Section 32 of Income Tax Act, 1961: Depreciation
Updated: Oct 13, 2022
Introduction
Depreciation is permitted under Section 32 of the Income Tax Act of 1961 and is governed by Rule 5 of the Income Tax Rules. According to the Income Tax Act, a deduction is allowed when the value of a tangible or intangible asset used by the taxpayer decreases. The income-tax department determines the depreciation on an asset's total cost over its lifetime at the time of the deduction, however. A taxpayer may use either the straight-line method or the written line method to determine the deduction brought on by depreciation (WLM). The written line method is a concept used by the income tax department (WLM). However, when depreciation is taken into account when generating or distributing power, the Income-tax department uses the concept of “Additional general method”. In certain circumstances, the Income Tax Act allows a deduction for additional depreciation in the year of purchase.
Meaning of Depreciation
Depreciation is discussed in Section 32 of the Income Tax Act of 1961. Depreciation is the term used to describe a decline in asset value brought on by normal wear and tear. Depreciation is only deducted by people for accounting or taxation purposes.
Depreciation of both tangible and intangible assets is permitted under the Income Tax Act of 1961. You can deduct the building, plant, and machinery costs associated with a tangible asset. You may deduct the cost of a patent, trademark, copyright, license, franchise, or any other similar business or commercial right in the case of an intangible asset. You are eligible to claim a deduction for depreciation on assets used by the taxpayer for the purpose of business or profession during the previous year.
Any asset that has been in use for more than 180 days is eligible for 50% depreciation in that year. It is not necessary for assets to have been used by the taxpayer in the prior year in order to qualify for a deduction under depreciation. According to the Income Tax Act, the taxpayer is entitled to a deduction for depreciation if they buy an asset and then lease it to the lessee.
Rates of Depreciation
Rates of depreciation on the following assets:
· Building for residential use: 5%;
· Building for non-residential use: 10%;
· Furniture and fittings: 10%;
· Computers including software: 40%;
· Plant and machinery: 15%;
· Motor vehicles for personal use: 15%;
· Motor vehicles for commercial use: 30%;
· Ships: 20%;
· Aircraft: 40%;
· All intangible assets: 25%.
Conditions for Claiming Depreciation
1. The assessee must be the sole or joint owner of the assets.
2. The taxpayer's business or line of work must use the assets. The amount of allowable depreciation would be proportionate to the use of the assets for business purposes if they were used for other purposes in addition to the business. According to Section 38 of the Act, the Income Tax Officer also has the authority to choose the proportionate portion of the depreciation.
3. Co-owners may deduct depreciation up to the value of the assets that each owns.
4. Goodwill and the cost of the land are not subject to depreciation.
5. Depreciation is required starting in the A.Y. 2002-03 and must be permitted or deemed to have been permitted as a deduction regardless of a taxpayer's claim in the profit & loss account. That is, after deducting the depreciation amount, the taxpayer may carry the WDV forward.
6. The deemed profit is said to have taken into account depreciation if the presumptive taxation scheme was chosen.
7. The Companies Act of 1956's definition of depreciation differs from
8. Act on Income Tax. Therefore, regardless of the depreciation rates recorded in the books of accounts, only those permitted by the Income Tax Act are allowed.
Written Down Value Method (Block Wise)
The asset's book value declines annually, and depreciation is calculated using the asset's book value. The written down value (WDV) method is the most accurate way to determine an asset's depreciation because the amount of depreciation continuously decreases over time. Depreciation should be calculated at the prescribed percentage on the WDV of the asset, which is calculated with reference to the actual cost of the asset, according to Section 32(1) of the Income Tax Act of 1961. The WDV is the actual cost when an assessee purchases an asset from the prior year. While the asset purchased in a prior year's WDV must equal the actual cost less any permitted depreciation under the Act.
This may be easily followed by the following example:
Depreciable assets on 1.04.2017 on which the depreciation is available at the same rate of 25%.
Asset A
3,00,000
Asset B
5,00,000
Asset C
7,00,000
Total
15,00,000
Less: Depreciation @ 25% of 15,00,000
(3,75,000)
1. Written down the value on 1.4.2018 of a block of the asset.
Add: Cost of Asset purchased during 2018-19
11,25,000
6,00,000
Ii. Balance
Asset B sold during the year 2018-19
17,25,000
(6,75,000)
iii) Balance
Less: Depreciation for 2018-19 @ 25% of Rs. 10,50,000
10,50,000
(2,62,5000)
Written down value of all assets on 1.04.2019
7,87,500