Depreciation Rate as per Income Tax Act

According to the Income Tax Act of 1961, it is legal for taxpayers to account for the depreciation rate of an asset. Where the depreciation rate is the rate at which a value of a tangible or intangible asset is reduced over a period of time, the rate is levied based on the asset class.

What is Depreciation?

Depreciation is a process where the reduced value of an asset is accounted for in the books during its operational cycle. The deductions made in the assets are reflected in the profit and loss statement. The depreciated value of the assets can be found by employing various methods such as the straight-line method and written down method. The Act also allows additional depreciation with respect to exceptional cases. A higher depreciation rate diminishes the tax liability of businesses as they can stimulate their capital expenditure. The depreciation rate levied on the asset varies in accordance with the Income Tax Act. The assets are often segmented into the Block of Assets.

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Block Of Assets

The block of assets refers to a bracket of assets that can be positioned into the same class. Generally, they fall under the following categories:

Tangible Assets: refer to assets that have a physical existence. For example, machinery, furniture, plants, etc.

Intangible Assets: refers to assets that don’t have a physical existence but are employed for business operations. For example, copyrights, patents, trademarks, etc.

This classification of the assets into different blocks enables businesses to decipher the depreciation rate levied on their asset. They are just required to refer to the block where their asset features and write it in their accounting books accordingly. It is to be noted that the under the Income Tax Act, the assets lose their individuality as the depreciation rate on the assets is reduced based on the rate of the block in which they fall, not individually.

Depreciation Rates on Most Commonly Used Assets (Income Tax Act, 1961)

The following table showcases the depreciation rate as per Income Tax Act, 1961 charged on assets.

Asset Block	Type of Asset	Rate of Depreciation
Buildings	Residential Buildings barring boarding houses and hotels	5%
Buildings	Boarding Houses and Hotels	10%
Buildings	Temporary construction structures	40%
Plant and Machinery	Furniture/ Electrical fittings	10%
Plant and Machinery	Automobiles excluding those who utilised in the business for operational purposes after August 23, 2019 but before April 1, 2020; and the automobiles put to use before April 1, 2020	30%
Plant and Machinery	Lorries, taxis and motor buses working for utilised in the business for hire	30%
Plant and Machinery	Lorries/taxis/motor buses used in a business of running them on hire purchased on or after August 23, 2019 but before the April 1, 2020 and is put to use before April 1, 2020	45%
Plant and Machinery	Computer and computer softwares	40%
Plant and Machinery	Books owned by a professional that are annual publications	100%
Plant and Machinery	Books owner by a professional that are not annual publications	60%
Plant and Machinery	Books owned by the utilised in the business of lending libraries	100%
Intangible Assets	Trademarks, franchise, patents, license, copyright, know-how or other commercial or business rights of similar nature	25%

Depreciation Rates as per the Income Tax Act (Comprehensive Chart)

The following table showcases the depreciation rate as per Income tax Act that is further segmented into two parts.
Part A – Exhibits the depreciation rate charged on the Tangible Assets

Part B – The depreciation rate charged on the Intangible Assets

Asset Class	Asset Type	Rate of Depreciation
Tangible Assets
Buildings	1. Residential Real Estate (Excluding boarding houses and hotels)	5%
	2. Residential properties that are not covered in subitems 1 (above) and subitems 3 (below)	10%
	3. Buildings procured on or after September 1, 2002, for installing plant and machinery forming part of a water treatment system or water supply project and which are used for the purpose of the business of providing infrastructure facilities under clause (i) of subsection (4) of section 80-IA	40%

 

