Depreciation Rates for the Financial Year 2023-24 as per the Income Tax Act

Depreciation is a rule in the Income Tax Act that lets you subtract the decreasing value of things like equipment or property that you use for your business.

Understanding Depreciation

Depreciation refers to the gradual reduction of an asset’s value over time. It’s a necessary expense recorded in a company’s financial statements for assets that wear out or lose value. The Income Tax Act provides guidelines for calculating depreciation using either the Straight-Line method or the Written Down Value (WDV) method.

The WDV method is commonly used for depreciation calculations, although businesses engaged in power generation have the option to choose the straight-line method. Additionally, under certain conditions, the Act permits an additional deduction for depreciation in the year an asset is purchased. For more information on additional depreciation, refer to the section on Additional Depreciation Under the Income Tax Act.

Block of Assets – Understanding the Concept

Depreciation is computed based on the Written Down Value (WDV) of a group of assets known as a Block of Assets. A Block of Assets comprises:

– Tangible assets like buildings, machinery, plants, or furniture.

– Intangible assets such as patents, copyrights, trademarks, licenses, franchises, or similar business or commercial rights.

Identification of the block of assets hinges on factors like its lifespan, nature, and common usage. Additionally, the depreciation rate applicable to the asset class is pivotal in its classification. Each asset class with the same depreciation rate is grouped together as a block of assets.

Under the Income Tax Act, assets lose their individual identity as depreciation is calculated collectively on the block of assets rather than on individual assets.

Criteria for Depreciation Claim

To claim depreciation, certain conditions must be met:

1. Ownership: The assets must be owned, either wholly or partially, by the taxpayer.
2. Business Use: The assets must be utilized for the taxpayer’s business or profession. If assets are used for both business and personal purposes, depreciation is allowed proportionately for business use, determined by the Income Tax Officer if necessary.
3. Co-ownership: Co-owners can claim depreciation based on the value of assets owned individually.
4. Exclusions: Depreciation cannot be claimed on Goodwill or the cost of land.
5. Mandatory Deduction: Depreciation is compulsory from Assessment Year (A.Y.) 2002-03 onward, regardless of whether the taxpayer claims it in the profit and loss account.
6. Presumptive Taxation: If opting for the presumptive taxation scheme, deemed profit considers the effect of depreciation.
7. Distinct Depreciation Rates: Depreciation rates under the Companies Act, 1956 differ from those under the Income Tax Act. Only depreciation rates prescribed by the Income Tax Act are permissible, regardless of rates recorded in the books of accounts.

Understanding Written Down Value (WDV) of Assets

According to Section 32(1) of the Income Tax Act, depreciation is calculated based on a prescribed percentage of the Written Down Value (WDV) of the asset. The WDV is derived from the actual cost of the asset. To comprehend depreciation computation, it’s essential to grasp the definitions of ‘WDV’ and ‘Actual Cost’.

Under the Income Tax Act, WDV denotes:

1. If the asset was acquired in the current year, its actual cost serves as the WDV.
2. If the asset was acquired in a previous year, the WDV equals the actual cost incurred minus depreciation allowed under the Act.

Amount of Depreciation Allowed

Depreciation is computed using the WDV method, with rates specified in Appendix 1. However, undertakings involved in power generation or distribution have the choice between WDV and Straight-Line methods if exercised before the return filing deadline.

During amalgamation or demerger, total depreciation allowance is divided between involved entities, treating the transaction as if it hadn’t occurred, based on asset usage days.

For finance lease transactions, lessees must capitalize assets according to AS-19. Consequently, lessees can claim depreciation since they possess ownership rights over the assets.

