Depreciation Rules Under Income-tax Act and Companies Act 2013: Integrated Practical Reference

Depreciation is a core concept in both tax computation and financial reporting. Under the Income Tax Act 1961, it acts as a statutory deduction from business income, while under the Companies Act 2013, it is a financial reporting requirement aligned with accounting standards. This guide consolidates the operative provisions from both regimes and explains how they interact in practice from the assessee’s perspective.

1. Depreciation Framework Under the Income-tax Act

Under the Income Tax Act 1961, depreciation is allowed on qualifying assets that are:

  • Owned, wholly or partly, by the assessee; and
  • Used for the purposes of business or profession.

Depreciation is governed mainly by Section 32, read with the Income-tax Rules and Appendix prescribing rates.

1.1 Methods of Depreciation

The Act recognises two computation approaches:

  1. Written Down Value (WDV) method
  2. Straight-Line Method (SLM)

However, method choice is restricted as under:

  • Assessees engaged in generation or generation and distribution of power
    • May opt for SLM based on prescribed percentage of actual cost.
  • All other assessees
    • Must compute depreciation using the WDV method on “blocks of assets”.

Once a method is chosen (where permitted), consistency should be maintained.

1.2 Types of Depreciation Under the Income-tax Act

For tax purposes, depreciation falls into three broad categories:

1.2.1 Normal Depreciation

  • Available on eligible tangible assets (buildings, plant and machinery, furniture, ships, etc.) and specified intangible assets (know-how, patents, copyrights, trademarks, licences, franchises and similar rights).
  • Goodwill is not eligible for tax depreciation.
  • Depreciation is computed on a block of assets at prescribed WDV rates.

1.2.2 Additional Depreciation

Additional depreciation is allowed in certain cases over and above normal depreciation:

  • Available to assessees:
    • Engaged in manufacture or production of any article or thing, or
    • Engaged in generation or generation and distribution of power.
  • Applies to new plant and machinery acquired and installed after 31-03-2005, subject to statutory exclusions.
  • The additional rate and conditions are governed by Section 32(1)(iia).

The rationale is to incentivise fresh capital investment in manufacturing and power sectors.

1.2.3 Unabsorbed Depreciation

If current year depreciation (normal plus additional) cannot be fully set off:

  • The unabsorbed portion is carried forward as unabsorbed depreciation.
  • It can be set off against any head of income (subject to law as applicable for specific years).
  • Carry forward is allowed indefinitely in the current regime.

This feature distinguishes depreciation from business losses, which are subject to time limits and head restrictions.

2. Depreciation Rates Under Income-tax Act (WDV Method)

2.1 General Rate Structure

Depreciation rates are prescribed in Annexure-I and Annexure-IA to the Income-tax Rules. These rates are applied to the WDV of each block of assets for non-power entities.

Where an assessee exercises an option for concessional tax regimes under:

  • Section 115BA
  • Section 115BAA
  • Section 115BAB
  • Section 115BAC
  • Section 115BAD

Depreciation on any block of assets cannot exceed 40%.

Thus, the effective rate is capped even if the schedule otherwise prescribes a higher percentage.

2.2 Illustrative Key Rate Categories (AY 2018-19 Onwards)

Below is a conceptual overview of major categories, as applicable from AY 2018-19 onwards (as per the extracted table):

2.2.1 Buildings

  • Residential buildings (excluding hotels and boarding houses): 5%
  • Non-residential buildings not falling under special infrastructure categories: 10%
  • Buildings for specified water supply / water treatment infrastructure under section 80-IA(4)(i) (post 01-09-2002):
    • Earlier 100% but standardised to 40% from AY 2018-19
  • Purely temporary structures (e.g., temporary wooden erections): 40% (standardised from prior 100%)

For tax purposes, “buildings” also include certain civil structures such as roads, bridges, culverts, wells and tubewells as per the Notes to the depreciation table.

2.2.2 Furniture and Fittings

  • Furniture and fittings (including electrical fittings):
    • 10% WDV from AY 2006-07 onwards.

“Electrical fittings” cover items such as wiring, switches, sockets, and fans.

2.2.3 General Plant and Machinery

  • Plant and machinery (general block) not covered by special entries:
    • 15% WDV for AY 2006-07 onwards.

2.2.4 Motor Vehicles

Key distinctions include:

  • Motor cars not used on hire (acquired on or after 01-04-1990, general block): 15%.
  • Specific window for motor cars acquired between 23-08-2019 and 31-03-2020 and put to use before 01-04-2020 (not used on hire):
    • 30% WDV.
  • Motor buses, lorries and taxis used in the business of running them on hire:
    • Generally 30%
    • 45% where acquired between 23-08-2019 and 31-03-2020 and put to use before 01-04-2020.

The definition of “commercial vehicle” for these purposes ties back to the Motor Vehicles Act, 1988.

2.2.5 Specialised Machinery and Devices