the company shall not exceed the amount if there were no such succession or conversion
2. Depreciation will be apportioned between the predecessor and the successor in the ratio of number of days for which the assets were used by them