Depreciation Rate As Per Income Tax Act

Ever wondered how businesses in India save millions in taxes annually? 

The secret lies in understanding the depreciation rate as per income tax act – a powerful tax planning tool that can significantly impact your bottom line. 

With Indian businesses collectively claiming depreciation worth over ₹2 lakh crores each year, mastering these rates isn’t just beneficial, it’s essential.

The depreciation rate as per income tax act serves as your roadmap to legitimate tax savings while ensuring complete compliance. 

What is Depreciation Rate as Per Income Tax Act?

The value of annual depreciation allowed by the income tax act is determined by sets of percentages called the depreciation rate. These rates are unique to several types of business assets. Just as with other provisions, the Income Tax Act sorts assets into different blocks using a depreciation approach.

Above all, the allowable tax rates are only those listed in the Income Tax Act. Therefore, all companies have to use these rates, no matter how they keep their accounting. This means it is important to know how depreciation is calculated under the income tax act to ensure you comply with taxes.

What are Block of Assets? 

Under the Income Tax Act, assets are grouped into different “blocks” based on their nature and depreciation rates. This block system simplifies depreciation calculations and ensures uniformity across businesses. 

Here are some of the key features of how block system works:

• Similar assets with the same depreciation rate are grouped together
• Each block is treated as a single unit for depreciation calculation
• When you buy new assets, they’re added to the relevant block
• When you sell assets, the sale proceeds are deducted from the block
• Depreciation is calculated on the net block value

Below are some examples of asset blocks, commonly used for categorizing fixed assets:

• Building Block: Office buildings, factories, warehouses.
• Furniture Block: Office furniture, fixtures, fittings.
• Plant & Machinery Block: Manufacturing equipment, tools, machinery.
• Computer Block: IT equipment, software, digital assets.
• Vehicle Block: Cars, trucks, commercial vehicles.

Conditions for Claiming Depreciation

To claim depreciation under the Income Tax Act, certain conditions must be fulfilled:

1. Ownership of the Asset

• The asset must be owned (wholly or partly) by the entity or individual claiming depreciation.
• In case of joint ownership, depreciation is claimed proportionally.

2. Asset Must Be Used for Business or Professional Purposes

• Depreciation is allowed only if the asset is used in the course of business or for professional activities.
• Assets used for personal purposes are not eligible for depreciation claims.

3. Asset Must Be Put to Use

• The asset must be put to use during the relevant financial year.
• If the asset is not used during the year, no depreciation can be claimed.

In some tax systems (e.g., India), if the asset is used for less than 180 days in the year, only 50% of eligible depreciation is allowed.

Methods of Calculating Depreciation

The Income Tax Act, 1961 prescribes specific methods for calculating depreciation on tangible and intangible assets. These methods serve different purposes and offer unique advantages for accounting accuracy and tax planning. 

The two primary methods are the Straight Line Method (SLM) and the Written Down Value (WDV) Method.

1. Straight Line Method

Under this method, depreciation is calculated as a fixed percentage of the original cost throughout the asset’s useful life. The depreciation amount remains constant each year.

Key Features of SLM:

• Equal depreciation amount is deducted every year.
• Simple and easy method, making it easy to plan and account for expenses..
• Primarily used for accounting and financial reporting purposes as per Schedule II of the Companies Act, 2013. 
• Not recognized for Income Tax purposes in India, except in special cases such as undertakings engaged in power generation and distribution, where the SLM is permissible under Section 32(1)(i) of the Act.

2. Written Down Value (WDV) Method  

The Written Down Value method is the primary depreciation method under the Income Tax Act. Under this method, depreciation is calculated on the reducing balance each year.

In this method, depreciation is calculated on the net book value of the asset after deducting depreciation claimed in earlier years.

Key Features of WDV:

• Depreciation decreases each year.
• Higher depreciation in initial years.
• Tax benefits are front-loaded.
• Reflects actual asset value depreciation pattern.
• Mandatory for Income Tax calculations.

Common depreciation rates (as per Income Tax Rules, Appendix I):

• 15% for general machinery and vehicles
• 40% for computers and software
• 10% for buildings (non-residential use)
• 5% for residential buildings

What is Furniture Depreciation Rate?

The furniture depreciation rate stands at 10% per annum under the Income Tax Act. The income tax depreciation rate for furniture and fittings is 10%. This furniture depreciation rate income tax applies to various categories.

What Is Protected by a Furniture Block?

In essence, a furniture block safeguards both your physical workspace assets and the essential infrastructure that keeps your environment functional and professional.

• There are office desks, chairs, tables and cabinets.
• Filing cabinets and storage units are standard office and home belongings.
• You should also plan for both the reception and waiting area furnishings.
• Equipment and furniture designed for use in conference rooms.
• Cables for your appliances, air ventilators, sockets, switches, light fixtures and the like.

Depreciation Rates for FY 2025-26 for Most Commonly Used Assets

Here’s an overview of the current depreciation rates applicable for the financial year 2025-26, covering the most frequently used business assets across various industries.