	4. Purely temporary erections like wooden structures	40%
Furniture and Fittings	Furniture and fittings including electrical fittings	10%
Plant and Machinery	1. Plant and machinery excluding those covered by sub-items (2), (3), and (8) below	15%
	2. Motor cars, excluding those used in a business of running them on hire, procured or put to use on or after April 1, 1990,	15%
	3. (i) Motor cars, other than those used in a business of running them on hire, acquired on or after the 23rd day of August 2019 but before the 1st day of April 2020 and is put to use before the 1st day of April 2020.	30%
	3. (ii) Aeroplanes and Aero Engines	40%
	(a) Motor taxis, motor buses and motor lorries used in a business of running them on hire	30%
	(b) Motor buses, motor lorries and motor taxis used in a business of running them on hire, acquired on or after the 23rd day of August 2019 but before the 1st day of April 2020 and is put to use before the 1st day of April 2020.	45%
	3(iii) Commercial vehicle which is procured by the assessee on or after October 1, 1998, but before April 1, 1999, and is used for any period of time prior to April 1, 1999, for the purpose of profession or business in agreement with the third proviso to clause (ii) of sub-section (1) of section 32	40%
	3 (iv) New commercial vehicle procured on or after April 1, 1999, but before April 1, 2000, in replacement of condemned vehicle of more than 15 years of age and is put to use prior to April 1, 2000, for the purposes of profession or business in agreement with the second proviso to clause (ii) of sub-section (1) of section 32	40%
	3 (v) New commercial vehicle procured on or after April 1, 2001, but before April 1, 2002, and is put to use before April 1, 2002, for the purpose of profession or business	40%
	3 (vi) New commercial vehicle which is acquired on or after the 1st day of January, 2009 but before the 1st day of October, 2009 and is put to use before the 1st day of October, 2009 for the purposes of business or profession	40%
	3 (vii) Moulds used in plastic and rubber goods factories
	3 (viii) Air pollution control equipment
	Felt-filer System
	Electrostatic precipitation systems
	Scrubber
	Counter current / packed bed / venture / cyclonic scrubbers
	Dust collector systems
	Evacuation system and ash handling system
	3 (ix) Water pollution control equipment	40%
	3 (x) (a) Solid waste, control equipment Cryolite / mineral / lime / caustic / chrome recovery system (b) Resource recovery and solid waste recycling systems
	Aerated detritus chambers (including air compressor)
	Mechanical screen systems
	Mechanically skimmed grease and oil removal systems
	Flash mixing equipment and chemical feed systems
	Mechanical reactors and mechanical flocculators
	Mechanically aerated activated sludge / diffused air systems
	Biofilters
	Aerated lagoon systems
	Air floatation systems
	Methane
	recovery anaerobic digester systems
	Steam/air stripping systems
	Marine outfall systems
	Urea Hydrolysis systems
	Activated carbon column
	Disc or rotating biological contractor
	Marine outfall systems
	Ion exchange resin column
	Centrifuge for dewatering sludge
	3 (x) (a)Solid waste, control equipment Cryolite/mineral/lime / caustic / chrome recovery system (b) Resource recovery and solid waste recycling systems	40%
	3. (xi) Plant and machinery used in semiconductor industry covering all integrated circuits (ICs) (not including hybrid integrated circuits) ranging from small scale integration (SSI) to large scale integration / very large scale integration (LSI/VLSI) as also discrete semiconductor devices like diodes, triacs, thyristors, transistors, etc., except those covered by entries (viii), (ix), (x) of this sub-item and sub-item (8) below	30%
