Let’s first understand what is depreciation.
When a business or professional buys assets like machinery, equipment, or vehicles, they typically use them for several years. However, as these assets are used, their value decreases over time due to wear and tear, getting outdated, or other factors. For example, if you buy a car for your business, its value will decrease over time as you use it.
Depreciation comes under the category of “business and profession” income and it’s important to claim and take advantage of it while filing your taxes. There are different methods of calculating depreciation, but the most commonly used one is the Written Down Value (WDV) method.
Written-down value is the value of an asset after considering the depreciation. Essentially, it reflects the present value of your asset. It is calculated as the cost of the asset minus the depreciation.
Now, how do you use the WDV method to calculate depreciation?
If an asset is used for 180 days or more during the FY, calculate using the full rate of depreciation.
On the other hand, if the asset is used for less than 180 days during the FY, calculate using the half rate of depreciation.
In addition to the normal depreciation, the ITD also provides for an additional depreciation of 20% for new plant and machinery in the first year of use. So, if you buy a new machine for your business, you can claim a total depreciation of 35% (15% normal depreciation + 20% additional depreciation). However, the benefit of additional depreciation is only available in the old regime.
Block of Assets: A block of assets is basically a collection or a group of similar assets that are treated together for the purpose of calculating depreciation, like tangible and intangible assets. It helps simplify the process by avoiding the need to calculate depreciation for each individual asset.
Here are the Depreciation Rates as per the Income Tax Act.
Here’s an example to help you understand it better
Let’s say you buy a computer and plant & machinery for your manufacturing business for FY 2022-23. There’s an already existing machinery whose WDV is 30,00,000. Calculate the depreciation.
Here’s the table to make it easier for you:
| Particulars | Amount |
|---|---|
| Opening WDV of Plant & Machinery as of 1st April 2023 | ₹30,00,000 |
| New machine purchased & put to use on 30th Nov 2022 | ₹60,00,000 |
| Computer purchased & put to use on 1st June 2022 | ₹80,000 |
How to calculate depreciation?
Solution:
| Particulars | Amount |
|---|---|
| Normal Depreciation | |
| Dep at the full rate of 15% on P&M of 30 lakhs | ₹4,50,000 |
| Dep at the half rate of 7.5% on P&M of 60 lakhs | ₹4,50,000 |
| Dep at the full rate of 40% on Computer of ₹80,000 | ₹32,000 |
| Additional Depreciation | |
| Dep at half rate of 10% on P&M of 60 lakhs used for less than 180 days | ₹6,00,000 |
| Total Depreciation | ₹15,32,000 |
Block of Assets: Format of calculating depreciation under the Income Tax Act
| Particulars | P&M | Computer | |
|---|---|---|---|
| Opening WDV as of 1st April | ₹30,00,000 | Nil | |
| Add | Cost of Assets purchased | ₹60,00,000 | ₹80,000 |
| Less | Sale Value of Assets sold | Nil | Nil |
| WDV of Block of Assets | ₹90,00,000 | ₹80,000 | |
| Less | Depreciation | ₹15,00,000 | ₹32,000 |
| Closing WDV at the end of the year | ₹75,00,000 | ₹48,000 |
So, you can claim a total depreciation of ₹15,32,000 for your business for FY 2022-23 while filing a return.
Remember, claiming depreciation is another important way to reduce your tax liability, and make sure you do it correctly!
Here’s an article on Depreciation under Income Tax Act - Learn by Quicko.