Depreciation as per Income-tax Act AY 2026-27

Depreciation as per Income-tax Act

Introduction
The term ‘depreciation’ means decrease or reduction in the value of an asset over a period of time due to wear and tear or obsolescence. Depreciation allows a business entity to allocate the cost of tangible and intangible assets (except goodwill) over their useful life. It is calculated using the written-down value (WDV) method, except for power generation entities, which may use the straight-line method (SLM). The prescribed depreciation rates are specified in Appendix I and Appendix IA of the Income-tax Rules.

Key Aspects

• Types of Depreciation

• Normal Depreciation: Applicable to assets used for business or profession, calculated using WDV or SLM depending on business type.
• Additional Depreciation: Available at 20% for manufacturing businesses under specific conditions.
  • Rate of Depreciation:

Depreciation is allowed at the rates specified in the New Appendix I on the written-down value of block of assets which are used for the purposes of business or profession of the assessee at any time during the previous year. The rates of depreciation under straight line method are prescribed under Appendix IA.

• Eligibility

• Assets must be owned, used for business/profession, and put to use during the relevant year.
• Partially used assets: Deduction is proportional to business use under Section 38.
  • Special Provisions
• Assets used less than 180 days in a year: Depreciation limited to 50% of the annual rate.
• In business reorganisations (e.g., mergers), depreciation is apportioned between entities based on the number of days for which the asset was used by them.
  • Exclusions
• Payments exceeding 10,000 in cash for asset acquisition disqualify for depreciation claims.
• Land or goodwill.
• Build-Operate-Transfer (BOT) arrangements allow cost amortization but not depreciation.[Circular No. 9/2014, dated April 23, 2014]
  • Block of Assets Concept
• Once included in a block of assets, depreciation applies even if specific assets within the block are not used during the year.
• If a block’s written-down value (WDV) becomes zero or ceases to exist, depreciation cannot be claimed.

 

Rate of Depreciation

 

Introduction
Depreciation is calculated at specified rates using the written-down value (WDV) or straight-line method (SLM), depending on the type of business. Entities engaged in power generation or distribution may opt for either method, while others must use the WDV method. Assets are grouped into blocks for depreciation purposes, classified into tangible and intangible categories.

Depreciation Rates

• WDV Method: Rates range from 5% to 40% for various asset classes (e.g., buildings, machinery, furniture). [see New Appendix I of Income-tax Rules]
• SLM Method: Applicable to power entities, with rates varying based on asset type (e.g., hydroelectric plants: 3.4%; transformers: 7.81%; temporary wooden structures: 33.4%). [see Appendix IA of Income-tax Rules]

Key Rules for Claiming Depreciation

• Part-Year Usage: Assets used for less than 180 days in a year qualify for 50% of the standard depreciation rate.

Exclusions

• Depreciation is disallowed for cash payments exceeding 10,000 per day for asset acquisition.
• Assets acquired but not used during the year are ineligible for depreciation.

 

Methods of Depreciation

 

Introduction
The Income-tax Act, 1961 provides two methods for claiming depreciation:

1. Written Down Value (WDV) Method: Mandatory for all taxpayers except those engaged in generation or generation and distribution of power.
2. Straight Line Method (SLM): Available exclusively for undertakings engaged in generation or generation and distribution of power.

Calculation of Depreciation under the WDV Method
Depreciation under the WDV method is computed in the following steps:

• Step 1: Classification of Assets
  Assets are grouped into relevant “blocks of assets” based on their class (e.g., building, furniture, plant) and depreciation rates as prescribed. Each block includes assets with the same depreciation rate.
• Step 2: Determination of Closing WDV
  Closing WDV is computed as:

• Opening WDV at the beginning of year
• Add: Actual cost of assets acquired during the year
• Less: Sale proceeds of disposed assets
• Less: WDV of the assets, transferred under ‘slump sale’ falling under that block
  • Step 3: Application of Depreciation Rate
    Depreciation is calculated by multiplying the prescribed rate with the closing WDV. For assets used for less than 180 days, only 50% of the applicable rate is allowed.

Calculation of Depreciation under the SLM Method
Applicable only to power generation or distribution undertakings, the SLM method calculates depreciation as follows:

• Option to Adopt SLM
  This option must be exercised before filing the income tax return for the first year of power generation. The option exercised in the first assessment year will be applicable in subsequent years as well.
• Depreciation Calculation

• Total depreciation over the asset’s working life cannot exceed its acquisition cost.
• Depreciation rates are applied to tangible assets; intangible assets are depreciated using the WDV method.
  • Terminal Depreciation and Balancing Charge
    If an asset is sold during its working life, unclaimed cost may be allowed as terminal depreciation, or surplus may be taxed as a balancing charge.

 

Actual Cost of Assets Used for Business or Profession

 

Introduction
The term “actual cost” refers to the cost incurred by an assessee to bring an asset to its current location and condition, reduced by any portion of the cost borne directly or indirectly by another party. In certain cases, “notional cost” is used instead of actual cost.

