What Is Depreciation in the Income Tax Act?

Depreciation helps businesses spread asset costs across useful life instead of recording the full expense immediately after purchase. 

Businesses commonly calculate depreciation using the Written Down Value and Straight Line methods based on asset category and applicable tax provisions. 

Assets like machinery, vehicles, furniture, and software qualify for depreciation if used for business or professional purposes during operations. 

Proper depreciation claims reduce taxable income, improve financial reporting accuracy, and support long-term business cash flow management stability. 

Tangible assets: Buildings, machinery, plant, and furniture. 

Intangible assets: Know-how, patents, trademarks, licences, franchises, or any other commercial rights of a similar nature (explicitly excluding goodwill).  

Ownership: To claim depreciation, the taxpayer must hold ownership of the asset, either fully or partially. Ownership acts as a prerequisite for depreciation claims, as it establishes the taxpayer's right to benefit from the asset. Even in cases of co-ownership, taxpayers can claim depreciation on their share of the asset, ensuring fairness in tax deductions. 

Usage for business or profession: The asset must be used for business or professional purposes to qualify for depreciation. This ensures that the benefit is only available for assets contributing to generating income. There is no proportionate monthly or periodic calculation for partial usage. Instead, if an asset is put to use for more than 180 days during its first financial year, the full 100% of the prescribed depreciation rate is allowed; if it is put to use for less than 180 days, the claim is legally restricted to exactly 50% of the normal depreciation rate for that year. 

Exclusion of sold assets: Depreciation is calculated on the aggregate value of a "block of assets" rather than on isolated items. When an asset is sold, discarded, or destroyed during the financial year, its net sale proceeds are subtracted directly from the total Written Down Value (WDV) of that entire block. If the block's closing balance remains positive and at least one asset remains physically present, depreciation is claimed on the remaining value of the block rather than wiping out the sold asset's eligibility entirely. 

Specific asset types: Certain asset categories are excluded from depreciation claims. For example, depreciation cannot be claimed on land and goodwill. Land is excluded because it typically does not depreciate over time, unlike machinery or buildings. Similarly, goodwill is explicitly excluded from the definition of a block of intangible assets under Section 32 of the Income Tax Act.  

Goodwill and land cannot be depreciated under the Income Tax Act. 

Depreciation became mandatory from the fiscal year 2002-03 and must be allowed or presumed as a deduction, even if not explicitly claimed in the profit and loss account. The taxpayer can carry forward the Written Down Value (WDV) after applying the depreciation amount. 

If the presumptive taxation scheme (such as Section 44AD or 44ADA) is chosen, depreciation is considered to have already been fully allowed and factored into the deemed profits. 

Depreciation rates under the Companies Act of 2013 differ from those in the Income Tax Act, so only the rates prescribed by the Income Tax Act apply for tax purposes, regardless of what is recorded in the company’s books. 

To claim depreciation, the taxpayer must fully or partially own the asset. 

Assets must be used for business or professional purposes. If used partially for personal reasons, depreciation will only be allowed proportionately for the business usage segment. Section 38(2) of the Act allows the Income Tax Officer to determine the fair proportionate share of depreciation. 

Co-owners can claim depreciation on the portion of the asset they own, based on their respective ownership share. 

How it works: Each year, depreciation is applied to the asset block’s opening balance (i.e., its written-down value at the start of the year). This reduces the value of the block, and the depreciation for the following year is calculated on this reduced amount. This process continues annually, and the value of the block only drops to zero if all the physical assets within that specific block are entirely sold, discarded, demolished, or destroyed. 

Example: If the cost of a machinery asset is ₹100,000 and the depreciation rate is 10%, then in the first year, ₹10,000 will be deducted from the asset's value. In the second year, depreciation will be calculated on the new value, ₹90,000, resulting in a depreciation of ₹9,000. This method leads to a decreasing amount of depreciation each year. 

b The WDV method applies to almost all business entities and asset classes under the Income Tax Act, including buildings, machinery, vehicles, intangibles, and plant equipment. 

How it works: Unlike the WDV method, where depreciation reduces over time, SLM ensures that the same amount of depreciation is deducted every year, based on the asset’s original cost. Under the Income Tax Act, the asset's cost is multiplied directly by a specific percentage rate prescribed in Appendix IA of the Income Tax Rules, rather than being divided by an estimated useful life or adjusted for custom residual salvage values. The same depreciation amount is applied each year until the asset is fully depreciated or disposed of. 

Example: If an asset costs ₹100,000 and has a prescribed statutory tax rate of 10%, the depreciation calculated each year will be ₹10,000 (₹100,000 × 10%). This amount remains constant throughout the asset’s life. 

Application: The SLM method is exclusively available as an option for undertakings engaged in the generation, transmission, or distribution of power. To use this method, the power undertaking must explicitly elect it before the due date of filing their very first Income Tax Return; otherwise, the standard Written Down Value (WDV) method automatically applies by default.  

Classify assets: Segregate assets into specific "blocks of assets" based on their legal type and prescribed depreciation rate. 

Calculate WDV: Determine the Written Down Value of the asset block at the start of the financial year, actively adjusting for any new additions or sale consideration received during the year. 

Apply rates: Use the prescribed depreciation rates stipulated under the Income Tax Rules (ensuring you apply the 180-day half-depreciation threshold rule for new assets) to calculate the deduction. 

Reconcile with accounts: Calculate book depreciation for your official financial statements according to the Companies Act. For tax purposes, you do not force this into your primary books; instead, you add back the book depreciation in your tax computation and claim the Income Tax Act depreciation as a separate adjustment. 

Include in tax returns: Claim the deduction when filing income tax returns by filling out the dedicated asset depreciation schedules (such as Schedule DPM and Schedule DEP).  

The asset should belong to the taxpayer 

The asset must be used for business or professional purposes 

Depreciation generally applies only to tangible or specified intangible assets 

The asset should exist within the relevant financial year  

Reduces taxable income: Depreciation lowers taxable income by allowing businesses to deduct asset depreciation, resulting in reduced tax liabilities and more cash flow for reinvestment. 

Encourages capital investment: Tax depreciation incentivises businesses to invest in new assets, promoting growth, modernisation, and enhanced productivity in various industries. 

Simplifies compliance: Grouping assets into blocks for depreciation makes tax calculations easier and more efficient, reducing administrative complexity and the risk of errors. 

Improves cash flow: As a non-cash expense, depreciation allows businesses to lower their taxable income without affecting actual cash flow, providing flexibility for other investments. 

Provides long-term benefits: Depreciation spreads tax benefits over the asset's useful life, offering consistent financial relief and stability for businesses over time.