Plant and Machinery Depreciation Rate: Calculation Process and Formulas

Depreciation of plant and machinery is a part of the Indian Income Tax Act. It may be collected under it for investments made in furniture, equipment, and machinery by an assessor throughout the year. Read this blog to know more about the same.

The Indian Income Tax Act specifies a depreciation rate for purchases of plant, furniture, and machinery acquired by an assessee during the fiscal year. Depreciation is a term used to describe how an asset’s cost is written off throughout its functional life. The WDV, Written Down Value, or Straight-Line technique requires it as a mandatory deduction. plant and machinery depreciation rate is frequently computed using the WDV approach.

What is the WDV Method?

It is an often used notion, except for businesses involved in producing or issuing power. The Indian Income Tax Act even reduces extra depreciation during the acquisition year in certain specified situations.

Ships, automobiles, books, scientific equipment, plus medical supplies used mainly for profession or business are considered a plant for taxation purposes. Machinery includes a wide range of mechanical devices and objects.

Equipment doesn’t have to be self-contained; it may be a component of more extensive equipment or even something that must be utilised in tandem with other equipment.

Block of Assets

The block of assets WDV is used to determine the plant and machinery depreciation rate. This is a collection of assets that belongs to a particular asset type and includes:

• Examples of concrete assets are furniture, a plant, a structure, or machinery
• Copyrights, trademarks, patents, franchises, licenses, and other similar types of commercial or business rights are examples of intangible assets
• The assets are further divided into categories based on how they are used, how long they last, and what they are made of.

Depreciation Claims Requirements

Depreciation deductions are only available when the criteria listed below are met:

• The assesses must fully or partially own the assets
• The taxpayer’s company or profession ought to utilise the assets 
• The amount of permitted depreciation would be proportional to the usage of the assets for business reasons if they were used for many other purposes besides business reasons
• The Offer of Indian Income Tax Act also has the right to understand the proportionate fraction of the plant and machinery depreciation rate, according to the Indian Income Tax Act’s Section 38
• Joint owners may deduct depreciation up to the worth of the assets they jointly own
• Depreciation must be authorised or presumed to have been approved as a deduction beginning with the A.Y. 2002-03, regardless of a taxpayer’s claim there in the account of profit and losses.

Rate of Depreciation for Furniture

A piece of furniture is a utility or decorative item used to decorate a home, apartment, workplace, or lodging. Fittings are included in the definition of “furniture” under the Indian Income Tax Act. Wiring, fans, sockets, switches, light fixtures, and other electrical fittings are included. As per the Indian Income Tax Act, the rate of depreciation for fittings and furnishings is 10%.

What is Plant and Machinery Depreciation Rate

The depreciation rate for plant and machinery is determined by the provisions outlined in the Income Tax Act. When a company acquires assets like furniture, equipment, or machinery within a fiscal year, it must account for depreciation as the value of these assets naturally diminishes over time.

For income tax calculations, the term ‘plant’ encompasses various items such as scientific apparatus, ships, vehicles, and surgical equipment necessary for business operations.

Machinery comprises diverse mechanical items and devices. It’s important to note that machinery can be part of larger units or stand-alone devices, working independently or in tandem with others.

A company’s plant and machinery inventory extends to a broad range of movable assets, including telephone systems, electric fans, air conditioners, electrical transformers, gas cylinders, safe deposit lockers, scaffolding, ladders, books with technological knowledge, tools, equipment, shelves, bins in a factory, data processing machines, computers, printers, mains, switch gears, and service lines. Understanding the plant and machinery depreciation associated with these assets is essential for accurate financial reporting and income tax compliance.

Plant and Machinery Depreciation Rate as Per the Companies Act, 2013

Since the financial year 2014-15, the Companies Act, 2013 mandates the calculation of depreciation for plant and machinery. Determined by an asset’s cost, useful life, and residual value, companies can employ either the Straight-Line Method (SLM) or the Written Down Value (WDV) method.

Schedule II of the Act provides a prescribed list of the useful life of various asset classes, ensuring uniformity in calculations. The residual value of an asset should not exceed 5% of its original value.

Companies retain flexibility but must justify any deviation from specified useful life or residual value, accompanied by technical advice during tax return submissions.

Depreciation calculation methods must be explicitly mentioned in the company’s accounts, with adjustments made for asset purchases or sales based on the transaction date.

For assets without Extra Shift depreciation, the rate remains constant. However, if utilised for double or triple shifts, the depreciation rate increases by 50% and 100%, respectively. Each part of an asset incurs depreciation separately, considering its cost significance.

The WDV method’s depreciation calculation formula is:

R = {1 – (S/C) ^1/n} x 100

Here R = rate of depreciation in %

          S = Scrap value of an asset after a useful life

          C = Cost or written down value of an asset

          n = Remaining useful life of an asset in years

The SLM method’s formula is:

[(Original Cost – Residual Value) / Useful Life] * 100

Thus, calculating depreciation involves intricate mathematical formulas. Alternatively, online calculators simplify the process by inputting cost, residual value, depreciation method, and asset life, providing a comprehensive depreciation timeline.

