Depreciation Under Income Tax Act

Know what is depreciation, and how depreciation is calculated under income tax act.

Under the Income Tax Act, the concept of depreciation is allowed. Depreciation, as per the Income Tax Act, is a deduction allowed for some reduction in the actual value of any intangible or tangible asset the taxpayer uses.

The Basics of Depreciation

The depreciation concept is used mainly for the writing of any cost over the assets over their useful life. Depreciation is a compulsory reduction in the profit and loss statement of the entity using some depreciable asset under the act, which allows deduction either using the straight-line method or written down value method. The calculation for the depreciation under the written down value method is used widely. But in case of any undertaking that is engaged in the power generation or its generation and distribution nearby is an option to choose the straight-line method. 

In some circumstances, the act also allows the deduction for additional depreciation In the purchase year.

The Block of Asset

Depreciation is mainly calculated on the written-down value of the block of the asset. The block of assets is primarily a group of assets that feature a class of assets comprising tangible assets that are building plant machinery or furniture.

It also includes intangible assets being know-how patent copyright license, trademark franchise, or any other business or commercial rights of a similar nature.

The block of the asset would be identified depending on the natural life and the similar use. Additional depreciation percentages within the class of assets should be considered for all the asset classifications. The such asset class with the same depreciation rate would be identified as the asset block. Individual assets lose their identity under the Income Tax Act, like depreciation would be calculated on the asset block instead of the unique asset.

Some Conditions For Claiming Depreciation

The assets should be owned partially or completely by the income taxpayer

Furthermore, the assets should be used for the business but another purpose also, and depreciation allowable should be proportionate to the use of the business purpose. The income tax officer would also have the right to understand the proportionate part of the depreciation given under section 38 of the act.

Co-owners can also claim depreciation to some extent for the value of the asset switch is owned by all the Co-owners.

You cannot claim any depreciation on the goodwill or the cost of the land

Depreciation is compulsory from the financial year 2000 to 2003. It should be allowed or deemed to have been allowed as a deduction irrespective of any claim made by the taxpayer in the profit and loss statement. Hence the taxpayer can always carry forward the written down value after reducing the amount of depreciation.

The deemed profit is considered depreciation’s effect if it has opted for a presumptive taxation scheme.

Under the Companies Act 1956, depreciation is different from the Income Tax Act. Hence the depreciation rate would be prescribed under the Income Tax Act, which is only allowed irrespective of any depreciation rate charged in the account box.


Meaning Of The Written Down Value

The asset’s written down value is intern calculated regarding the actual cost of the asset reference. It is essential to understand the meaning of the written-down value on actual cost when calculating depreciation. The written down value under the Income Tax Act means the value where the asset was acquired in the previous year, and the actual asset cost would be treated as the return down value. If the asset was calculated in the last year, the return down value should be the actual cost minus the depreciation, which is allowed under the Income Tax Act.

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Amount Of Depreciation Allowed

The depreciation is calculated as per the written down value method. There is an exception to this, when the engagement of undertakings takes place in the power generation or the generation and distribution like execution has some option to claim depreciation on the written down method or the straight-line method then this option would be exercised before the due date of return filing.

Methods For Calculating Depreciation

The depreciation methods and the valuable life of the depreciable assets differ for all the assets. Based on the asset type, all the industries can vary for taxation and accounting purposes. Additionally, the most commonly employed depreciation methods include the written down value and straight-line methods. Other than the depreciation rate, the primary difference between depreciation calculation regarding the Income Tax Act and Companies Act is also the method that is used for calculating depreciation.

The Companies Act 2013 includes the depreciation methods, the straight-line method, the written down value method, and the unit of production method.

The Formula for Calculating Depreciation

The straight-line method rate of depreciation in clothes original cost minus the residual value divided by the useful life into 100.

Depreciation would equal the original cost to the depreciation rate as per the slm.

Depreciation methods are different for all taxation but for all accounting purposes. Hence the amount of depreciation would differ, which gives rise to the difference in timing. Such timing differences should be quantified in any financial statement in the form of asset or deferred tax liability. As per accounting standard 22, the deferred tax is mainly income tax payable or recoverable in the future timeline due to the temporary taxable difference. The temporary difference includes the difference between carrying the amount of the asset or liability in the balance sheets.


If you want to know more about depreciation under the income tax act, then you would need the assistance of experts such as Vakilsearch, who can be of great help here.

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