Inclusions in Actual Cost
The actual cost of a fixed asset under the Income-tax Act includes:

• Attributable incidental expenses (Acquisition and Installation Costs)

• Purchase price, freight, import duties, and installation expenses.
• As per ICDS-V (Tangible Fixed Assets) any sale proceeds realised from sale of experimental products shall be reduced from cost of acquisition of a fixed asset.
  • Borrowing Costs
• Interest on borrowings for acquiring the asset until it is put to use (capitalized as per ICDS-IX).
  • Technical Fees and Commissions
• Payments for technical know-how, erection, or commissioning of machinery.

Exclusions from Actual Cost

• Payments in Cash Exceeding 10,000
  Expenditure paid in non-permissible modes exceeding Rsa. 10,000 in a day is excluded.
• Post-Use Interest
  Interest after the asset is put to use is claimed as a revenue expense under Section 36(1)(iii).
• Subsidy, Grant, or Reimbursement
  Government-provided subsidies that directly or indirectly reduce the cost of the asset are excluded.
• Input Tax Credit
  Taxes eligible for GST or customs credit are not included.
• Incidental Income
  Income related to asset acquisition (e.g., interest on funds temporarily parked) is deducted.

Notional Cost of Fixed Assets
Notional cost is used to determine the actual cost in special situations:

1. Assets Previously Used for Scientific Research
   Cost is reduced by the deduction allowed under Section 35 for scientific research.
2. Assets Acquired by Gift or Inheritance
   Cost equals the previous owner’s cost, adjusted for depreciation.
3. Re-acquired Asset

If an asset once owned and used for business/profession is re-acquired after transfer, its actual cost shall be the lower of:

• Re-acquisition price, or
• Original cost – depreciation actually allowed
  4. Sale and Leaseback Transactions
     Transferee’s actual cost is deemed the transferor’s written-down value.
  5. Transfer within Related Companies
• Transfers between holding and subsidiary companies or under amalgamations or demergers are carried over at the transferor’s written-down value.
  6. Building Brought from Personal Use
     Depreciation since acquisition is deducted to compute actual cost.
  7. Second-Hand Assets
     If acquired to claim excess depreciation, the Assessing Officer may revalue the cost after approval of JCIT.
  8. Asset acquired by a non-resident outside India

Actual cost shall be the acquisition price reduced by notional depreciation computed at prescribed rates as if the asset had been used in India from the date of acquisition.

9. Assets under Corporatization Scheme

If an assessee acquires assets through SEBI-approved corporatization of a recognized stock exchange, the actual cost is deemed to be the same as it would have been without such corporatization.

Special Cases

• Trial-Run Income
  Proceeds from experimental sales reduce the asset’s cost as per ICDS-V.
• Assets Acquired Under Specific Modes
  Assets acquired by gift, inheritance, amalgamation, or corporatization are valued per specified provisions, ensuring no double deduction or inflated depreciation claims.

 

Computation of Written Down Value (WDV)

 

Introduction
The Written Down Value (WDV) represents the depreciated value of an asset or a block of assets, adjusted for acquisitions and disposals during a financial year. This value is crucial for calculating depreciation under the Income-tax Act, 1961.

General Calculation of WDV
The WDV of a block of assets is computed as follows:

Particulars

• Opening WDVat the beginning of the year
• Add: Actual cost of new assets acquired (excluding goodwill for businesses or professions)
• Less: Money payable for assets sold, discarded, or destroyed, along with scrap value
• Less: WDV of assets transferred in slump sales

Closing WDV
The remaining value represents the closing WDV before applying depreciation.

Special Cases for WDV Calculation

1. Slump Sale

• Net worth, computed as the difference between total assets and liabilities, determines WDV for depreciation.
• Depreciable assets are valued at their individual WDV, as if each was the sole asset in its block.
  2. Demerger
• For the demerged company: WDV of transferred assets is deducted from the block’s WDV.
• For the resulting company: WDV of transferred assets in the books of the demerged company is adopted.
  3. Business Succession
• WDV is calculated as if the ownership change did not occur, ensuring continuity in depreciation claims.
  4. Corporate Restructuring
• In corporatization schemes (e.g., stock exchanges), WDV of transferred assets is carried forward to the successor entity.
  5. Exempt Income Period
• If profits were exempt earlier, WDV is adjusted based on notional depreciation for the exemption period.
  6. Goodwill Adjustment
• From A.Y. 2021-22, depreciation on purchased goodwill is disallowed. WDV is adjusted to exclude goodwill after deducting depreciation claimed in earlier years.

Key Considerations

• Depreciation Ceases: If WDV becomes nil or the block ceases to exist, depreciation ends, and Section 50 capital gain provisions apply.
• Exempt Income: For entities earning agricultural or other exempt incomes with normal business income, depreciation is computed as if all income were taxable under “Profits and Gains of Business or Profession.”