Depreciation Rates for FY 2023-24 for Most Commonly Used Assets

Sl. No	Asset Class	Asset Type	Rate of Depreciation
1	Building	Residential buildings not including boarding houses and hotels	5%
2	Building	Boarding houses and hotels	10%
3	Building	Purely temporary constructions like wooden structures	40%
4	Furniture	Any fittings / furniture including electrical fittings	10%
5	Plant and machinery	Motor cars excluding those used in a business of running them on hire	15%
6	Plant and machinery	Motor cars excluding those used in a business of running them on hire purchased on or after 23 August 2019 but before the 1 April 2020 and is put to use before 1 April 2020	30%
7	Plant and machinery	Lorries/taxis/motor buses used in a business of running them on hire	30%
8	Plant and machinery	Lorries/taxis/motor buses used in a business of running them on hire purchased on or after 23 August 2019 but before the 1 April 2020 and is put to use before 1 April 2020	45%
9	Plant and machinery	Computers and computer software	40%
10	Plant and machinery	Books owned by assessee carrying on a profession being annual publications	100%
11	Plant and machinery	Books owned by assessee carrying on profession not being annual publications	60%
12	Plant and machinery	Books owned by assessee carrying on business in running lending libraries	100%
13	Intangible assets	Franchise, trademark, patents, license, copyright, know-how or other commercial or business rights of similar nature	25%

Depreciation rates according to the Income Tax Act (Comprehensive Chart) 

Are divided into two sections:

