DEPRECIATION AS PER INCOME TAX

Meaning of Depreciation as per Income Tax

Depreciation as per income tax means the decline in the worth of an asset due to gradual wear and tear due to the lapse of time or oldness. It is charged upon income.

Methods like the straight-line method or written down value method are used to ascertain depreciation as per income tax.

Type of Depreciation as per Income Tax

The following are the types of depreciation as per the Income Tax Act prevalent in India:-

1. Normal depreciation for block of assets.
2. Additional depreciation for new machinery or plant subject to certain conditions.
3. Normal asset-wise depreciation for a business involved in production and supply of power.

Depreciation Rates:

1. Normal depreciation for block of assets: Written down value method.
2. Additional depreciation for new machinery or plant: 20% or 35% of the value of machinery or plant.

In case of normal depreciation for block of assets, depreciation is allowed on the basis of written down value method. In case additional depreciation is allowed, depreciation at 20% or 35% of the cost of the eligible plant and machinery acquired and installed in the previous year is allowed in the first year in which asset is acquired and installed.

Requirements for claiming Depreciation as per Income Tax

The following requirements must be present for an Assessee to claim Depreciation as per Income Tax.

1. The assessee must own the asset either entirely or partially.
2. The assessee must have utilized this asset for a business or profession carried on by him.
3. The assessee must have utilized the asset during the relevant year in which he is claiming depreciation as per Income Tax.

Block of Assets

Assets eligible for depreciation as per Income Tax are categorized under Block of Assets, they are as follows:

1. Tangible Assets:
   1. Buildings;
   2. Machinery and plant;
   3. Furniture.
2. Intangible Assets

1. TANGIBLE ASSETS

1. DEPRECIATION RATE FOR BUILDINGS

The Income Tax act provides for Depreciation rate for Buildings.

The act however does not define the term ‘building.’ However, based on various case laws and government notifications, the following assets can be included under the term ‘building’ for the purpose of this act.

1. Roads constructed within said premises of building.
2. Walls or barriers.
3. Process warehouses.
4. Driveways and compound walls.
5. Landscaping.
6. Toll road.
7. Hoarding structures for advertising.
8. Wells and tube wells.

A building does not include land as it does not depreciate. Hence, any expenditure incurred by an assessee for land cannot be a part of the cost of construction of building. Further, depreciation is also not allowed in respect of premium paid for leasehold land, as such amount does not constitute part of the cost of land.

Land is not part of a building for the purpose of this act as the value of it does not depreciate. Also any kind of payments made for leasehold land does not come under the ambit of building for the purpose of this act.

Depreciation Rate:

The depreciation rate for buildings falls under the three heads as per the Income tax act.

1. Residential Premises: Includes buildings used for residential purposes only besides hotels, resorts and boarding houses- 5%.
2. Other Buildings: Includes all Buildings used for any other purpose other than residential purposes-10%
3. Water Treatment Facility Buildings – 100%
4. Wooden Structures – Include temporary structures made of tin shed- 100%

Calculating Depreciation for Building:

Depreciation Rate for buildings is calculated based upon the written down value method.

If the building was acquired in the previous year, the actual cost of the buildings is considered for calculating depreciation rate; if asset acquired prior to previous year then actual cost minus the depreciation applicable for that year is used for calculating depreciation rate.

2. DEPRECIATION RATE FOR MACHINERY AND PLANTS

The Income Tax act provides for Depreciation rate for Machinery and Plants.

The term ‘Plant’ includes ships, vehicles, books, scientific apparatus and surgical equipment utilized for the business or profession of the assessee. The term ‘Machinery’ include all kinds of mechanical items and related equipment.

Under the Income Tax Act, Machinery and Plants are deemed to include the following as well:

1. Air conditioners and electric fans.
2. Electricity Mains, service lines and switch gears.
3. Framework and ladders.
4. Electrical transformers.
5. Telephone systems.
6. Safe deposit lockers.
7. Data processing machines, computers and printers.
8. Tools and instruments.
9. Books containing technical know-how.
10. Bins and shelves in factory.
11. Cylinders for storing gas.

Depreciation Rate:

15% Depreciation Rate applicable for:

1. Motor vehicles not utilized in a business of hiring them
2. Any type of machinery and plant not mentioned under any of the blocks.

30% Depreciation Rate applicable for:

1. Motor vehicles utilized in a business of hiring them.
2. Apparatus like moulds etc. utilized in plastic and rubber industries.

40% Depreciation Rate applicable for:

1. Airplanes and their engines.
2. Commercial vehicles bought for the purpose of business or profession of the assessee from 1^st October, 1998 to 1^st April, 1999; and utilized before 1^st April, 1999.
3. Certain medical equipment.
4. New commercial vehicles bought from 1^st April, 2001 to 1^st April, 2002 and utilized before 1st April, 2002.
5. New commercial vehicles bought from 1^st January, 2009 to 1^st October, 2009 and utilized before 1^st October, 2009.
6. Plastic and glass vessels.
7. Items used in weaving, processing and garment sector of textile industry bought from 1^st April, 2001 to 1^st April, 2004 and utilized before 1^st April, 2004.

The following 40 % depreciation rates are according to the amendments made to the Income tax act with effect from 1^st April, 2017.

1. Computers hardware and software.
2. Books bought by assesses for business of profession requirements.
3. Gas cylinders including its allied parts.
4. All types of Rollers utilized in flour mills, sugar industries, iron and steel industry, energy saving devices, renewable energy devices, etc.
5. Windmills and their allied devices erected on or after 1^st April, 2014.
6. Devices utilized for water supply, treatment project etc.
7. Equipment including lighting bulbs etc. used in films studios.
8. Match factories, wooden match frames.
9. Tubs, winding ropes and safety lamps used in mines and quarries.
10. Equipment utilized for Air, water, solid waste pollution control and recycling.

3. DEPRECIATION RATE FOR FURNITURE

The Income Tax act provides for Depreciation rate for Furniture.

The term ‘Furniture’ deems to include fittings under the Income Tax act. These fittings include electrical equipment as well like wires, switches, sockets, light fittings, switch board etc.

Depreciation Rate: 10%

2. INTANGIBLE ASSETS

The Income Tax act provides for Depreciation rate for Intangible Assets.

The term ‘Intangible Assets’ under the Income Tax Act include patents, copyrights, trademarks, licenses, franchises, business or commercial rights of any kind provided they have been acquired on or after 1^st April, 1998.

Depreciation Rate: 25%.

SUMMARY

Under the Income Tax Act, depreciation can be sought in a manner allied from the normal mode of wear and tear. Also, the more the depreciation rate, the less the tax liability on businesses while calculating capital investments.

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