Income tax depreciation – Section 32 of Income Tax Act

Depreciation is a positive decline in the real value of tangible assets due to consumption, wear and tear or obsolescence. It’s used all over the world to write off an asset used for business purpose over its life time and charge it to the profits of the business as it is used there. Two methods of depreciation are used;

  • Straight line method
  • Written down value method (wdv)

You can use either of the method and charge depreciation as a percentage on the value of the asset. Such amount will be reduced from profit and charged against the asset to reduce it’s value.  Income tax depreciation – How to claim it as per IT Act

Income tax depreciation is based on the written down value method. Only in the case of an undertakings engaged in generation and/or distribution of power uses straight line method.

Section 32 of Income tax act deals with depreciation. Under this section following conditions are laid down;

  • The asset must be owned by the assessee who wants to claim depreciation (co owners are also allowed to the extent of their ownership).
  • The asset must be used for the purpose of business or profession of the assessee. (where the asset is used partly in business and partly for personal use then the portion used for business should be allowed for depreciation)
  • Depreciation is not allowed on land.

Followings are the terms we need to understand before getting into depreciation calculation;

  • Block of asset – section 2(11)
  • Written down value – section 43(6)

Income tax Depreciation can be claimed for following assets (Block of asset)

Section 2(11) of income tax act define block of asset as a group of assets falling within a class of assets comprising;

Tangible Asset

  • Building
  • Machinery
  • Plant or Furniture

Intangible Asset

  • Know-how
  • Patents
  • Copyright
  • Trademark
  • Licenses
  • Franchises
  • Any other business or commercial rights of similar nature

in respect of which same percentage of depreciation is prescribed.

In the depreciation chart as prescribed by Income tax department you find 3 types of rate (i.e. 5%, 10% and 100%) for building. According to this definition now building will have three blocks based on the percentage even though building is a single asset.

Written down value – how to calculated WDV

Now you have two situations;

  • You acquired a new asset falling under a new block of asset
  • Acquired an asset but you already have that type of asset in your block of asset.

In the first case where you acquire a new asset the WDV will be the acquired value of the asset. In the second case, the wdv value of asset will be equal to acquisition value of asset minus deprecation charged to the asset till previous year.

Here is how WDV is calculated

Sr. No Particulars Amount in Rs. Amount in Rs.
1 Opening WDV of all the assets falling under one block XXXXXX
2 ADD: Asset acquired during the previous year and falling under the same block XXXXXX
3 Total (1+2) XXXXXX
4 LESS: Money received or payable for the assets sold, discarded, demolished, destroyed during the previous year to the extent it does not exceed the value arrived at serial no.3 (XXXXXX)
5 WDV of the block of asset (3-4) XXXXXX

 

When you charge depreciation you need to apply the percentage that is prescribed in depreciation chart on the WDV value of the block of asset arrived at serial no. 5.

Here is how WDV for a slump sale is calculated

Sr. No Particulars Amount in Rs. Amount in Rs.
1 Actual cost of assets falling in the same block XXXXX
2 LESS: Depreciation actually allowed so far (XXXXX)
3 WDV of the block for slump sale XXXXXX

When you charge depreciation you need to apply the percentage that is prescribed in the chart on the WDV value of the block of asset arrived at serial no. 3.

So to calculate depreciation you need to find out two things;

  • WDV of the block of asset and
  • Rate of depreciation of the block of asset

When you multiply the wdv value of the block of asset with the rate of depreciation you arrive at the income tax depreciation amount to be charged to profit and loss account and to be deducted from the asset.

Example: if you arrived at a WDV value of the block of asset “building” as Rs. 1, 00,000 then find out the rate of depreciation from the chart. Multiply the depreciation chart rate with the wdv value to arrive at depreciation amount. Suppose you found out the depreciation rate for your building as 10% then depreciation to be charged is Rs. 1, 00,000*10% = Rs. 10, 000.

Exceptions to the above calculations of depreciation

Followings are exception to our above discussion of income tax depreciation calculation;

  • WDV of the block of asset is reduced to zero even though the block of asset is not empty.

If the block of asset exists and the wdv value of such block of asset is reduced to zero then no depreciation will be charged on such assets.

  • Block of asset is empty or ceases to exist but the WDV value is not zero at the end of the previous year.

If the block of asset cease to exist but the WDV value is not zero then no depreciation will be charged on such assets.

  • Imported cars

If you bought a foreign made car (manufactured out of India) after 28th February 1975 but before 1st April 2001 then no depreciation will be allowed.

If you use the above imported car for business of running it on hire for tourist or for the purpose of business or profession outside India then normal depreciation as explained above can be claimed.

If you acquired the above imported car after 31st march 2001 then normal rate of depreciation will be allowed as a deduction.

  • Succession or amalgamation or  business re-organisation
  • Asset is put to use for less than 180 days

Relevant points for Income tax depreciation

  • From assessment year 2002-2003 onwards depreciation is mandatory and the assessee should claim it or else it will be deemed to have been allowed under section 32 irrespective of the claim made in the profit and loss account.

5 thoughts on “Income tax depreciation – Section 32 of Income Tax Act

  1. Ketan Jain

    I need help on WDV method for Income tax purpose used in JD Edwards and how we set up Depreciation formula with different ledger type in line with AA ledger type ? Can any one share me with set up copy or manual on Reducing balance method used in JD Edwards

    My Contact -8007999726

    Reply
  2. Nitin

    HI

    I am working in a society and i do know not about depreciation but i want to know about it because they gave me this work . our company charge depreciation according to income tax act . so can you help you help me on this matter . which book is better for it.

    Reply
  3. Saurabh Aggarwal

    If WDV on 1-4-2016 is Rs. 10,000. Asset ‘B’ is purchased for Rs. 5000 in same block on 1-6-2016. Asset ‘B’ is sold on 1-9-2016 for Rs. 2500. Whether 50% dep will allowable on the value of asset ‘B’ as the block exists.
    Please let me the WDV computation and calculation of dep

    Reply
    1. Raghunath Padwalkar

      saurabh aggarwal,
      asset must be present til 31 march i.e on the date of calculation of depreciation.
      in the above example,
      on the remaining 2500 the depreciation will be on the rates of that asset as prescribed.

      Reply

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