Section 32 of Income Tax Act: Meaning, Depreciation Rules, Rates and Examples

The value of a machine, computer, vehicle, or other business asset does not vanish entirely from the books over a period of one year. The Income Tax Act takes into account the fact that business assets lose value over time because of use, wear and tear, or obsolescence.

Under Section 32 of the Income Tax Act, depreciation deductions are provided for eligible tangible and intangible business and professional assets (such as buildings, machinery, plant, or patents) that are owned and actively used by the taxpayer for the purposes of their business or profession.

Keep reading to understand how depreciation functions, which assets are eligible, the method of calculation, and what taxpayers should know prior to making a claim for the deduction.

Key Takeaways

• The section deals with the depreciation of eligible tangible and some intangible assets that are used for business or professional purposes.
• Depreciation is usually based on the written down value of a group of assets rather than considering each asset individually.
• An asset that is used for fewer than 180 days during the year in which it is acquired usually receives only 50% of the normal amount of depreciation for that year.
• The goodwill of a business or profession is not included among the intangible assets which can be depreciated under the present provision.
• The claim has to comply with the specified asset classifications and tax rules.

What is Section 32 of the Income Tax Act?

The rules concerning depreciation for income tax purposes are set out in Section 32 and provide for a deduction relating to the depreciation of specified assets which are owned either wholly or in part by a taxpayer and are used for business or professional purposes.

The provision broadly covers two categories:

• Buildings, machinery, plants, and furniture are examples of tangible assets.
• Intangible assets include know-how, patents, copyrights, trademarks, licenses, franchises, and other similar business or commercial rights.

Core Eligibility Conditions

To claim a depreciation deduction under Section 32, the asset must satisfy the following core conditions:

• Ownership: The asset must be owned wholly or in part by the taxpayer. (Note: In the case of buildings, the taxpayer may be a lessee in certain co-ownership or specific statutory leasing arrangements, but proprietary interest is generally required).
• Business or Professional Use: The asset must be actively used for the purposes of the business or profession carried on by the taxpayer during the relevant previous year.
• Asset Classification: The asset must fall into one of the statutory categories:
  • Tangible Assets: Buildings, machinery, plant, and furniture.
  • Intangible Assets: Know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of a similar nature.

Which Assets Qualify for Depreciation Under Section 32?

Asset category	Examples	General treatment
Buildings	Commercial buildings, business premises	Depreciation may be available
Plant and machinery	Manufacturing equipment, machines	Depreciation may be available
Furniture	Office tables, chairs and fixtures	Depreciation may be available
Intangible assets	Patents, copyrights, trademarks, licences	Depreciation may be available
Goodwill	Business goodwill	Not eligible under the current Section 32 provision

How is Depreciation Calculated Under Section 32?

Under Section 32 of the Income Tax Act, 1961, depreciation is not calculated on an asset-by-asset basis. Instead, it is computed on a block of assets. A pool of assets falling within the same class (such as plant and machinery, building, or furniture) sharing the same prescribed depreciation rate.

To determine the closing Written Down Value (WDV) and the allowable depreciation for any given financial year, the computation follows a structured sequential framework that accounts for opening values, mid-year acquisitions, and asset disposals.

Step-by-Step Computation Formula

Depreciation = Adjusted Block Value x Applicable Depreciation Rate

The Adjusted Block Value is arrived at through the following statutory sequence:

• Opening WDV of the Block: Take the WDV of the block at the beginning of the previous year (carried over from the closing WDV of the preceding assessment year).
• Additions (New Acquisitions):
  • Put to use for 180 days or more during the year: Add the actual cost of assets acquired during the year. These qualify for the full applicable depreciation rate.
  • Put to use for less than 180 days during the year: Add the actual cost of assets acquired. These qualify for 50% of the applicable depreciation rate for that year.
• Moneys Payable / Sale Consideration: Deduct the actual sale price, scrap value, or insurance compensation received for any asset within that block sold, discarded, demolished, or destroyed during the year. (The deduction cannot reduce the block value below zero).
• Closing WDV Before Depreciation: The resulting figure represents the base value upon which the applicable depreciation rate is applied.

