Depreciation under Section 32 of the Income Tax Act, 1961 is a deduction allowed for the decrease in the value of tangible and intangible assets that are used in the course of business or profession. It is calculated on the Written Down Value (WDV) of each block of assets, based on specified rates—such as 40% for computers, 15% for plant and machinery, 10% for furniture, 5% for residential buildings, and 25% for intangible assets.
What is Depreciation?
Depreciation is the decline in the value of a tangible asset over time due to usage, wear and tear, or the passage of time. The Income Tax Act makes it mandatory for businesses to claim depreciation as a deduction in their profit and loss account when such assets are used for professional or business activities.
Depreciation can be claimed under two methods:
- Written Down Value (WDV) Method – the most widely adopted method across various industries.
- Straight-Line Method (SLM) – available only to undertakings engaged in power generation, or in generation and distribution.
Additionally, the Act provides for extra depreciation in the year of acquisition of certain new assets, particularly for businesses engaged in manufacturing and production, subject to specific conditions.
Block of Assets Concept
For tax purposes, depreciation is computed on a block of assets, meaning a collection of assets that fall under the same class and are subject to the same depreciation rate. These are categorized as:
- Tangible assets: Buildings, plant, machinery, furniture, etc.
- Intangible assets: Patents, copyrights, trademarks, licenses, franchises, know-how, etc.
Once grouped into a block, individual assets are not treated separately for tax purposes. Depreciation is applied collectively to the entire block rather than to each asset individually.
Conditions for Claiming Depreciation
To be eligible for depreciation under the Income Tax Act, the following conditions must be satisfied:
- Ownership: The asset should be owned, either fully or partly, by the assessee.
- Business Use: The asset must be utilized for business or professional purposes. If it is used partly for personal purposes, depreciation will be granted proportionately. Under Section 38, the Income Tax Officer may determine the eligible portion.
- Co-ownership: Where an asset is jointly owned, each co-owner can claim depreciation according to their share of ownership.
- Exclusions: No depreciation is allowed on goodwill or on the cost of land.
- Mandatory Claim: From Assessment Year 2002–03 onward, depreciation is considered allowed (or deemed to be allowed) even if not claimed in the books. The Written Down Value (WDV) will still be reduced by the eligible depreciation.
- Presumptive Taxation: For taxpayers opting for presumptive income schemes, depreciation is presumed to be already included in the presumptive profits.
- Separate from Companies Act: Depreciation under the Income Tax Act is based on prescribed rates, independent of the Companies Act or the charges made in the books of accounts.
Written Down Value (WDV) of Assets – Meaning
According to Section 32(1) of the Income Tax Act, depreciation must be calculated at the prescribed rate on the WDV of assets. WDV is determined as follows:
- If the asset is acquired in the current year, the actual cost is taken as its WDV.
- If acquired in earlier years, the WDV equals the actual cost minus the depreciation already allowed under the Act.
Understanding WDV and actual cost is essential for correct computation of depreciation.
Amount of Depreciation Allowed
Depreciation is usually computed using the WDV method in line with Appendix 1 of the Income Tax Rules.
- Power Generation Companies: Businesses engaged in generation or distribution of power may choose either the WDV method or the Straight-Line Method (SLM), provided the choice is made before filing the return.
- Amalgamation or Demerger: Depreciation is calculated as if no restructuring occurred and then divided between the entities according to the number of days each used the assets.
- Finance Lease (AS-19): Assets acquired under a finance lease must be capitalized by the lessee. As per Accounting Standard 19, the lessee is treated as the deemed owner and can claim depreciation.
