Under the Income Tax Act, depreciation is allowed as a deductible expense for computing taxable income. Depreciation can be calculated using two methods: the Written Down Value (WDV) method and the Straight Line Method (SLM). For income tax purposes, depreciation is typically computed using the WDV method. In addition, taxpayers can claim additional depreciation as a deduction.
What is Additional Depreciation in Income Tax?
Additional depreciation is allowed at 20% of the actual cost of new machinery or plant (excluding ships and aircraft) acquired and installed after 31st March 2005 by a taxpayer engaged in the business of manufacturing or production of any article or thing.
- From AY 2013–14, this benefit was extended to taxpayers involved in generation or generation and distribution of power, with depreciation provided under the WDV method as per Appendix I.
- From AY 2017–18, it was further extended to taxpayers engaged in the transmission of power.
- If an asset is used for less than 180 days in the year of acquisition, only 50% of the additional depreciation (i.e., 10%) can be claimed in that year, with the remaining 50% claimable in the following year.
Assets Not Eligible for Additional Depreciation
No additional deduction is allowed for machinery or plant:
- Previously used by anyone in India or abroad before installation.
- Installed in office premises or residential accommodations, including guest houses.
- Any office appliances or road transport vehicles.
- Whose entire actual cost has already been claimed as a deduction in computing income in a previous year.
Enhanced Depreciation for Backward Areas
As per the Finance Act, 2015 (effective 1st April 2016), enhanced additional depreciation is allowed for taxpayers setting up manufacturing or production enterprises in notified backward areas:
- States Covered: Andhra Pradesh, Bihar, Telangana, and West Bengal.
- Benefit: For new machinery (excluding ships and aircraft) installed from 1st April 2015 to 31st March 2020, additional depreciation is 35% instead of 20%.
Non-Applicability of Additional Depreciation
Additional depreciation cannot be claimed on the following Plant and Machinery (P&M):
- Assets other than Plant and Machinery, such as furniture and buildings.
- Ships and aircraft.
- Second-hand or used P&M.
- P&M used in office premises, homes, or guesthouses.
- Office appliances.
- Road transport vehicles (cars, etc.).
- Assets that are 100% depreciable, like pollution control equipment.
- Additional depreciation is applicable only to factories or power generation units, not for dealers or service providers.
Computation of Depreciation
For machinery, the general depreciation rate is 15%. Additionally, 20% extra depreciation is available in the first year for industrial undertakings and power generation or distribution businesses.
- Total depreciation in the first year = 15% + 20% = 35%.
- If an asset is used for less than 180 days, only half of 35% (i.e., 17.5%) can be claimed in the first year. The remaining half can be claimed in the next year.
Illustration: ABC Ltd.
ABC Ltd., a manufacturing company, provides the following details:
- Opening WDV of Plant and Machinery (P&M) on 01.04.2017: ₹30,00,000
- New P&M purchased and put to use on 08.06.2017: ₹20,00,000
- New P&M purchased and put to use on 15.12.2017: ₹8,00,000
- Computer installed in office premises on 02.01.2018: ₹3,00,000
Depreciation and additional depreciation for AY 2018–19 are computed as follows:
Depreciation Rates:
- Plant and Machinery: 15%
- Computer: 60%
- Additional depreciation is applicable only to Plant and Machinery.
Calculation Table:
| Name of Asset | Block 1: Machine | Block 2: Computer |
| Depreciation Rate | 15% | 60% |
| Opening Value (Rs.) | 30,00,000 | 0 |
| Purchases (>180 days / <180 days) | 20,00,000 / 8,00,000 | 0 / 3,00,000 |
| Less: Sales During Year | 0 | 0 |
| Closing Value Before Depreciation | 58,00,000 | 3,00,000 |
| Depreciation | 8,10,000 | 90,000 |
| (30,00,000 + 20,00,000) 15% + 8,00,00015%*1/2 | (3,00,000*60%*1/2) | |
| Additional Depreciation | 4,80,000 | 0 |
| (20,00,00020% + 8,00,00010%) | (Used in office) | |
| Closing WDV (after Depreciation) | 45,10,000 | 2,10,000 |
Full 20% additional depreciation applies to P&M purchased on 08.06.2017.- Half of 20% applies to P&M purchased on 15.12.2017, as it was used for less than 180 days.
- No additional depreciation is available for computers since they are used in office premises.
FAQs for Depreciation Under Income Tax Act:
1. What is additional depreciation under the Income Tax Act?
Additional depreciation is an extra deduction allowed under the Income Tax Act on new plant and machinery (excluding ships and aircraft) acquired and installed by manufacturing or power generation businesses. It is over and above the normal depreciation.
2. Who is eligible to claim additional depreciation?
Taxpayers engaged in manufacturing or production of any article or in power generation/distribution are eligible. It is not available for service providers, dealers, or office appliances.
3. What is the rate of additional depreciation?
- Standard additional depreciation is 20% of actual cost of eligible plant and machinery.
- For new enterprises in backward areas (Andhra Pradesh, Bihar, Telangana, West Bengal) from 01.04.2015 to 31.03.2020, the rate is 35%.
4. Can additional depreciation be claimed for assets used less than 180 days?
Yes, if the asset is used for less than 180 days, only 50% of additional depreciation can be claimed in the year of installation. The remaining 50% can be claimed in the next year.
5. Which assets are not eligible for additional depreciation?
- Second-hand or used plant and machinery.
- Ships, aircraft, office appliances, and road transport vehicles.
- Assets installed in offices, homes, or guesthouses.
- 100% depreciable assets like pollution control equipment.
6. How is additional depreciation claimed in combination with normal depreciation?
Additional depreciation is added to the normal depreciation for the year. For example, if normal depreciation is 15% and additional depreciation is 20%, the total first-year depreciation = 35% (subject to usage less than 180 days adjustments).
7. Is additional depreciation available for computers or office equipment?
No, additional depreciation is only applicable to plant and machinery used in manufacturing or power generation. Computers and office equipment installed in offices are not eligible.
8. Can additional depreciation be carried forward if not fully claimed?
No, additional depreciation not claimed due to usage <180 days can be claimed in the next year, but there is no separate carry-forward beyond that.
9. What is the benefit of additional depreciation for new units in backward areas?
Taxpayers setting up new enterprises in backward areas get enhanced additional depreciation (35%), providing higher tax savings and encouraging industrial growth in these regions.
10. How is additional depreciation reported in the Income Tax Return (ITR)?
It is reported along with normal depreciation under the relevant asset block in the ITR computation section for plant and machinery.
