What is depreciation in the Income Tax Act?
Section 32 of the Income Tax Act of 1961 addresses depreciation. Depreciation is defined as a reduction in an item’s value brought on by wear and tear. Depreciation deductions are only claimed for tax or accounting purposes.
All real and intangible possessions are deductible under the Income Tax Act of 1961. It can be subtracted from the price of the house, factory, and equipment if it is a capital asset. A deduction against patents, trademarks, copyright, warrants, franchises, or any other relevant corporate or contractual privilege may be made in the event of an intangible possession.
Rates of depreciation on assets-
Assets | Rates of Depreciation |
Residential Building | 5% |
Non-residential Building | 10% |
Furniture and Fitting | 10% |
Computers and Software | 40% |
Plant and Machinery | 15% |
Personal Use Motor Vehicle | 15% |
Commercial Use Motor Vehicle | 30% |
Ships | 20% |
Aircraft | 40% |
Tangible Assets | 25% |
Types of Depreciation Methods
Depreciation techniques come in a variety of forms, each providing a unique way to spread out an asset’s cost over its useful life. It is essential for organizations to comprehend various approaches in order to select the best one for their assets and financial goals. These are a few typical categories of depreciation techniques:
This approach equitably distributes an asset’s cost over its useful life.
A less common method of spreading out the cost of an asset over its useful life is depreciation. It is typically used to assets that have a fixed rate of return, a lengthy lifespan, and a high purchase price.
With this accelerated depreciation technique, the asset’s residual book value is subject to a depreciation rate that is double that of the straight-line method.
The asset’s remaining book value is depreciated at a fixed rate using this method, which raises depreciation costs in the first few years.
This approach, which distributes depreciation according to the asset’s actual usage, is perfect for assets whose productivity fluctuates.
A number of factors, including asset type, projected usage, financial objectives, and business flexibility in handling financial reporting and tax ramifications, influence the choice of depreciation method.
Claiming Depreciation as Per Income Tax Act
An assessee must meet certain requirements to claim the depreciation deduction. Below are the conditions:
To take advantage of depreciation, the asset’s owner must be an assessee. Both tangible and intangible assets are possible. A home, machinery, a factory, or furnishings are examples of tangible assets. Patent rights, copyrights, trademarks, licenses, franchises, and other similar assets acquired on or after April 1, 1998, can all be considered intangible possessions.
Depreciation can only be sought by an assessee on capital assets that he owns. In order to benefit from the credit for property depreciation, the assessee must be the owner of the properties in question. The property does not have to be owned by the taxpayer. When an assessee builds a home but the land is owned by someone else, he is entitled to a credit for home depreciation.
A business or vocation may have used the commodity in order to be eligible for the depreciation credit. However, an assesseemust use the asset during the fiscal year in order to claim the credit for depreciation.
Therefore, the taxpayer is entitled to depreciation deductions if he uses the asset for a little period of time throughout an accounting year. Consider each seasonal factory, for instance.
An assessee cannot deduct depreciable assets. The assesseecannot claim the deduction if an item is sold, taken away, or damaged in the same year that it was purchased.
The assets must be used in conjunction with the taxpayer’s company or profession; if an asset has a co-owner, the co-owner may also record depreciation on the asset. The permitted depreciation will be commensurate to the duration of the assets’ business use if they are utilized for purposes
other than business. The Income Tax Officer is also authorized by Section 38 of the Act to determine the proportionate share of depreciation. Depreciation can be claimed by co-owners up to the value of their joint assets.
CASE LAWS:
CIT vs. Star Wire (India) Ltd. (2009):
CIT vs. Mahindra and Mahindra Ltd. (1997):
CIT vs. V. Sri Ram (1997):
DCIT vs. Lanco Infratech Ltd. (2014):
Conclusion
Effective tax planning requires an understanding of depreciation under the Income Tax Act. Taxpayers can maximize their deductions while maintaining legal compliance by utilizing Section 32’s provisions. Businesses can lower their tax obligations and promote long-term asset investment by properly classifying, calculating, and reporting depreciation. To submit truthful claims and steer clear of mistakes, always refer to the specified rates and conditions.
REFRENCES
1–Depreciation under Income Tax Act – Depreciation Rate and Calculation. (n.d.). Groww. https://groww.in/p/tax/depreciation-under-income-tax-act 1 25% TAX
2-Acharya, M. (2024, June 9). Depreciation method: Types of depreciation methods with formulas & examples. Cleartax. https://cleartax.in/s/methods-of-depreciation why decp is impt
3-Supra-1
4-One, A. (2025, January 24). What is depreciation in the Income Tax Act? Angel One. https://www.angelone.in/knowledge-center/income-tax/what-is-depreciation
By …
Harmanjeet Kaur ,
4th Year , B.A LL.B(Hons)
Lovely Professional University