Part A: Tangible Assets

Part B: Intangible Assets

Asset Class	Sr. No.	Asset Type	Rate of Depreciation
Part A Tangible Assets
Building	1	Buildings used primarily for residential reasons (excluding boarding houses and hotels)	5%
	2	Buildings apart from those used primarily for residential reasons and not covered by subitems 1 (above) and 3 (below)	10%
	3	Buildings procured on or after September 1, 2002, for installing plant and machinery forming part of water treatment system or water supply project and which is used for the purpose of business of providing infrastructure facilities under clause (i) of subsection (4) of section 80-IA	40%
	4	Purely temporary erections like wooden structures	40%
Furniture and fittings		Furniture and fittings including electrical fittings	10%
Plant and machinery	1	Plant and machinery excluding those covered by sub-items (2), (3) and (8) below	15%
	2	Motor cars, excluding those used in a business of running them on hire, procured or put to use on or after April 1, 1990	15%
	3	Motor cars, other than those used in a business of running them on hire, acquired on or after the 23rd day of August, 2019 but before the 1st day of April, 2020 and is put to use before the 1st day of April, 2020.	30%
	3(i)	Aeroplanes, Aero Engines	40%
	3(ii)	(a) Motor taxis, motor buses and motor lorries used in a business of running them on hire	30%
		(b) Motor buses, motor lorries and motor taxis used in a business of running them on hire, acquired on or after the 23rd day of August, 2019 but before the 1st day of April, 2020 and is put to use before the 1st day of April, 2020.	45%
	3(iii)	Commercial vehicle which is procured by the assessee on or after October 1, 1998, but before April 1, 1999, and is used for any period of time prior to April 1, 1999, for the purpose of profession or business in agreement with the third proviso to clause (ii) of sub-section (1) of section 32	40%
	3(iv)	New commercial vehicle procured on or after October 1, 1998, but prior to April 1, 1999, in replacement of condemned vehicle of more than 15 years of age and is used for any period of time prior to April 1, 1999, for the purpose of business or profession in agreement with the third proviso to clause (ii) of sub-section (1) of section 32	40%
	3(v)	New commercial vehicle procured on or after April 1, 1999, but before April 1, 2000, in replacement of condemned vehicle of more than 15 years of age and is put to use prior to April 1, 2000, for the purposes of profession or business in agreement with the second proviso to clause (ii) of sub-section (1) of section 32	40%
	3(vi)	New commercial vehicle procured on or after April 1, 2001, but before April 1, 2002, and is put to use before April 1, 2002, for the purpose of profession or business	40%
		New commercial vehicle which is acquired on or after the 1st day of January, 2009 but before the 1st day of October, 2009 and is put to use before the 1st day of October, 2009 for the purposes of business or profession [See paragraph 6 of the Notes below this Table]	40%
	3(vii)	Moulds used in plastic and rubber goods factories	30%
	3(viii)	Air pollution control equipment	40%
		Felt-filer system
		Electrostatic precipitation systems
		Scrubber
		Counter current / packed bed / venture / cyclonic scrubbers
		Dust collector systems
		Evacuation system and ash handling system
	3(ix)	Water pollution control equipment	40%
		Aerated detritus chambers (including air compressor)
		Mechanical screen systems
		Mechanically skimmed grease and oil removal systems
		Flash mixing equipment and chemical feed systems
		Mechanical reactors and mechanical flocculators
		Mechanically aerated activated sludge / diffused air systems
		Biofilters
		Aerated lagoon systems
		Air floatation systems
		Methane
		recovery anaerobic digester systems
		Steam/air stripping systems
		Marine outfall systems
		Urea Hydrolysis systems
		Activated carbon column
		Bio
		Disc or rotating biological contractor
		Marine outfall systems
		Ion exchange resin column
		Centrifuge for dewatering sludge
	3(x)	(a) Solid waste, control equipment Cryolite / mineral / lime / caustic / chrome recovery system (b) Resource recovery and solid waste recycling systems	40%
	3(xi)	Plant and machinery used in semiconductor industry covering all integrated circuits (ICs) (not including hybrid integrated circuits) ranging from small scale integration (SSI) to large scale integration / very large scale integration (LSI/VLSI) as also discrete semiconductor devices like diodes, triacs, thyristors, transistors, etc., except those covered by entries (viii), (ix), (x) of this sub-item and sub-item (8) below	30%
	3(xi)a	Life Saving medical equipment	40%
		D.C Defibrillators for pacemakers and internal use
		Colour Doppler
		Haemodialysis
		Cobalt therapy unit
		Vascular Angiography System including Digital subtraction Angiography
		Heart lung machine
		Spect Gamma Camera
		Magnetic Resonance Imaging System
		Ventilator used with anaesthesia apparatus
		Ventilator except those used with anaesthesia
		Surgical laser
		Gamma knife
		Fibre optic endoscopes including audit resectoscope/paediatric resectoscope, arthoscope, peritoneoscopes, fibreoptic flexible nasal pharyngo, microaryngoscope, video laryngo, fiberoptic flexible laryngo bronchoscope.
		Bronchoscope, video oescophago gastroscope, video oescopghago bronchoscope, fibreoptic flexible oesophago gastroscope
	4	Containers made of plastic or glass used as refills	40%
	5	Computers including computer software	40%
	6	Plant and machinery, used in processing, weaving and garment sector of textile industry, which is bought under TUFS on or after April 1, 2001, but prior to April 1, 2004, and is put to use prior to April 1, 2004	40%