Depreciation of Plant and Machinery

A company’s plant & machinery contain a variety of mobile assets, such as the following;

• Electric fans and air conditioners
• Switch gears, service lines, & mains
• Ladders and scaffolds
• Transformers for electricity
• Telephone networks
• A safe deposit box
• Computers, printers, and devices are used for data processing
• Tools and equipment
• Books with technological knowledge
• Shelves and bins in a manufacturing unit
• Gas cylinders.

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The Rate of Depreciation for Equipment is Divided into 6 Separate Block Rates as Follows:

• 15% Rate of Depreciation 

Any kind of machinery and plant not covered in any other blocks, including motor vehicles not employed in a business of operating them on rent, is subject to a 15% plant and machinery depreciation rate.

• 30% Rate of Depreciation

The following categories of plant and machinery are subject to a 30% rate of depreciation;

1. Motor taxis, trucks, and buses are utilised in the rental transportation industry
2. Molds used for the production of rubber and plastic items
3. In addition to those entities, the plant and machinery depreciation rate for machinery and plant utilised in the semiconductor industry is set at 80%.

• 40% Rate of Depreciation

There is a 40% plant and machinery depreciation rate applied to the following kinds of equipment:

1. Aircraft and aircraft engines
2. Commercial cars that the assessee purchases on or post 1 October, 1998 but prior to 1 April, 1999 and uses for any time prior to that date in the course of their trade or profession
3. Specific medical equipment can save lives
4. New commercial cars that are purchased on or after 1 January, 2001, but prior to 1 January, 2002, and are used for business or professional activities before 1 January, 2002
5. New commercial cars purchased on or after 1 January, 2009, but 2009, are used for business or professional purposes prior to 1 October, 2009
6. Refills in the form of glass or plastic containers
7. Machines and equipment utilised in the textile industry’s processing, weaving, and apparel sectors that are bought on or after 1 January, 2001, but prior to 1 January, 2004, and are used prior to 1 January, 2004.

• 60% Rate of Depreciation

The following categories of machinery and plant are eligible for a 60% rate of plant and machinery depreciation rate. With effect from 1 April, 2017, the rate has been lowered to 40%.

1. Computers and software for computers
2. Books that evaluate own to practice their vocation
3. Gas cylinders.

• 80% Rate of Depreciation

The following categories of machinery and plant are eligible for a 60% plant and machinery depreciation rate. With effect from 1 April, 2017, the same has been lowered to 40%.

1. Rolls are used in sugar factories, steel and iron flour mills, rolling mills, energy-saving technology, and renewable energy technology
2. Windmills erected on or after 1 April, 2014, as well as any mainly developed equipment that uses windmills
3. Any unique equipment, such as wind-powered electric generators & pumps, was installed on or after 1 January, 2014.

• 100% Rate of Depreciation

The following categories of machinery and plant are eligible for a 100% plant and machinery depreciation rate. With effect from 1 April, 2017, the same has been lowered to 40%.

1. Machinery and equipment installed and purchased in a water supply project or a water-treatment system on or after 1 September, 2002 are used for commercial operations and infrastructure facilities
2. Wooden components used in the production of artificial silk
3. Cinematograph movies and studio light bulbs
4. Wooden match frames and match factory
5. Used within mines and quarries include tubs, haulage ropes, winding ropes, sand stowing pipelines, and safety lamps
6. Saltworks are condensers, salt reservoirs, and pans formed of dirt, clay, sand, or any other comparable material
7. Assessments of yearly publications
8. Books are possessed by assessees who operate lending libraries like a business
9. Systems for recovering resources from trash, recycling solid waste, controlling air and water pollution, and managing solid waste.

Conclusion

You would want the assistance of expert legal professionals from Vakilsearch, who can be of excellent service in this case if you need any help understanding plant and machinery depreciation rate is a part of the Indian Income Tax Act.

FAQs on Plant and Machinery Depreciation Rate

Is additional depreciation on plant and machinery as per Income Tax Act?

Yes, the Income Tax Act allows for additional depreciation on plant and machinery, providing businesses with a financial incentive to invest in new assets. This provision encourages capital expenditure and supports economic growth.

Is depreciation included in income tax?

Plant and machinery depreciation rate is a tax-deductible expense that reduces the taxable income of a business. While the actual depreciation amount is deducted from the company's income for tax purposes, it does not represent a direct inflow of funds.

Which method of depreciation is approved by the Income Tax Act?

The Income Tax Act approves various methods of depreciation, including the Straight Line Method and the Written Down Value Method. Businesses can choose the method that aligns with their accounting practices, but the chosen method must comply with the regulations outlined in the Income Tax Act.

What are the depreciation rules for 2023?

In 2023, companies have the opportunity to deduct 80% of the acquisition cost for an asset that is put into service within the calendar year. The remaining 20% of the property's cost can be depreciated over subsequent years. The complete bonus depreciation phase-out schedule for 2023 is as follows: 80%.

Can depreciation be more than income?

Yes, it is possible for depreciation to exceed income in a given accounting period. This scenario may occur when a business experiences a net loss due to factors beyond depreciation, such as operating expenses or financial losses. However, it is essential to manage financial health to ensure long-term sustainability.

What is the relationship between depreciation and tax?

Depreciation is a crucial element in tax planning as it allows businesses to deduct the cost of assets over time. This deduction reduces taxable income, lowering the tax liability. The relationship between plant and machinery depreciation rate and tax underscores the financial strategy employed by businesses to optimise tax benefits and improve cash flow.

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