Depreciation Rates for FY 2025–26 (Common Assets)
| Sl. No | Asset Class | Asset Type | Rate of Depreciation |
| 1 | Building | Residential buildings (excluding boarding houses & hotels) | 5% |
| 2 | Building | Boarding houses and hotels | 10% |
| 3 | Building | Purely temporary constructions (e.g., wooden structures) | 40% |
| 4 | Furniture | Furniture and fittings including electrical fittings | 10% |
| 5 | Plant & Machinery | Motor cars (not used for hire) | 15% |
| 6 | Plant & Machinery | Motor cars (not used for hire) purchased between 23 Aug 2019–1 Apr 2020, put to use before 1 Apr 2020 | 30% |
| 7 | Plant & Machinery | Lorries, taxis, motor buses used for hire | 30% |
| 8 | Plant & Machinery | Lorries, taxis, motor buses used for hire purchased between 23 Aug 2019–1 Apr 2020, put to use before 1 Apr 2020 | 45% |
| 9 | Plant & Machinery | Computers and computer software | 40% |
| 10 | Plant & Machinery | Books (annual publications) owned by professionals | 40% |
| 11 | Plant & Machinery | Books (non-annual publications) owned by professionals | 40% |
| 12 | Plant & Machinery | Books owned by lending libraries | 40% |
| 13 | Intangible Assets | Franchise, trademarks, patents, licenses, copyrights, know-how, or similar rights | 25% |
Depreciation Rates as per the Income Tax Act (Detailed Chart)
The depreciation rate chart under the Income Tax Act is divided into two broad categories:
- Part A – Tangible Assets
- Part B – Intangible Assets
Part A: Tangible Assets
Buildings
- Residential buildings (excluding boarding houses and hotels) – 5%
- Buildings other than those specified in (1) and (3) – 10%
- Buildings acquired on or after 1 September 2002 for installing plant and machinery forming part of a water treatment system or water supply project (used for providing infrastructure facilities under Section 80-IA(4)(i)) – 40%
- Temporary structures such as wooden constructions – 40%
Furniture & Fittings
- Furniture and fittings, including electrical fittings – 10%
Plant & Machinery
- General plant and machinery not covered elsewhere – 15%
- Motor cars (not used for hire), purchased or put to use on or after 1 April 1990 – 15%
- Motor cars (not used for hire), acquired between 23 August 2019 and 1 April 2020 and put to use before 1 April 2020 – 30%
3(i). Aeroplanes and aero engines – 40%
3(ii). (a) Motor taxis, motor buses, and motor lorries used for hire – 30%
(b) Same vehicles acquired between 23 August 2019 and 1 April 2020, and put to use before 1 April 2020 – 45%
3(iii). Commercial vehicles purchased between 1 October 1998 and 1 April 1999, and used before 1 April 1999 – 40%
3(iv). New commercial vehicle purchased between 1 October 1998 and 1 April 1999 replacing an old vehicle (15+ years), used before 1 April 1999 – 40%
3(v). New commercial vehicle purchased between 1 April 1999 and 1 April 2000 replacing a 15+ year condemned vehicle, used before 1 April 2000 – 40%
3(vi). New commercial vehicle acquired between 1 April 2001 and 1 April 2002 and used before 1 April 2002 – 40%
Commercial vehicles acquired between 1 January 2009 and 1 October 2009 and used before 1 October 2009 – 40%
3(vii). Moulds used in rubber and plastic manufacturing – 30%
3(viii). Air pollution control equipment (e.g., felt-filter system, scrubbers, dust collectors, evacuation systems) – 40%
3(ix). Water pollution control equipment (e.g., aerated chambers, biofilters, mechanical reactors, lagoons, ion exchange systems, methane recovery digesters, centrifuges) – 40%
3(x). Solid waste control, resource recovery, and recycling systems – 40%
3(xi). Semiconductor manufacturing equipment (ICs, diodes, transistors, etc., excluding items in (viii), (ix), (x), and (8)) – 30%
3(xi)(a). Life-saving medical equipment (MRI, ventilators, angiography systems, gamma knife, endoscopes, surgical lasers, etc.) – 40%
Other Tangible Assets
- Plastic or glass containers used as refills – 40%
- Computers including software – 40%
- Textile machinery purchased under TUFS between 1 April 2001 and 1 April 2004 and put to use before 1 April 2004 – 40%
- Plant & machinery installed after 1 September 2002 in a water treatment/supply project (Section 80-IA) – 40%
- Specific items like wooden machinery parts, match factory frames, studio bulbs, salt works, quarries, mines, safety lamps, flour mills, sugar works, steel rollers – 40%
- Energy-saving devices (furnaces, boilers, waste heat recovery, cogeneration systems, electrical equipment, burners, etc.) – 40%
- Gas cylinders with valves and regulators – 40%
- Direct fire glass melting furnaces in glass manufacturing – 40%
- Mineral oil concerns:
(i) Above-ground field operation plants – 40%
(ii) Below-ground plants (excluding kerbside pumps) – 40%
(iii) Oil wells not covered in (i) & (ii) – 15% - Renewable energy devices (solar panels, solar pumps, cookers, heaters, desalination, refrigeration, etc.) – 40%
- Windmills and related devices installed after 1 April 2014 – 40%
- Special devices including electric pumps and generators operating on wind energy (installed after 1 April 2014) – 40%
- Books owned by professionals – 40%
(i) Annual publications – 40%
(ii) Other publications – 40%
(iii) Books owned by assessees running lending libraries – 40%
Ships
4(i). Ocean-going ships, dredgers, barges, wooden-hull fishing vessels – 20%
4(ii). Vessels operating on inland waters – 20%
4(iii). Speed boats – 20%
Part B: Intangible Assets
- Franchise, trademarks, patents, licenses, copyrights, know-how, and other similar commercial/business rights – 25%
Example of Depreciation Calculation
| Asset Type | Block 1 – Machine (15%) | Block 2 – Furniture (10%) | Block 3 – Car (15%) |
| Opening WDV | 0 | 0 | 0 |
| Purchases (≥180 days) | 5,00,000 | 20,000 | – |
| Purchases (<180 days) | 40,000 | – | 3,00,000 |
| Sold Assets | – | – | – |
| Closing Value (before depreciation) | 5,40,000 | 20,000 | 3,00,000 |
| Depreciation | 78,000 [(5,00,000×15%) + (40,000×15%×½)] | 2,000 (20,000×10%) | 22,500 (3,00,000×15%×½) |
| Closing WDV (after depreciation) | 4,62,000 | 18,000 | 2,77,500 |
Methods of Calculating Depreciation
The method of depreciation and the useful life of depreciable assets can vary depending on the type of asset and the industry. It may also differ for accounting and taxation purposes. The two most widely used methods are the Straight-Line Method (SLM) and the Written Down Value (WDV) Method.
