Depreciation Under the Income Tax Act: Rates and Block of Assets

Short answer: Depreciation is a tax-deductible allowance under Section 32 of the Income Tax Act, 1961, for the wear and tear of assets used for business or professional purposes. It is calculated on the 'block of assets' using the Written Down Value (WDV) method at rates prescribed in the Income Tax Rules. This reduces your taxable income, lowering your overall tax liability. It cannot be claimed on personal assets.

What is the 'block of assets' concept?

The Income Tax Act mandates grouping similar assets into a 'block' to simplify calculations. A block of assets is a group of assets falling within a class of assets (for example, buildings, machinery, or furniture) for which the same rate of depreciation is prescribed. All transactions, such as additions or sales of assets, are recorded at the block level rather than for individual assets. This approach streamlines accounting for tax purposes and removes the need to track the WDV of each single asset.

What are the main depreciation rates under the Income Tax Act?

Depreciation rates are specified in Appendix I of the Income Tax Rules, 1962, and vary based on the asset class. It is crucial to classify your assets correctly to apply the appropriate rate, as this is a common area for errors during tax filing and scrutiny. The rates are applied to the Written Down Value (WDV) of the block.

Asset Class	Block of Assets	Depreciation Rate
Buildings	Residential Buildings	5%
	General (Offices, Factories)	10%
	Temporary Erections	40%
Furniture & Fittings	General Furniture & Fittings	10%
Plant & Machinery	General Rate	15%
	Motor Cars (not used in hire)	15%
	Buses, Lorries (used in hire)	30%
	Computers & Software	40%
	Books (Annual Publications)	100%
	Books (Owned by Professionals)	60%
	Pollution Control Equipment	40%
Intangible Assets	Know-how, Patents, Copyrights	25%

How is depreciation calculated using the WDV method?

Depreciation under the Income Tax Act is calculated using the Written Down Value (WDV) method on a block of assets. The calculation follows these steps:

1. Opening WDV: Start with the closing WDV of the block from the previous financial year.
2. Additions: Add the actual cost of any new assets purchased and put to use during the year that fall into that block.
3. Reductions: Subtract the money realised from the sale, discard, or destruction of any asset from the block during the year.
4. Closing WDV for Depreciation: The resulting figure is the WDV on which depreciation is calculated.
5. Calculate Depreciation: Apply the prescribed rate for the block to this WDV. If assets were used for less than 180 days, special rules apply.

This method ensures that the value of the block is depreciated over its useful life.

What are the conditions for claiming depreciation?

To claim a deduction for depreciation under Section 32, you must satisfy two fundamental conditions. First, you must be the owner (either wholly or partly) of the asset. Ownership is a key criterion. Second, the asset must be 'put to use' for the purpose of your business or profession during the relevant financial year. If an asset is purchased but not used, no depreciation can be claimed. Depreciation is not permissible on assets held as stock-in-trade or for personal use.

What happens if an asset is used for less than 180 days?

If a new asset is acquired and put to use for a period of less than 180 days in the financial year of its acquisition, you can only claim 50% of the normal depreciation rate on that specific asset for that year. For instance, if the normal rate is 40% (like for computers), the depreciation for an asset used for less than 180 days would be 20%. This restriction applies only in the first year the asset is put to use. From the following year onwards, full depreciation is available on the remaining WDV of the block.

Can businesses claim 'additional depreciation'?

Yes, certain businesses are eligible for 'additional depreciation' under Section 32(1)(iia) to encourage investment in new machinery. This is an extra deduction of 20% of the actual cost of new plant and machinery. It is available to assessees engaged in manufacturing, production, or the business of generation or distribution of power. This is over and above the normal depreciation. Additional depreciation is not available on ships, aircraft, second-hand machinery, or office appliances.

Is depreciation allowed on intangible assets?

Yes, the Income Tax Act permits claiming depreciation on specified intangible assets acquired on or after 1st April 1998. The eligible assets include know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of a similar nature. These assets form a separate block and are depreciated at a rate of 25% on their WDV. It is important to note that goodwill of a business or profession is not eligible for depreciation.

Worked example

A new Bengaluru-based software company, 'Innovate Solutions Pvt. Ltd.', began operations in FY 2025-26 (AY 2026-27). Here's how its depreciation is calculated:

Asset Purchases:

• Office furniture for ₹2,00,000 on 15 May 2025.
• 5 high-end laptops for ₹5,00,000 (at ₹1,00,000 each) on 20 November 2025.
• Software licenses for ₹3,00,000 on 1 July 2025.