Asset Category	Depreciation Rate	Method
Buildings (General)	10%	WDV
Buildings (Temporary)	100%	WDV
Furniture & Fittings	10%	WDV
Plant & Machinery	15%	WDV
Motor Vehicles	15%	WDV
Computers & Software	40%	WDV
Aeroplanes	40%	WDV
Ships	20%	WDV
Books & Scientific Equipment	40%	WDV
Renewable Energy Devices	40%	WDV

Formula for Calculating Depreciation

Understanding the correct formulas behind depreciation calculations is essential for accurate tax planning and compliance with Income Tax Act provisions.

1. Straight-Line Method Formula

Annual Depreciation = (Cost of Asset – Salvage Value) ÷ Useful Life

For example, the depreciation will be computed as follows: 

Suppose  you purchase machinery for ₹1,00,000 with a useful life of 10 years and salvage value of ₹10,000:

Annual Depreciation = (₹1,00,000 – ₹10,000) ÷ 10 = ₹9,000 per year

2. Written Down Value (WDV) Assets Formula

Annual Depreciation = Opening WDV × Depreciation Rate ÷ 100

For example, the depreciation will be computed as follows: 

Example 1: Machinery Depreciation @15% Rate

Machinery purchased for ₹1,00,000, using the WDV method at a 15% depreciation rate:

Year 1: ₹1,00,000 × 15% = ₹15,000 → Closing WDV = ₹85,000

Year 2: ₹85,000 × 15% = ₹12,750 → Closing WDV = ₹72,250

Year 3: ₹72,250 × 15% = ₹10,838 → Closing WDV = ₹61,412

Example 2: Furniture Depreciation @10% Rate

Furniture block valued at ₹1,00,000, using the WDV method at a 10% rate:

Year 1: ₹1,00,000 × 10% = ₹10,000 → Closing WDV = ₹90,000

Year 2: ₹90,000 × 10% = ₹9,000 → Closing WDV = ₹81,000

Year 3: ₹81,000 × 10% = ₹8,100 → Closing WDV = ₹72,900

Analysis of AS-22/IND AS 12 Concerning Depreciation

The treatment of depreciation under accounting standards and tax laws often differs, leading to temporary (timing) differences that affect income tax reporting. 

Understanding AS-22 (Accounting Standard) and Ind AS 12 (Indian Accounting Standard) is crucial for accurately accounting for such differences and recognizing deferred tax impacts.

1. AS-22 (Accounting for Taxes on Income)

Issued by: ICAI (Institute of Chartered Accountants of India)

Applicable to: Entities not covered under Ind AS (mainly non-listed and smaller companies)

• Governs the accounting treatment of current tax and deferred tax.
• Focuses on timing differences, which arise when income or expenses are recognized in different periods under accounting and tax laws.
• Specifically addresses the impact of depreciation-related differences between financial books and tax filings.

Impact of Depreciation:

Book depreciation (as per Companies Act) may differ from tax depreciation (as per the Income Tax Act).

These differences create timing differences, leading to:

• Deferred Tax Liability (DTL): When tax depreciation exceeds book depreciation.
• Deferred Tax Asset (DTA): When book depreciation exceeds tax depreciation (e.g., due to disallowed depreciation or accelerated depreciation reversals).

AS-22 requires:

• Recognition of DTA/DTL in financial statements.
• Disclosure of the nature and amount of such differences.
• Reconciliation between accounting and tax depreciation.

2. IND AS 12 (Income Taxes)

Issued by: Companies (Indian Accounting Standards) Rules, 2015

Applicable to: Companies following Ind AS (typically listed and large unlisted companies)

Enhanced Requirements:

• More than AS-22.
• Detailed guidance on temporary differences.
• Specific provisions for depreciation differences.
• Enhanced disclosure requirements.

Depreciation-Related Provisions:

Ind AS 12 explicitly addresses differences arising from:

• Varying depreciation methods or rates (SLM in books vs. WDV for tax).
• Revaluation of assets (common under Ind AS, but not recognized for tax).
• Assets with zero tax base due to full depreciation under tax laws.

Requires recognition of:

• DTL for taxable temporary differences.
• DTA for deductible temporary differences, subject to probability of future taxable income.

Emphasizes comprehensive disclosures about:

• DTA/DTL movements
• Nature of differences
• Expected reversal periods

Aspect	Accounting Standards (AS-22 / Ind AS 12)	Income Tax Act
Basis	Based on useful life as per Companies Act (Schedule II)	Prescribed rates/methods under Income Tax Rules
Method	Straight Line / WDV as per policy	WDV method (generally mandatory)
Purpose	Fair presentation of financial position	Tax liability computation
Implication	Creates deferred tax (DTA/DTL)	Impacts current tax liability

Mastering these depreciation provisions isn’t merely an accounting exercise; it’s a strategic imperative that can significantly impact your business’s financial health and tax efficiency. 

The proper application of depreciation rates can optimize your cash flows, reduce tax liabilities, and enhance your company’s overall financial performance. As regulations continue to evolve and business environments become increasingly competitive, staying updated with the latest depreciation guidelines becomes crucial for sustainable growth. 

Professional expertise in tax planning and compliance ensures that your business not only meets statutory requirements but also maximizes legitimate tax benefits available under the law.

Ready to maximize your tax benefits through strategic depreciation planning? Contact RegisterKaro’s expert today for personalized tax compliance solutions that optimize your business savings.