	3. (xi) Life Saving medical equipment
	D.C Defibrillators for pacemakers and internal use
	Colour Doppler
	Haemodialysis
	Cobalt therapy unit
	Vascular Angiography System including Digital subtraction Angiography
	Heart lung machine
	Spect Gamma Camera
	Magnetic Resonance Imaging System
	Ventilator used with anaesthesia apparatus
	Ventilator except those used with anaesthesia
	Surgical laser
	Fibreoptic endoscopes including audit resectoscope/paediatric resectoscope, arthoscope, peritoneoscopes, fibreoptic flexible nasal pharyngo, microaryngoscope, video laryngo, fiberoptic flexible laryngo bronchoscope.
	Bronchoscope, video oescophago gastroscope, video oescopghago bronchoscope, fibreoptic flexible oesophago gastroscope
	4. Containers made of plastic or glass used as refills	40%
	5. Computers including computer software	40%
	6. Plant and machinery used in the textile industry’s processing, weaving, and garment sector, which is bought under TUFS on or after April 1, 2001, but before April 1, 2004, and is put to use before April 1, 2004,	40%
	7. Plant and machinery procured and installed on or after September 1, 2002, in a water treatment system or a water supply project and put to use for the purpose of business of providing infrastructure facility under clause (i) of sub-section (4) of section 80-IA	40%
	8 (i) Wooden parts used in artificial silk manufacturing machinery	40%
	(ii)  Cinematograph films – bulbs of studio lights	40%
	9. Mines and quarries	40%
	(a)Tubs, winding ropes, haulage ropes, and sand stowing pipes	40%
	(b)  Safety lamps	40%
	(c) Saltworks – Salt pans, reservoirs, and condensers, etc., made of earthy, sandy or clayey material or any other similar material	40%
	10. Flour mills, rollers	40%
	Iron and steel industry – Rolling mill rolls
	Sugar works – Rollers
	11. Energy saving devices, being—	40%
	A. Specialised boilers and furnaces:
	(a)  Ignifluid/fluidized bed boilers
	(b)  Flameless furnaces and continuous pusher type furnaces
	(c)  Fluidized bed type heat treatment furnaces
	(d) High-efficiency boilers (thermal efficiency higher than 75 percent in case of coal-fired and 80 percent in case of oil/gas-fired boilers)
	B. Instrumentation and monitoring system for monitoring energy flows:
	(a)  Automatic electrical load monitoring systems
	(b)  Digital heat loss meters
	(c)  Micro-processor based control systems
	(d)  Infra-red thermography
	(e)  Meters for measuring heat losses, furnace oil flow, steam flow, electric energy and power factor meters
	(f)  Maximum demand indicator and clamp on power meters
	(g)  Exhaust gases analyser
	(h)  Fuel oil pump test bench
	C. Waste heat recovery equipment:	40%
	(a)  Economisers and feed water heaters
	(b) Recuperators and air pre-heaters
	(c)  Heat pumps
	(d)  Thermal energy wheel for high and low-temperature waste heat recovery
	12. Co-generation systems:	40%
	(a)  Back pressure pass out, controlled extraction, extraction-cum-condensing turbines for co-generation along with pressure boilers
	(b)  Vapour absorption refrigeration systems
	(c)  Organic Rankine cycle power systems
	(d)  Low inlet pressure small steam turbines
	13. Electrical equipment	40%
	(a)  Shunt capacitors and synchronous condenser systems
	(b)  Automatic power cut-off devices (relays) mounted on individual motors
	(c)  Automatic voltage controller
	(d) Power factor controller for AC motors
	(e) Solid state devices for controlling motor speeds
	14. Burners	40%
	15. Renewable Energy Devices	40%
	16. Books owned by assessee	40%
	17. Ships	20%
PART B – Intangible Assets
	Know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature not being goodwill of businesses of profession	25%