	7	Plant and machinery procured and installed on or after September 1, 2002, in a water treatment system or a water supply project and put to use for the purpose of business of providing infrastructure facility under clause (i) of sub-section (4) of section 80-IA	40%
	8	1. Wooden parts used in artificial silk manufacturing machinery	40%
		2. Match factories, wooden match frames	40%
		3. Cinematograph films, bulbs of studio lights	40%
		4. Salt works, condensers, reservoirs, salt pans, etc., made of clayey, sandy or earthy material or any other similar material	40%
		5. Quarries and mines
		Sand stowing pipes, winding ropes, tubs and haulage ropes	40%
		Safety lamps	40%
		6. Flour mills, rollers	40%
		7. Sugar works, rollers	40%
		8. Steel and iron industry, rolling mill rolls	40%
		9. Energy saving devices
		(A) Furnaces and specialised boilers
		(i) Fluidized bed boilers / ignifluid
		(ii) Continuous pusher type furnaces and flameless furnaces
		(iii) High efficiency boilers
		(iv) Fluidized bed type heat treatment	40%
		(B) Instrumentation and monitoring system for monitoring energy flows
		(i) Digital heat loss meters
		(ii) Automatic electrical load monitoring systems
		(iii) Infrared thermography	40%
		(iv) Microprocessor based control systems
		(v) Meters for measuring heat losses, steam flow, furnace oil flow, power factor and electric energy meters
		(vi) Exhaust gas analysers
		(vii) Maximum demand indicator and clamp on power meters
		(viii) Fuel oil pump test bench
		(C) Waste heat recovery equipment
		(i) Air pre-heaters and recuperators	40%
		(ii) Feed water heaters and economisers
		(iii) Thermal energy wheel for low and high temperature heat recovery
		(iv) Heat pumps
		(D) Co-generation systems
		(i) Controlled extraction, back pressure pass out, extraction cum condensing turbines for cogeneration along with pressure boilers	40%
		(ii) Organic rankine cycle power systems
		(iii) Vapour absorption refrigeration systems
		(iv) Low inlet pressure small steam turbines
		(E) Electrical equipment
		(i) Synchronous condenser systems and shunt capacitors
		(ii) Relays (automatic power cut off devices)
		(iii) Power factor controller for AC motors
		(iv) Automatic voltage controller
		(v) Solid state devices for controlling motor speeds
		(vi) FACT (Flexible AC Transmission) devices, Thyristor controlled series compensation equipment	40%
		(vii) Thermally energy-efficient stenters
		(viii) Series compensation equipment
		(ix) TOD (Time of Day) energy meters
		(x) Intelligent electronic devices/remote terminal units, computer software/hardware, bridges/router, other required equipment and associated communication systems for data acquisition systems and supervisory control, distribution management systems and energy management systems for power transmission systems
		(xi) Special energy meters for ABT (Availability Based Tariff)
		(F) Burners
		(i) Zero to ten per cent excess air burners
		(ii) Burners using air with high preheat temperature (above 300 degrees Celsius)
		(iii) Emulsion burners	40%
		(G) Other equipment
		(i) Mechanical vapour recompressors
		(ii) Wet air oxidation equipment for recovery of heat and chemicals
		(iii) Automatic microprocessor based load demand controllers	40%
		(iv) Thin film evaporators
		(v) Fluid couplings and fluid drives
		(vi) Coal based producer gas plants
		(vii) Super-charges/turbo charges
		(viii) Sealed radiation sources for radiation processing plants
		10. Gas cylinders including regulators and valves	40%
		11. Glass manufacturing concerns, Direct fire glass melting furnaces	40%
		12. Mineral oil concerns	40%
		(i) Plant used in field operations (above ground) distribution, returnable packages
		(ii) Plant used in field operations (below ground), but not including kerbside pumps including fittings and tanks used in field operations (distribution) by mineral oil concerns
		(iii) Oil wells not covered in (i) and (ii) above	15%
		13. Renewable energy devices
		(i) Pipe type and concentrating solar collectors
		(ii) Flat plate solar collectors
		(iii) Solar cookers
		(iv) Air/fluid/gas heating systems
		(v) Solar water heaters and systems
		(vi) Solar crop drivers and systems
		(vii) Solar steels and desalination systems
		(viii) Solar refrigeration, air conditioning systems and cold storages
		(ix) Solar pumps based on solar-photovoltaic and solar-thermal conversion	40%
		(x) Solar power generating systems
		(xi) Solar-photovoltaic panels and modules for water pumping and other applications
		14. Wind mills and any other specially designed devices that operate on wind mills (installed on or after April 1, 2014)
		15. Any special devices including electric pumps and generators operating on wind energy (installed on or after April 1, 2014)
		16. Books owned by assessees carrying on a profession
		(i) Books, being annual publications	40%
		(ii) Books, excluding those covered by entry (i) above	40%
		(iii) Books owned by assessees carrying on business in running lending libraries	40%
Ships	4(i)	Ocean-going ships including tugs, survey launches, dredgers, barges and other similar ships used primarily for dredging purposes and sighing vessels with wooden hull	20%
	4(ii)	Vessels ordinarily operating on inland waters, not covered by sub-item (iii) below	20%
	4 (iii)	Vessels ordinarily operating on inland waters being speed boats	20%
Part B Intangible Assets
		Franchise, trademark, patents, license, copyright, know-how or other commercial or business rights of similar nature	25%

