Section 32 of the Income Tax Act, 1961: Depreciation on Business Assets:

Section 32 of the Income Tax Act, 1961, has the provision to claim depreciation on assets, which are used for business and professions. Instead of writing off the entire cost of an asset (like machinery, a building, or a vehicle) in the year it is bought, the law allows the cost to be spread out over the asset's useful life. This lowers taxable profit each year and is one of the most commonly used deductions for businesses. 

 Basic Conditions to Claim Depreciation

To claim depreciation under section 32, three conditions must be satisfied:

1.     Ownership - The asset must be owned, wholly or partly, by the taxpayer.

2.     Use for business on profession - The asset must actually be used for the purposes of the business or profession during the relevant financial year.

3.     The asset falls within a prescribed category - buildings, machinery, plant, furniture (tangible assets), or know-how, patents, copyrights, trademarks, licenses, franchises, or similar commercial rights (intangible assets).

 Methods of Depreciation

Section 32 prescribes two methods for depreciation

1.    SLM Method: Option available to only Business of Power Generation or generation & distribution of power(Individual Asset system as per prescribed rates)  

2.    WDV Methods: Other Assessees always follow the WDV Method (Block of Asset System)

Block of Assets

Major Assessees have to follow the block of Asset system for the computation of depreciation. Depreciation is not computed asset-by-asset.

Instead, similar assets with the same depreciation rate are grouped into a "block of assets." Once assets are grouped, they lose their individual identity for tax purposes, and depreciation is calculated on the block as a whole.

Computation of Depreciation under Block of Assets

Particulars	Amount
Opening WDV of Block	XXX
Add: Actual Cost of Asset acquired for the year	XXX
Put To use for >=180 Days	XX
Put To use for <180 Days	XX
Asset not Put to use	XX
Less: Selling Price of Asset Sold during the FY	(XXX)
WDV For Depreciation	XXX
Less: **Depreciation Allowed in FY	(XX)
Closing WDV of Block	XXX

 **Depreciation allowed:

·       Asset Not Put to use: No depreciation

·       Put to use < 180 Days: Half Rate

·       Put to use >= 180 Days: Full rate

 The 180-Day Rule

If an asset is put to use for 180 days or more in the year it is acquired, full depreciation is allowed for that year. If it is used for less than 180 days, only 50% of the normal depreciation rate can be claimed in that year, with the remaining depreciation available in subsequent years through the WDV carried forward.

 Typical Depreciation Rates

Rates are different from assets to assets and it is mentioned in the income tax act, 1961 some common rates are as under:

Asset Type	Typical Rate
Residential buildings	5%
Non- residential buildings	10%
Furniture and fittings	10%
Plant and machinery (General)	15%
Computers, Including software	40%
Intangible assets (patents, know-how, trademarks, etc.)	25%

 

Additional Depreciation – Section 32(1)(iia)

Over and above normal depreciation, businesses engaged in manufacturing or production can claim additional depreciation on new plant or machinery:

·       The standard additional rate is 20% of the actual cost of new (not second-hand) machinery or plant.

·       It is not available for office appliances, furniture, or certain other excluded assets.

·       If the asset is used for less than 180 days in the year of purchase, only 10% (half of the 20%) can be claimed that year, with the balance claimed the following year.

This provision is to encourage capital investment and modernization in manufacturing.

 Unabsorbed Depreciation

If a business does not have enough profit in a year to absorb the full depreciation allowance, the unused "unabsorbed" depreciation is carried forward and added to the next year's depreciation claim and this can, in fact, be carried forward indefinitely until fully set off, even against income from other heads in later years, subject to conditions.

Depreciation Schedules in ITR-3/5/6

Schedule	Purpose
DPM	Depreciation on plant & machinery blocks (WDV method).
DOA	Depreciation on other blocks buildings, furniture, intangibles.
DEP	Consolidated summary of DPM + DOA depreciation for the year.
DCG	Deemed capital gains/loss u/s 50 on sale of depreciable assets (block ceases or WDV goes negative).
UD	Brought-forward unabsorbed depreciation u/s 32(2), carried forward indefinitely.