Types of Depreciation

Under the Income Tax Act, the following types of depreciation allowance are viable for the taxpayer.

• Standard depreciation shall be applied to the assets featured in a similar block.
• Plant and machinery are eligible for an additional depreciation on assets:
• That is obtained post 31.3.2005 and utilised in producing products or assets for generation and distribution of power.
• That is acquired between 31.3.2015 and 1.4.2020 by a taxpayer whose business operations are established in the backward areas of states such as Andhra Pradesh, Bihar, Telangana, and West Bengal.
• Standard Asset-wise depreciation of an operation for generation or distribution of power.

Techniques to Compute Depreciation

The techniques to compute the depreciation on the assets vary with respect to the type of the assets and even the industries. It can also vary with respect to taxation purposes. The two main techniques employed to calculate asset depreciation are the straight-line method and the Written down value method. Other than the depreciation rates, these methods employed are the reason for the varying depreciation of assets under the Income Tax Act.

Straight line method

 In this method, the asset obtained is consistently expensed from the time it was acquired. The asset’s value is reduced by the asset’s salvage value calculated. The depreciation in this method is accounted for annually. This consistent devaluation of the asset is done until the valuation of the assets is at scrap value.

Formulae for Calculating Depreciation by Straight-Line Method

The computation of the depreciation is done after employing the following formulae:

(Original Cost- Residual Value)/ Useful Life

Here,

Original Cost is the price paid for the obtainment of the assets.

Residual value is the expected value of the asset at the end of its operational life.

Useful life is the expected operational tenure of the asset. It is generally valued at the number of years with periods.

This method has been identified as one of the most convenient ways to calculate the asset’s value after accounting for depreciation. The depreciation is accounted for on an annual basis, where the reduced value of the asset is reflected in the profit and loss statement. The rate of depreciation charged is constant throughout the product’s life cycle.

Written Down Value Method

 In this method, depreciation is calculated by subtracting the accumulated depreciation on the assets. A fixed rate of depreciation is charged on the assets annually. And the value of the asset is reduced. Unlike the straight-line method, a higher amount of depreciation is accounted for on the assets after they are reduced from their previous depreciation cycle.

Formulae for Calculating Depreciation by Written Down Value Method

The computation of the depreciation through this method is done after employing the following formulae:

Depreciation Rate = {1 – (s/c)^1/n} * 100,

Where

S is the Residual value of the asset at the end of their useful life cycle

C is the valuation of the asset at the time of the obtainment

N refers the useful years of the asset

Claiming of Depreciation Allowance – Conditions

The assess must meet the following conditions in case they want to avail of depreciation allowance under the income tax act.

• The assess must fully or partially own the asset if they want to claim depreciation on the asset.
• The asset must be employed in the day-to-day business operations.
• For the asset to be eligible for depreciation, it should have been operational during the years depreciation is accounted for.

Amount of Depreciation Allowed

The depreciation on the assets enables the business to limit the amount of tax liability. However, under the Income Tax Act, the following depreciation parameters are allowed on the assets:

• The depreciation is generally computed with the assistance of the written down Value method (WDV). The taxpayer can refer to the depreciation rate as per the income tax act in appendix 1.
• Assets engaged in the power generation, or distribution has the provision to avail of either the straight-line method or the written down method.
• In case of a demerger, the depreciation shall be dispensed between the demerged and its amalgamated company. The calculation of depreciation on the assets would take place without accounting for the demerger.
• If the asset is under a finance lease transaction, then it would be accounted as per the AS-19, i.e. the standard accounting reference for leases.

Analysis of AS-22/IND AS 12 with Reference to Depreciation

The method employed to compute depreciation varies with respect to taxation and accounting purposes. Such timing differences must be accounted for in the financial statements under deferred tax liability or asset.

The deferred tax income refers to the income accrued for future periods owing to the differences in the taxes under Accounting Standard-22. Here temporary differences are a result of the carrying amount of the asset or liability featured in the balance sheet refers to the balance sheet.

Let’s take an example for a better understanding.

Suppose a business obtained an asset for Rs 150,000, and over time the carrying amount for the asset is valued at Rs 100,000.

The depreciation calculated concerning tax purposes is Rs 90,000, where the tax rate levied is 25%.

So, the tax base as per the IT Act  = Initial Value of the Asset (Rs 1,50,000) – Cumulative Depreciation (Rs 90,000)

= Rs 60,000

Now, to recuperate the carrying amount of Rs 1,00,000, the entity required to collect a taxable income Rs 1,00,000. However, the entity can only account for the tax depreciation of Rs 60,000. After the entity redeems the carrying amount on the asset, it will be required to pay income taxes of Rs 10,000 (Rs 40,000 at 25%). The temporary taxable difference on the asset will be Rs 40,000, which is the difference between the carrying amount (Rs 1,00,000) and the tax base
(Rs 60,000).

In this case, the entity would account for a deferred tax liability of Rs 10,000 (40,000 at 25%). Depicting the income tax payable at the time of recovery of the asset’s carrying amount.