What do you mean by Depreciation?

The concept of depreciation is used for the purpose of writing off the cost of an asset over its useful life. Depreciation is a mandatory deduction in the profit and loss account of an entity using depreciable assets and the act allows deductions either using the Straight Line method (SLM) or Written Down Value (WDV) method.

The calculation of depreciation under the WDV method is widely used. However, in case the undertaking is engaged in power generation or its generation and distribution, there is an option to choose the straight line method.

CONDITIONS TO CLAIM DEPRECIATION?

Conditions to claim depreciation:

Assets should be used for business/ profession purposes (active or passive).
Assessee should be owner of such asset (wholly or partly).

Notes:

	Depreciation is allowed if assessee is beneficial owner.
	In case of lease, depreciation is always claimed by lessor whether it is financial lease or operating lease.
	In case of Hire Purchase, assessee gets the ownership only after the payment of last installment, but he can claim depreciation from beginning assuming assessee is owner from the beginning.
	Depreciation on asset partially owned by the assessee shall be allowed to him of his share in asset.
	In case of standby machinery and emergency spares, the depreciation shall be allowed even if they are ready for use & not put to use.
	Case law: ICDS ltd (2013) (SC): Depreciation shall be allowed to lessor even though the asset is registered in the name of lessee. As per lease agreements: The lessor is the exclusive owner of vehicle at all points of time. The lessor is empowered to repossess the vehicle, in case the lessee committed default. The lessor had a right of inspection of the vehicle at all the times. At the end of the lease period, the lessee was obliged to return the vehicle to the lessor. It can be seen that proof of ownership lies in the lease agreement itself, which clearly points in the favour of the lessor.

CLASSIFICATION OF DEPRECIABLE ASSETS

The depreciable asset can be classified into two categories:

Intangible Assets.

Tangible Assets

Building.
Furniture.
Plant & Machinery.

RATES OF DEPRECIATION (WDV Method) (Block of Asset System)

The rate of depreciation as per WDV method is as follows:

S.NO	ASSETS	Rate
	Buildings (include roads, bridges, wells and tubewells) Residential use (except hotels) Other use Temporary or Wooden Structure	5% 10% 40%
	Furniture & Fittings (include electrical fittings like fans, wires, switches etc.)	10%
	Plant & Machinery (as per note 1)	Note 1
	Intangible Assets	25%

NOTE 1:

Motor Vehicles	15%
Motor Vehicles (Acquired & put to use between 23.08.19 to 31.03.20)	30%
Motor Vehicles used in Hire Business	30%
Motor Vehicles used in Hire Business (Acquired & put to use between 23.08.19 to 31.03.20)	45%
Ships, Vessels, Speed Boats	20%
Aero planes, Aero engines	40%
Computer & Computer Software	40%
Pollution Control Equipment	40%
Windmills & its equipment installed before 01/04/14	15%
Windmills & its equipment installed after 01/04/14	40%
Renewable Energy Devices (include E-Vehicles)	40%
Oil Wells	15%
Books owned by assessee carrying on a profession being annual publication	100%
Books owned by assessee carrying on a profession not being annual publications	60%

NOTE 2:

	It is mandatory for all the assessee to claim depreciation.
	EPBAX & Mobile phones are not considered as computers as per Income Tax Act, hence depreciation will be levied @ 40%.
	Intangible assets includes know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature but other than goodwill of business and profession i.e. depreciation is not leviable on business and profession.
	Depreciation rate of computer accessories i.e. UPS, Printers, Scanners is also 40% similar to depreciation rates for computers.
	Depreciation is allowed only when the asset is actually put to use & not ready to use.
	As per Section 49(3) plant includes ships, vehicles, books, scientific apparatus & surgical equipment’s used for business or profession but does not include Tea bushes, livestock, building, furniture.

METHOD OF DEPRECIATION

There are two methods of depreciation only Written Down Value (WDV) and Straight Line Method (SLM) and can be opted by assessee as follows: -

TYPE OF ASSESSEE	DEPRECIATION METHOD
Business of Generation or Generation & Distribution of power	They have an option to follow straight line method or written down value method.
All other assessee’s	They have to follow only written down value method

SYSTEM OF DEPRECIATION

WDV METHOD: For Written Down Value method of depreciation Block of Asset System shall apply.

SLM METHOD: For Straight Line Method of depreciation Individual asset system shall apply (Power units).

Note 1: “Group of Assets” having same rate of depreciation within the same class of Assets; Block of Assets = Same rate + same class

Note 2: Depreciation calculated on Individual asset – Same as aacounts.

FREQUENTLY ASKED QUESTIONS

Q. Is it Mandatory to deduct depreciation for tax purposes?

A. Depreciation must be deducted compulsorily, regardless of whether the taxpayer has claimed it when computing their total income.

Q. Can depreciation be claimed on assets used partially for personal purposes?

A. Yes, Depreciation can be claimed on assets used partially for business purposes and partially for personal purposes. However, only the proportion of asset used for purpose of business can be claimed as deduction from total income.

Q. Are there any assets exempt from Depreciation?

A. Certain assets like Land, Goodwill and assets not used for business purposes are not eligible for depreciation under the Income Tax Act.

DEPRICIATION U/S 32 OF INCOME TAX ACT