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January 1, 2025

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Depreciation as per Section 32 of the Income Tax Act

Depreciation is a significant element of accounting and taxation which enables firms to draw the cost of tangible as well as some intangible assets over their lifetime. In India, Section 32 of the Income-tax Act, of 1961 governs the rules and guidelines for claiming depreciation. This provision allows taxpayers to deduct a fraction of the asset from income each year, thereby reducing the taxable income and promoting investment in long-term assets such as buildings and plants. This guide attempts to understand the complexities of Section 32, who are eligible, what are the depreciation rates, what are the different methods of calculation and what are the implications.

What is Depreciation?

As per custom depreciation could be considered to be the decrease in the worth of an asset which encompasses wear and tear, obsolescence or usage over time. It is considered a practice in taxation laws where the firm gets the opportunity to spend the value of an asset evenly across its dispersal to comply with the matching principle of accounting.

Overview of Section 32 of the Income Tax Act

Section 32 details the criteria and procedures as well as the rates and depreciation claims for assets held by a taxpayer. It includes:

1. Eligibility:

A taxpayer is required to possess the asset either in full or in part.

2. This asset shall be employed for business or professional use.

2. Types of Assets Covered:

Tangible Assets: Structures, equipment, industrial facilities, office equipment, etc.

Intangible Assets: Knowing how- political, copyright, trademark, and licensed agreements, among others.

3. Methods of Depreciation:

Straight-line Method (SLM): A uniform reduction is applied every year.

Written Down Value (WDV): Depreciation is taken at the end of every financial year concerning the asset's remaining book value.

Key Provisions under Section 32

1. Depreciation on Tangible and Intangible Assets

Items in an economic value such as vehicles, buildings, and machinery are eligible for depreciation.

On the Other side, intangible assets like trademarks and goodwill acquired after April 1, 1998 are available for depreciation.

2. Block of Assets Concept

Assets are grouped as a block while claiming depreciation instead of claiming it on one asset at a time.

Dissimilar assets can still form a block provided they belong to the same class and fall under similar depreciation rates.

3. Conditions for Claiming Depreciation

Ownership: The taxpayer must possess legal title in part or full in the case of the asset.

Usage: Within a financial year the asset has to be utilized concerning the business or a profession.

Actual Use: An asset should be put to use to apply for depreciation except under certain circumstances otherwise it cannot be applied for.

4. Additional Depreciation

According to Section 32, any asset used for a production or a manufacturing entity is eligible for a higher depreciation of 20% more than what is standard.

Acquisition and installation of the asset ought to be done after 1st April 2005.

5. Unabsorbed Depreciation

Any amount unabsorbed deduction which is greater than profit may be carried forward for an indefinite period.

Depreciation Rates as per Income Tax Rules

Depreciation rates vary based on the type of asset and usage:

Asset	Rate (WDV Method)	Rate (SLM Method)
Buildings (Residential)	5%	Not Applicable
Buildings (Commercial)	10%	Not Applicable
Furniture & Fittings	10%	Not Applicable
Plant & Machinery	15%	Not Applicable
Motor Vehicles	15%	Not Applicable
Intangible Assets	25%	Not Applicable

Calculation of Depreciation

Written Down Value (WDV) Method Formula: Depreciation=Opening WDV×Depreciation Rate\text{Depreciation} = \text{Opening WDV} \times \text{Depreciation Rate}Depreciation=Opening WDV×Depreciation Rate

Example:

Opening WDV: ₹10,00,000

Rate: 15%

Depreciation: ₹10,00,000 × 15% = ₹1,50,000

Extra Depreciation: Study Receivers or new entrants to the Manufacturing Businesses;

An additional 20% tax per new asset obtained in the first year.

Impact of Depreciation on Taxable Income

To claim depreciation, it follows that such an amount lowers taxable income and thus the tax amount to be paid is lesser. For example:

‍Gross Income: ₹20,00,000

Depreciation Claimed: ₹5,00,000

Taxable Income: ₹15,00,000

Businesses can mitigate their tax burden under their strategy by including depreciation.

Important Considerations for Depreciation

1. Half-Yearly Depreciation Rule:

An asset which has been in use for less than 180 days in that year will be subject to a capped depreciation to not exceed 50 per cent.

2. Assets Not Qualifying for Depreciation:

Land, since it has an unlimited life.

Personal effects which are not used for business.

3. Exemptions And Disallowances:

Depreciation is not permissible on assets that wouldn't be utilized in the year in consideration.

4. Changes In Rates/Rules:

Changes in any rates about depreciation or any provisions regarding depreciation should be monitored by the taxpayer.

Conclusion

Section 32 of the money taxation laws governs depreciation, they provide a good incentive for enterprises to plan their finances properly to minimize their tax liabilities. There is also a good scope for tax planning within the scope of the law. For that matter, continuous involvement with the amendments including this professional engagement may also provide value, more especially with tax savings on the depreciation side.

FAQs

What is Section 32 of the Income Tax Act?

According to Section 32 of the Income Tax Act, the purpose of this section is to provide an allowance that allows for depreciation on assets which are utilized in the course of business or professional practice, for tax purposes.

What is depreciation as per the Income Tax Act?

Depreciation according to the Income Tax Act is the allowance for the decrease in value due to the use of tangible or intangible assets that have annual calculations.

How is depreciation under Section 32 calculated?

For an asset, normalization is computed from the cost of the asset as well as the applicable depreciation rate of the asset able to be claimed as per the Income Tax Act- under WDV or SLM methods, depending upon the asset.

What are the depreciation rates as per the Income Tax Act?

Depreciation rates vary by asset type, with prescribed rates for categories such as buildings, machinery, furniture, and intangible assets, outlined in the Income Tax Rules.

Who can claim depreciation under Section 32?

Any taxpayer, including individuals, companies, and firms, who owns and uses assets for business or professional purposes, can claim depreciation under Section 32 of the Income Tax Act.

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