What is Additional Depreciation Under Section 32?

Section 32 also contains provisions for additional depreciation on certain new machinery or plants. The benefit is conditional in a particular way and cannot be applied as a general deduction whenever a taxpayer buys an asset.

The clause includes any new machinery or plant which is acquired and installed by specified businesses, such as certain manufacturing or production businesses and those involved in the generation, transmission, or distribution of power. The law also sets out exclusions and other conditions.

For instance, the provision does not usually apply to any machinery or plant which had already been in use by some other person prior to the taxpayer installing it.

Exclusions are also included in the provision with regard to certain office premises, residential accommodation, office appliances, and road transport vehicles.

Key Conditions and Application Rules

The 180-Day Rule:

If the eligible asset is acquired and put to use for 180 days or more during the financial year, the full rate of 20% is allowed.

If the asset is put to use for less than 180 days in the year of acquisition, the deduction is restricted to 10% (50% of the normal rate) for that year. The remaining 10% can be claimed in the immediately succeeding financial year.

Statutory Conditions for Eligibility:

• Eligible Businesses: Available primarily to taxpayers engaged in the business of manufacture or production of any article or thing, or the generation, transmission, or distribution of power.
• Tax Regime Requirement: Under current tax provisions (including the New Tax Regime under Section 115BAC), eligibility to claim additional depreciation depends on the tax regime chosen by the assessee (e.g., opting for the new concessionary regime typically restricts the claim of additional depreciation).
• Statutory Exclusions: Eligibility is subject to strict exclusions, meaning additional depreciation cannot be claimed on:
  • Second-hand or pre-owned assets: Any plant or machinery that was used inside or outside India by any other person prior to acquisition.
  • Premises & Appliances: Machinery or plant installed in any office premises, residential accommodation, or guest houses.
  • Office Equipment & Vehicles: Office appliances, computers/laptops (used for office work), furniture, and road transport vehicles (e.g., cars, trucks).
  • Fully Deducted Assets: Any machinery or plant whose total cost is allowed as a full deduction (100%) under any other provision of the Income Tax Act in a single previous year.

How Does Section 32 Reduce Taxable Income?

Depreciation is allowed as a deduction when calculating the income chargeable under the head Profits and Gains of Business or Profession, provided that the conditions laid down by the law are met. Consider a business with:

• Business income before depreciation = ₹12 lakh
• Eligible depreciation = ₹2 lakh

Then:

Taxable business income after depreciation = ₹12 lakh − ₹2 lakh

Taxable business income = ₹10 lakh

The amount of tax that can be saved will vary according to the tax system in question, the tax rate, and any other deductions or adjustments available to the taxpayer.

Depreciation is not a cash outlay that occurs in the year in question. It is a tax allowance which acknowledges the use or the decrease in value of an eligible business asset.

What is Block of Assets Under Section 32?

The concept of a block of assets is important since depreciation is usually calculated on the basis of the block rather than on each asset individually.

For instance, when several assets which are eligible lie within the same block and have the same prescribed rate, their values are taken into account together. The calculation can involve:

• Opening WDV of the block
• Cost of eligible assets added during the year
• Money received or receivable from assets sold or transferred
• Applicable depreciation rate
• The period for which newly acquired assets were put to use

The method used for calculating depreciation is different from just multiplying the original purchase price by a constant percentage each year.

What are the Main Conditions for Claiming Depreciation?

• An asset is eligible if it falls within the categories recognised in Section 32.
• The asset should be put into the right block of assets.
• Appropriate depreciation rate for that block should be used.
• The 180-day rule should be applied in the case of assets that are used during the year.
• It is necessary to keep purchase documents, invoices, the details of assets, and all other relevant records.

Section 34 also specifies the conditions regarding prescribed particulars and places limits on deductions for depreciation.

What is the Difference Between Book Depreciation and Tax Depreciation?

Purpose	Financial reporting	Income-tax computation
Basis	Accounting standards and company policy	Income-tax provisions
Calculation	Based on applicable accounting principles	Based on prescribed tax rules
Impact	Determines accounting profit	Determines taxable business income
Asset treatment	Can differ based on accounting requirements	Follows tax classification and block rules