 

Depreciation in Case of Sale of Fixed Assets (Income-tax)

 

Introduction
The treatment of depreciation on the sale of fixed assets depends on the method of depreciation adopted by the assessee:

1. Written Down Value (WDV) Method
2. Straight Line Method (SLM)

Treatment Under the WDV Method
For entities not engaged in the generation or generation and distribution of power, depreciation is computed on a block of assets basis under the WDV method.

• Sale of Fixed Assets within a Block
  The sale proceeds are reduced from the block’s WDV, and depreciation is calculated on the remaining value.
• Block Ceases to Exist
  If entire block of assets has been transferred or it ceases to exist, the scheme of depreciation comes to an end. The difference between the sale consideration and the WDV is treated as short-term capital gain or lossunder Section 50.
• Partial Sale with WDV Nil
  If the sale consideration exceeds the WDV of the block, the surplus is treated as a capital gain under Section 50. No depreciation is allowed on the block for that year or subsequent years.

Treatment Under the SLM Method
Entities engaged in the generation or generation and distribution of power compute depreciation on individual assets under the SLM method.

• Terminal Depreciation
  If the money payable (plus scrap value) is less than the asset’s WDV, the deficiency is deductible as terminal depreciation. This does not apply to intangible assets, which are treated as capital loss under Section 50A.

Particulars	Taxability
Sale price > Actual cost	Sale price – Actual cost = Capital Gains
	Actual Cost – WDV = Profit under the head PGBP
Sale price is upto Actual cost	Actual Cost – WDV =Profit under the head PGBP

• Balancing Charge
  If the money payable (plus scrap value) exceeds the WDV, the surplus is taxable as a balancing charge under Section 41(2) to the extent of previously allowed depreciation. Excess beyond depreciation is treated as a short-term capital gain.

 

Additional Depreciation

 

Introduction
Assessees engaged in manufacturing, production, or power generation, transmission, or distribution can claim additional depreciation. This benefit is not available to those in trading, investment businesses, or professional services.

Eligibility

• Who Can Claim: Assessees involved in manufacturing, production, or power sector activities. Power units using the straight-line method for depreciation cannot claim additional depreciation.
• Who Cannot Claim:

• Assessees opting for concessional tax regimes under Sections 115BA, Sections 115BAA, Sections 115BAB, Sections 115BAC, Sections 115BAD, or Sections 115BAE.
• Unabsorbed depreciation related to additional depreciation cannot be carried forward in such cases.

Eligible Assets
Additional depreciation is allowed for new machinery or plant acquired and used during the same financial year, except for:

• Ships, aircraft, buildings, furniture.
• Second-hand machinery.
• Machinery used in offices or residential accommodations.
• Road transport vehicles.
• Fully depreciated machinery.

Rates

• 20%: If used for less than 180 days, only 10% is allowed in the first year, with the balance in the next year.

 

Computation of Depreciation in Case of Succession

 

Introduction
In cases of succession, amalgamation, or demerger, depreciation is computed as if the succession, amalgamation, or demerger had not occurred. The computed depreciation is then allocated between the predecessor and successor entities proportionately.

Applicability
Proportionate depreciation applies in the following cases:

• A firm or sole proprietorship succeeded by a company.
• An AOP/BOI succeeded by a company during demutualization or corporatization of a recognized stock exchange in India.
• A private company or unlisted public company succeeded by an LLP.
• Business or profession succession under Section 170.
• Amalgamation of companies or transfer of undertakings in a scheme of demerger.

Computation Methodology

1. Depreciation Calculation: Compute depreciation for tangible and intangible assets as if no succession or restructuring had occurred.
2. Apportionment: Allocate depreciation between the predecessor and successor based on the number of days the assets were utilized by each.

 

Unabsorbed Depreciation

 

Introduction
Unabsorbed depreciation arises when the depreciation allowance exceeds the business profits in a given year. Such unclaimed depreciation can be set off against any other income (excluding salary) and carried forward indefinitely for adjustment in subsequent years.

Treatment of Unabsorbed Depreciation

1. First Preference: Set-off Against Business Profits

• Unabsorbed depreciation can first be adjusted against profits from any other business or profession carried on by the assessee in the same year.
  2. Second Preference: Set-off Against Other Income
• If business profits are insufficient, the unabsorbed depreciation can be set off against income under other heads such as house property, capital gains, or income from other sources. However, it cannot be adjusted against:
  • Income under the head “Salaries.”
  • Lottery or similar income taxed under Sections 115BB and 115BBJ.

3. Third Preference: Carry Forward

• If any depreciation remains unabsorbed, it can be carried forward indefinitely. It will be deemed as the current year’s depreciation in subsequent years and adjusted in the same order of preference.

Order of Set-off

1. Adjust current year’s depreciation against business profits.
2. Offset unabsorbed business losses (subject to Section 70, Section 71, and Section 73A).
3. Set off unabsorbed depreciation against the remaining taxable income.

Conditions for Carry Forward

• The entity claiming the set-off must be the same as the one in which the depreciation originated, except in cases like:

• Amalgamation or demerger under Section 72A and 72AA.
• Conversion of a firm or proprietorship into a company as per Section 47(xiii) and 47(xiv).