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Depreciation – Meaning, Conditions & Rates

In Accounts, depreciation estimates wear and tear. In Income Tax, it's a statutory allowance (Section 32). It follows the Block of Assets method, not individual assets. Let's learn the rules!

Key Differences: Accounts vs Tax

FeatureAccounting (Companies Act)Income Tax (IT Act)
MethodSLM or WDVWDV (mostly)
BasisIndividual Asset lifeBlock of Assets
RatesBased on useful lifeFixed Block Rates
UsagePro-rata (days used)180 Days Rule (50% or 100%)

Conditions for Claiming Depreciation

  1. Asset Ownership: Assessee must be the owner (wholly or partly). Includes beneficial ownership.
  2. Used for Business: Asset must be used for business/profession during the previous year.
  3. Tangible or Intangible: Available on both (Know-how, patents, etc., but NOT Goodwill of business).

1. Block of Assets Concept

Assets of the same class having the same rate of depreciation form a Block.

Main Classes:

  1. Buildings
  2. Furniture & Fittings
  3. Plant & Machinery (P&M)
  4. Intangible Assets

Example:

  • Using Motor Car (15%) and Machinery (15%).
  • These belong to the same block (P&M 15%).

2. Key Depreciation Rates (FY 2024-25)

A. Buildings

  • Residential (staff quarters): 5%
  • General (Office, Factory, Godown): 10%
  • Temporary Structures (Wooden): 40%

B. Furniture & Fittings

  • General (Tables, Chairs, ACs, Lights): 10%

C. Plant & Machinery (General Rate 15%)

  • Motor Cars (Personal/General use): 15%
  • Motor Cars (Running for hire): 30%
  • Computers & Software: 40%
  • Books (Professional): 40%
  • Pollution Control Equipment: 40%

D. Intangible Assets

  • Patents, Copyrights, Trademarks, Licenses: 25%
  • Note: Goodwill is NOT eligible for depreciation (Supreme Court/Amendment).

3. Computation Method (WDV)

Formula for Closing WDV:

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Important Rules:

  1. Block WDV cannot be negative: If Sale > (Opening + Purchase), the excess is Short-Term Capital Gain (STCG). WDV becomes Zero.
  2. Block ceases to exist: If all assets are sold, but WDV is positive, the WDV balance is Short-Term Capital Loss.

4. The 180 Days Rule (Half Depreciation)

If an asset is:

  1. Acquired during the year, AND
  2. Put to use for LESS than 180 days (i.e., put to use after approx Oct 3rd).

Then: Depreciation is restricted to 50% of the normal rate for that specific asset.

Example:

  • Bought Machine A (15%) on Dec 1, 2024 for ₹10L.
  • Depreciation: ₹10L × 15% × 50% = 7.5%.

5. Additional Depreciation (Section 32(1)(iia))

Who gets it? Manufacturers (Factories) and Power Generators. Rate: 20% of actual cost (one-time). Conditions:

  • New Plant & Machinery acquired and installed.
  • Not applicable to cars, office appliances, computers in office.
  • If put to use < 180 days: 10% this year, 10% next year.

Practical Example

M/s Alpha Traders (WDV Method):

  • Block: Plant & Machinery (15%).
  • Opening WDV (1-4-2024): ₹5,00,000.
  • Purchased Machine X (June 2024): ₹3,00,000.
  • Purchased Machine Y (Dec 2024): ₹2,00,000 (Use < 180 days).
  • Sold Old Machine Z (Jan 2025): ₹1,00,000.

Computation:

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(Note: Sales value is deducted from the general pool first. The < 180 day asset is identified specifically for the rate restriction.)

Summary

  • Section 32 allows specific depreciation deduction on WDV of Block of Assets.
  • Rates: Building (10%), Machinery/Car (15%), Computer (40%), Furniture (10%).
  • 180 Day Rule: Asset used < 180 days gets half rate in first year.
  • Additional Dep: 20% extra for manufacturing units on new machinery.
  • Capital Gains:
    • Sale > WDV + Purchases = STCG.
    • Block Empty but WDV positive = STCL.

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