Income Tax Depreciation rate for is

Overview

Income Tax Depreciation rate for Intangible Assets is 25%. Depreciation is a provision permitted under the Income Tax Act. It allows taxpayers to claim a deduction for the decrease in the actual value of both tangible and intangible assets that are utilized in their business or profession.

Understanding 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 deduction in the profit and loss statements of an entity using depreciable assets and the Income tax Act allows deduction based on Written Down Value (WDV) method.

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.

The Concept of “Blocks of Asset”

Depreciation is calculated based on the Written Down Value (WDV) of a Block of assets. A Block of assets refers to a group of assets that fall within a specific asset class, which includes:

• Tangible assets such as buildings, machinery, plants, or furniture.
• Intangible assets like know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of a similar nature.

The classification of the block of assets depends on factors like the asset's lifespan, nature, and usage. Additionally, the applicable depreciation rate for each asset class must be considered when grouping assets. Each class of assets with the same depreciation rate is treated as a single block.

Under the Income Tax Act, individual assets lose their separate identity, as depreciation is calculated on the entire block of assets, not on each asset separately.

Eligibility Criteria for Claiming Depreciation

1. Ownership: The assets must be owned, either fully or partially, by the taxpayer.
2. Business Use: The assets must be used for the taxpayer’s business or profession. If the assets are used for both business and personal purposes, depreciation will be allowed only for the proportion of business use. The Income Tax Officer has the authority to determine the proportion of depreciation that can be claimed under Section 38 of the Act.
3. Co-ownership: Co-owners are eligible to claim depreciation based on their respective share of ownership in the asset.
4. Exclusions: Depreciation cannot be claimed on goodwill or the cost of land.
5. Mandatory Depreciation: Depreciation has been mandatory since the Assessment Year (A.Y.) 2002-03, and it will be deemed to have been allowed as a deduction, regardless of whether the taxpayer claims it in their profit and loss account. The taxpayer can carry forward the Written Down Value (WDV) after adjusting for depreciation.
6. Presumptive Taxation Scheme: If the taxpayer opts for the presumptive taxation scheme, the deemed profit is considered to have accounted for depreciation.
7. Depreciation Rates: The depreciation rates under the Income Tax Act differ from those under the Companies Act, 1956. Only the depreciation rates specified in the Income Tax Act are applicable, regardless of the rates applied in the books of accounts.

Definition of Written Down Value (WDV) of Assets

According to Section 32(1) of the Income Tax Act, depreciation must be calculated at the prescribed percentage on the Written Down Value (WDV) of the asset, which is determined based on the asset's actual cost. To properly compute depreciation, it's crucial to understand the terms "WDV" and "Actual Cost."

WDV under the Income Tax Act is defined as follows:

• For assets acquired in the current financial year, the actual cost of the asset is treated as the WDV.
• For assets acquired in earlier years, the WDV is calculated by subtracting the depreciation actually allowed under the Income Tax Act from the actual cost of the asset.

Depreciation Allowable Amount

Amount of Depreciation Allowed:

Depreciation is calculated using the Written Down Value (WDV) method. The depreciation rates are specified in Appendix 1 of the Income Tax Act.

• Power Generation Undertakings: Companies involved in power generation or its generation and distribution have the option to claim depreciation either under the WDV method or the Straight-Line method. This option must be exercised before the due date for filing the return.
• Amalgamation or Demerger: In the event of an amalgamation or demerger, the total depreciation allowance is divided between the amalgamating and amalgamated companies or the demerged and resulting companies. The total depreciation is calculated as though the amalgamation or demerger did not occur. The apportionment is based on the period for which the assets were used by each company.
• Finance Lease Transactions: In a finance lease, the lessee must capitalize the leased assets in their books according to AS-19 (the Accounting Standard on Leases). Since the lessee exercises ownership-like rights over the assets, they are eligible to claim depreciation on these assets.

Rate of Depreciation for FY 2024-25 on Frequently Used Assets

Example

For example, the calculation of depreciation will proceed as follows:

Depreciation Calculation Techniques

Depreciation calculation methods and the useful life of assets can vary depending on the type of asset and the industry. These methods may differ for accounting and tax purposes as well. The two most commonly used depreciation methods are the Straight Line Method (SLM) and the Written Down Value (WDV) Method.

Apart from the depreciation rates, the key distinction in depreciation calculations between the Income Tax Act and the Companies Act lies in the method employed.

Depreciation Methods under the Companies Act, 1956 (Based on Prescribed Rates):

• Straight Line Method
• Written Down Value Method

Depreciation Methods under the Companies Act, 2013 (Based on Asset Useful Life):

• Straight Line Method
• Written Down Value Method
• Unit of Production Method

Depreciation Methods under the Income Tax Act, 1961 (Based on Prescribed Rates):

• Written Down Value Method (Block-wise)
• Straight Line Method for Power Generating Unit

Method of Depreciation as per Companies Act

The Companies Act, 2013, provides the following methods for calculating depreciation:

1. Straight Line Method (SLM)

The Straight Line Method is the most commonly used method under the Companies Act. In this method, the same amount of depreciation is charged each year over the useful life of the asset.

• Formula:

Depreciation: Cost of Asset- Residual Value/ Useful Life




Here, the cost of the asset is divided evenly across its useful life. This method is easy to apply and ideal for assets that have a consistent usage pattern over their lifespan.




2. Written Down Value Method (WDV)

Under the Written Down Value method, a fixed percentage of depreciation is applied to the reducing balance of the asset every year. This means that the depreciation amount decreases over time as the value of the asset declines.

• Formula:

Depreciation: Opening WDV * Depreciation ratee




This method is typically used for assets that lose value more quickly in the earlier years of their useful life.

Why is there a difference between depreciation charged under the Income Tax Act and the Companies Act?

Depreciation is claimed by businesses for two primary reasons:

• Accounting Purposes
• Taxation Purposes

For accounting, depreciation addresses two key concepts: the reduction in asset value over time and the allocation of the asset’s cost across its useful life. According to the Companies Act, 2013, depreciation is calculated based on the estimated useful life of the asset, rather than a fixed depreciation rate. The list of useful lives can be found in the reference chart provided by the Ministry of Corporate Affairs: Schedule 2.

From a taxation perspective, depreciation is used to lower the company’s taxable income, thereby reducing its tax liability. As per the Income Tax Act of 1961, businesses are allowed to claim depreciation as an expense when determining income under the "Income from Business and Profession" category. Depreciation is calculated based on asset blocks, according to the rates specified in the Income Tax Act, starting from the year the asset is first used.

Because the depreciation methods differ for accounting and tax purposes, the depreciation amounts calculated under the Income Tax Act and the Companies Act are not the same. This discrepancy creates a timing difference, which must be accounted for in the financial statements as either a deferred tax asset or a deferred tax liability.

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