For example, the depreciation will be computed as follows:

Name of asset	Block 1	Block 2	Block 3
	Machine – 15%	Furniture – 10%	Car – 15%
Opening Value	0	0	0
Add– Purchases (>or = 180 days)  Purchase (<180 days)	5,00,000  40,000	20,000	3,00,000
Less– Sold during the year	0	0	0
Closing value of block before depreciation	5,40,000	20,000	3,00,000
Depreciation	78,000	2,000	22,500
	(5,00,000 x 15%) +  (40,000 x 15% x 1/2)	20000 x 10%	300000 x 15% x 1/2
Closing WDV after depreciation	4,62,000	18,000	2,77,500

Depreciation Calculation Methods

The methods used for calculating depreciation and determining the useful life of depreciable assets can vary depending on the type of asset and the industry it belongs to. These variations may also extend to accounting and taxation practices. Among the most commonly employed methods of depreciation are the Straight-Line Method and the Written Down Value Method.

Apart from differences in depreciation rates, one of the fundamental distinctions in depreciation calculation between the Income Tax Act and the Companies Act lies in the method employed for depreciation calculation.

Methods of depreciation as per the Companies Act, 1956 (Based on Specified Rates) include:

– Straight Line Method

– Written Down Value Method

Under the Companies Act, 2013, depreciation calculation methods are based on the useful life of assets and include:

– Straight Line Method

– Written Down Value Method

– Unit of Production Method

As per the Income Tax Act, 1961, depreciation calculation is based on specified rates and includes:

– Written Down Value Method (Block wise)

– Straight Line Method for Power Generating Units

Formula for Calculating Depreciation Using the Straight-Line Method:

1. Rate of Depreciation under Straight-Line Method:

\[ \text{Rate of Depreciation} = \left[ \frac{(Original Cost – Residual Value)}{\text{Useful Life}} \right] \times 100 \]

1. Depreciation Amount:

\[ \text{Depreciation} = \text{Original Cost} \times \text{Rate of Depreciation under SLM} \]

As calculated in step (a).

Analysis of AS-22/IND AS 12 Regarding Depreciation

Depreciation methods vary between tax and accounting practices, resulting in differing depreciation amounts and creating timing differences. These timing differences must be accounted for in financial statements through deferred tax liabilities/assets.

According to Accounting Standard-22, deferred tax represents income tax payable/recoverable in future periods due to taxable temporary differences.

Temporary differences refer to variations between the carrying amount of an asset or liability in the balance sheet and its tax base. The tax base denotes the amount attributed to the asset or liability for tax purposes.

Illustration:

Consider an asset with a cost of Rs 150 and a carrying amount of Rs 100. The cumulative depreciation for tax purposes is Rs 90, with a tax rate of 25%. Therefore, the tax base (opening balance per IT Act) is calculated as follows:

Tax Base = Cost of Rs 150 – Cumulative tax depreciation of Rs 90

          = Rs 60

To recover the carrying amount of Rs 100, the entity must generate taxable income of Rs 100. However, it can only deduct tax depreciation of Rs 60. Consequently, the entity will incur income taxes of Rs 10 (25% of Rs 40) when recovering the asset’s carrying amount. The difference between the carrying amount of Rs 100 and the tax base of Rs 60 constitutes a taxable temporary difference of Rs 40.

Therefore, the entity recognizes a deferred tax liability of Rs 10 (25% of Rs 40), representing the income taxes payable upon recovery of the asset’s carrying amount.