Tax depreciation refers to a depreciation expense claimed by a person on the tax return to compensate for the loss of the tangible assets utilized in income-reaping undertakings. Identical to accounting depreciation, the tax depreciation allocates depreciation over multiple periods. Therefore, the value of tax of depreciable assets slowly decreases over their useful lives. The notion of depreciation is utilized for writing off the asset’s cost over its useful life. Depreciation is a compulsory deduction in the company’s P&L statements, and the Act permits deduction either in Written down Value or Straight-Line method.
What is the Written down Value method?
As per Section 32(1), the depreciation should be estimated at the standard % on the WDV of the asset, which in turn is computed w.r.t to the actual asset’s cost. In regard of estimating depreciation, it is vital to get familiar with the meaning of the ‘WDV’ & ‘Actual Cost’.
WDV under the IT Act means:
- Where the asset is acquired in the preceding year, the actual asset’s cost shall be considered as WDV[1].
- Where the asset is purchased in an erstwhile year, the WDV shall be equivalent to the actual cost incurred minus depreciation actually permitted under the Act,
Concept regarding the Block of Asset
Depreciation is computed on the WDV of a block of assets. It is referred to a group of assets coming under the assets’ class comprising;
- Tangible assets such as building, machinery, plant or furniture,
- Intangible assets such as copyrights, patents, licenses, trademarks, franchises, or any other commercial rights of similar nature
- The block of assets is further classified based on similar use, nature of the asset, and life of the asset.
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Block of assets |
Depreciation as % of written down value |
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PART A TANGIBLE ASSETS |
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I. |
BUILDING |
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(1) |
Buildings utilized primarily for residential purposes (except hotels & boarding houses) |
5 |
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(2) |
Buildings not mentioned under sub-items (1) (3) & (4) |
10 |
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(3) |
Buildings acquired on or after 01.Sep.2002 for installing machinery and plant forming part of water treatment system or water supply project & which is put to use for the business of rendering infrastructure facilities |
40 |
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(4) |
Temporary erections like wooden structures |
40 |
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Buildings include bridges, roads, culverts, wells & tube wells. A building shall be treated as a building used specifically for residential purposes, if the built-up floor area thereof utilized for residential purposes is not lower than 2/3rd of its overall built-up floor area & shall include any such establishment in the factory premises.. Water treatment system employing system for demineralization, desalination, & filtration of water |
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II. |
FURNITURE AND FITTINGS |
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Furniture & fittings including electrical fittings |
10 |
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Electrical fittings switches, wiring, electrical sockets, fans and other fittings, etc. |
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III. |
MACHINERY AND PLANT: Section-43(3) “plant” employs vehicles, ships, scientific apparatus, books, and surgical equipment for the purposes of profession or business but not have tea bushes or livestock or buildings or furniture & fittings; |
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(1) |
Plant & Machinery (General) other than item 2-8 below |
15 |
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(2) |
(i) Motor cars )other than those used in a taxi business except those mentioned in (ii) below (ii) Motor Cars, other than those used in a taxi business, acquired on or after 23-Aug-2019 but before 01-Apr-2020 & is put to use before 01-April-2020 |
15
30 |
|
(3) |
(i) Aeroplanes- Aeroengines |
40 |
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(ii) |
Motor buses, motor lorries and motor taxis used in a hiring business (Other than entry (b); Motor buses, motor lorries & taxis used in a hiring business acquired on or after 23-Aug-2019 but before 01-Apr-2020 and is put to use before 01-Apr-2020; |
30
45 |
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(iii) |
Commercial vehicle acquired on or after 01-Oct-98 but before 01-Apr-99 and put to use 01-Apr-1999 for the purpose of profession & business |
40 |
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(iv) |
New commercial automobile acquired on or after 01-Jan-98 but before 01-Apr-99 in replacement of condemned automobile for profession or business |
40 |
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(v) |
New commercial automobile purchased on or after 01-Apr-1999 before -1-Arp-2000 in replacement of condemned automobile of over 15 years and put to use before 01-Apr-2000 for profession or business |
40 |
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(vi) |
New commercial automobile purchase on or after 01-Apr-2001 but before 01-Apr-2002 and is put to use before 01-Apr-2002 for profession or business. |