Depreciation Calculation for FY 2025-26:

1. Block: Furniture & Fittings (Rate: 10%)

• Opening WDV: ₹0
• Additions: ₹2,00,000 (Put to use on 15 May 2025, used for >180 days).
• WDV for depreciation: ₹2,00,000
• Depreciation @ 10%: ₹20,000

2. Block: Computers & Software (Rate: 40%)

• Opening WDV: ₹0
• Additions used for >180 days: ₹3,00,000 (Software licenses put to use 1 July 2025).
• Additions used for <180 days: ₹5,00,000 (Laptops put to use 20 Nov 2025).
• Depreciation on assets used >180 days: ₹3,00,000 * 40% = ₹1,20,000
• Depreciation on assets used <180 days: ₹5,00,000 * (40% * 50%) = ₹1,00,000
• Total Depreciation for this block: ₹1,20,000 + ₹1,00,000 = ₹2,20,000

Total Depreciation Claim for AY 2026-27:

• From Furniture Block: ₹20,000
• From Computer Block: ₹2,20,000
• Total Claim: ₹2,40,000

This amount of ₹2,40,000 can be claimed as an expense, reducing the company's taxable profit. The calculation will be part of the company's ITR filing.

Common mistakes

1. Claiming depreciation on Land: Land is a non-depreciable asset. You cannot claim depreciation on its cost, even if there is a building constructed on it.
2. Incorrectly applying the <180 days rule: Applying the 50% rate in subsequent years or failing to apply it in the year of acquisition. The half-rate rule applies only once.
3. Forgetting to reduce sale proceeds: Failing to subtract the money received from selling an asset from the block's WDV before calculating depreciation. This leads to incorrect WDV and excess depreciation claim.
4. Claiming depreciation on personal assets: Claiming depreciation on assets like cars or laptops used exclusively for personal purposes. A logbook is required to substantiate business use for mixed-use assets.
5. Wrong classification of assets: Placing an asset in a block with a higher depreciation rate (e.g., classifying a general office appliance as a computer) can lead to disputes during a tax audit.
6. Claiming depreciation without ownership: A person using a leased asset (lessee) cannot claim depreciation; only the owner (lessor) is entitled to this claim.

How SP & SC helps

Navigating the rules of depreciation can be complex, from asset classification to accurate calculation and reporting. At SP & SC, our tax experts provide comprehensive tax consultation. We assist businesses in creating a fixed asset register, correctly classifying assets into blocks, calculating annual depreciation as per the Income Tax Act, and preparing the detailed schedules required for ITR filing. We also offer strategic advice on tax planning related to asset acquisition and disposal to optimize your tax position.

Frequently asked questions

Can a salaried person claim depreciation?

A salaried person generally cannot claim depreciation against salary income. However, if a salaried individual also has income from a business or profession (e.g., as a consultant) or earns income from house property they own, they can claim depreciation against that specific income stream, provided the asset is used for that purpose.

What happens when I sell an asset from a block?

The sale proceeds are deducted from the WDV of the block. If the sale value is less than the block's WDV and the block is not empty, depreciation is claimed on the reduced balance. If the sale value exceeds the WDV of the block, the excess is taxed as a short-term capital gain. If the entire block is sold for less than its WDV, it results in a short-term capital loss.

Can I claim depreciation on my car?

Yes, if the car is used for your business or profession, you can claim depreciation at 15%. If the car is also used for personal purposes, you can only claim depreciation proportionate to its business use. You must maintain proper records, like a logbook, to substantiate your claim. If you are in the business of running motor cars on hire, the applicable rate is 30%.

Do I need to claim depreciation? Is it mandatory?

Yes, claiming depreciation is mandatory. The Supreme Court has held that if the conditions of Section 32 are satisfied, the depreciation deduction must be computed and allowed. An assessee cannot choose to not claim depreciation to show higher profits or for any other reason.

Can I claim depreciation if I opt for the presumptive tax scheme?

No. If you opt for presumptive taxation under sections like Section 44AD or 44ADA, your income is computed at a prescribed percentage of your gross turnover or receipts. This deemed profit is considered to cover all business expenses, including depreciation. You cannot claim any further deduction for depreciation separately.

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Need to ensure your depreciation claims are accurate and compliant? Share your fixed asset details with us for a review. SP & SC provides a written, fixed-fee quote before starting any work. We handle all tax and compliance matters from start to finish. Contact SP & SC or WhatsApp us at +91 90356 74566.