Apart from rates, a key difference in depreciation under the Income Tax Act and the Companies Act is the approach used for calculation.
Methods under Companies Act, 1956 (Based on Specified Rates):
- Straight-Line Method
- Written Down Value Method
Methods under Companies Act, 2013 (Based on Useful Life of Assets):
- Straight-Line Method
- Written Down Value Method
- Unit of Production Method
Methods under Income Tax Act, 1961 (Based on Specified Rates):
- Written Down Value Method (Block of Assets)
- Straight-Line Method (only for Power Generation Units)
Formula for Depreciation under Straight-Line Method
a. Rate of Depreciation (SLM):
Rate=(Original Cost – Residual Value)Useful Life×100\text{Rate} = \frac{(\text{Original Cost – Residual Value})}{\text{Useful Life}} \times 100Rate=Useful Life(Original Cost – Residual Value)×100
b. Depreciation Amount:
Depreciation=Original Cost×Rate of Depreciation (SLM)\text{Depreciation} = \text{Original Cost} \times \text{Rate of Depreciation (SLM)}Depreciation=Original Cost×Rate of Depreciation (SLM)
Analysis of AS-22 / Ind AS 12 in Relation to Depreciation
Since depreciation methods differ for accounting and tax purposes, the depreciation amount also varies, leading to a timing difference. This difference is recognized in financial statements as a Deferred Tax Liability (DTL) or Deferred Tax Asset (DTA).
According to Accounting Standard (AS)-22, deferred tax refers to income tax that is payable or recoverable in future periods because of temporary differences.
Temporary differences arise when the carrying value of an asset or liability in the balance sheet differs from its tax base. The tax base is the value assigned to an asset or liability for tax purposes.
Illustration:
- Asset Cost: ₹150
- Carrying Amount: ₹100
- Cumulative Tax Depreciation: ₹90
- Tax Rate: 25%
Tax base = ₹150 – ₹90 = ₹60
To recover ₹100 (carrying amount), the entity must generate taxable income of ₹100 but can only claim tax depreciation of ₹60.
Thus, taxable income = ₹40, and tax payable = ₹10 (₹40 × 25%).
This difference of ₹40 between the carrying value (₹100) and tax base (₹60) creates a taxable temporary difference, resulting in a deferred tax liability of ₹10.
FAQs on Depreciation Rates for FY 2025-26
1. What is depreciation under the Income Tax Act?
Depreciation under the Income Tax Act, 1961, is the reduction in the value of tangible or intangible assets used in business, which can be claimed as a deduction while computing taxable income.
2. How is depreciation calculated as per the Income Tax Act?
Depreciation is calculated using the Written Down Value (WDV) method on a block of assets basis. However, power generation units are allowed to use the Straight-Line Method (SLM).
3. What are the depreciation rates for FY 2025-26?
The rates vary by asset type. For example, buildings, machinery, furniture, and intangible assets each have prescribed depreciation rates under the Income Tax Rules.
4. Can 100% depreciation be claimed on any asset?
Yes, certain low-cost assets and specific eligible items notified under the Income Tax Act may qualify for 100% depreciation in the year of purchase.
5. Is depreciation mandatory for tax calculation?
Yes, claiming depreciation is compulsory. Even if not claimed in the income tax return, it will still be considered while calculating taxable income.
6. What is the difference between depreciation as per Companies Act and Income Tax Act?
The Companies Act prescribes depreciation based on useful life of assets, while the Income Tax Act follows block of assets with fixed rates. This difference may also create deferred tax implications.
7. How does additional depreciation work?
Manufacturing companies can claim additional depreciation (usually 20% on new plant and machinery, subject to conditions). This is over and above normal depreciation.