40 |
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(via) |
New commercial automobile acquired on or after 01-Jan-2009 but before 01-Oct-2009 & is put to use before the 01-Oct-2009 for profession or business |
40 |
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Commercial automobile implies heavy goods vehicle, light motor, vehicle, heavy passenger motor vehicle, medium passenger motor vehicle, medium goods vehicles does not entail motor-cab, maxi-cab, and road-roller. The expressions of above mentioned vehicles shall have the meanings assigned to them in Sec 2 of the Motor Vehicles Act, 1988 (59 of 1988). |
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(vii) |
Moulds utilized in plastic and rubber factories |
30 |
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(viii) |
Air pollution control equipment |
40 |
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(ix) |
Water pollution control equipment |
40 |
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(x) |
Solid waste Control machines & resource recoupment system |
40 |
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(xi) |
Machinery & plant utilized in semi-conductor factory encompassing all Integrated Circuits (i.e.ICs) (except hybrid ICs) ranging from SSI to VLSI as also discrete semi-conductor devices such as transistors, diodes, thyristors, riacs, etc expect those cited by entries (viii), (ix) and (x if this sub-item & sub-item (8) below. |
30 |
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(xia) |
medical equipment for life saving |
40 |
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(4) |
Containers manufactured from glass or plastic used as re-fills |
40 |
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(5) |
Computers having software |
40 |
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PC software implies any computer software recorded on any tape, disc, perforated media or other storage media Depreciation on scanner, printer shall also be charged at the rate as mentioned for systems as these form imperative parts of PC. These outputs devices can’t function in isolation & also operating on PC without an output device such as printer would be of no use. (ACIT v.CCI, Delhi-ITAT ITA No. 2851 & 3680/Del/2007) But, EPABX & phones are not computers; |
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(6) |
Machinery and plant, utilized in weaving processing & apparel industry of textile sector, which is procured under TUFS on or after 01-Apr-2001, and before 01-Arp-2004 and put to use before -01-Apr-2004 |
40 |
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TUFS stands for Technology Upgradation Fund Scheme. This is Government-oriented scheme |
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(7) |
Machinery & plant, purchased and erected on or after 01-Sep-2002 in a water treatment system or a water supply project and which is put to use for rendering infrastructure facility |
40 |
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Machinery & plant having pipes required for delivery from the source of supply of raw water to the facility and form the facility to the storage units. |
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(8) |
(i) Wooden parts utilized in machinery for artificial silk manufacturing (ii) Cinematograph films – bulbs of studio lights (iii) Match industries – Wooden match frames (iv) Mines & quarries : (a) Tubs winding ropes, haulage ropes & sand stowing pipes (b) Safety lamps (v) Salt works – Salt pans, condensers & reservoirs, etc., made of sandy, earthy, or clayed material or any other related material (vi) Flour mills Rollers (vii) Iron & steel industry – Rolling mill rolls (viii) rollers used in Sugar mills (ix) Energy saving devices being: Specialised furnaces & boilers Instrumentation & monitoring system for tracking energy flows Equipment for Waste heat recovery Co-generation systems Electrical equipments:- power factor controller, series compensation equipments, automatic power cut off devices, Shunt capacitors, Tod energy meters, FACT devices, intelligent electronic devices, Remote terminal units, router, bridges, computer hardware Burners Other equipment (x) Gas cylinder having regulators & valves (xi) Glass manufacturing concerns- Glass melting furnace (using direct fire technology) (xii) Mineral oil concerns- Plant utilized in field operations and field operative (xiic) Oil wells: (xiii) Renewal energy devices |
40
15 40 |
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(9) |
(i) Books owned by assesses carrying on a profession (ii) Books owned by assesses carrying on business in running lending libraries |
40 |
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IV. |
Ships |
20 |
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PART B INTANGIBLE ASSETS |
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Know-how, copyrights, patents, trademarks, licenses, franchises or commercial rights of similar nature |
25 |
Conclusion
It is vital to know that the computation for depreciation under Written down Value method is commonly used except for activities relating to generation or generation and distribution of power. The Act also permits a deduction for supplementary depreciation in the year of purchase in particular scenarios.
Read our article:Form 29B under Section 115JB of IT Act, 1961: Explained
