Depreciation is discussed in Section 32 of the Income Tax Act of 1961. Depreciation is characterised as a decrease in the value of an object caused by wear and tear. People claim depreciation deductions only for accounting or taxation purposes.
The Income Tax Act 1961 provides for the deduction of all real and intangible properties. In the case of a capital asset, it can be deducted from the cost of the home, factory, and equipment. In the case of an intangible possession, a deduction can be claimed against patents, trademarks, copyright, warrant, franchise, or any other related corporate or contractual privilege.
Depreciation is calculated using the WDV of a Block of assets. A block of assets is a collection of assets from the same asset class that includes-
The asset block is identified based on its life, type, and similar use. Furthermore, for asset classification, the depreciation percentage within the asset class must be addressed. Each such asset class with the same depreciation rate will be identified as a block of the asset.
Individual assets lose their individuality under the Income Tax Act because depreciation is calculated on a group of assets rather than individual assets.
Rates of depreciation on assets-
|
Assets |
Rates of Depreciation |
|
Residential Building |
5% |
|
Non-residential Building |
10% |
|
Furniture and Fitting |
10% |
|
Computers and Software |
40% |
|
Plant and Machinery |
15% |
|
Personal Use Motor Vehicle |
15% |
|
Commercial Use Motor Vehicle |
30% |
|
Ships |
20% |
|
Aircraft |
40% |
|
Tangible Assets |
25% |
An assessee must meet certain requirements to claim the depreciation deduction. Below are the conditions:
The owner of the asset must be an assessee to benefit from depreciation. The asset can be both real and intangible. In terms of a tangible asset, it can be a home, equipment, factory, or furniture. Intangible properties may be patent rights, copyrights, trademarks, licences, franchises, or something of a similar type gained on or after April 1, 1998.
The income tax department estimates only the depreciation on the house when estimating depreciation. They may not factor in the expense of the property on which the building is built. The justification for not incorporating the cost of the property in the house is that the land does not depreciate due to wear and tear or use.
An assessee can seek depreciation only on capital assets that he owns. If the assessee wishes to take advantage of the allowance for property depreciation, the assessee must be the owner of such properties. An assessee doesn't need to be the owner of the property. Where an assessee constructs a house but the property belongs to someone else, he is entitled to a credit for depreciation on houses.
The assessee cannot seek the deduction if he is a resident who uses the house. Where an assessee has taken a mortgage on the property and built a dwelling on that land, he is entitled to depreciation allowances. In the case of hire and buy, if an assessee contracts the equipment for a brief amount of time, he cannot demand the deduction.
However, in the event of a loan, if an assessee acquires the property and becomes the purchaser, he is eligible to receive the deduction.
The commodity may have been used for a company or occupation to qualify for the credit for depreciation. However, it is not required to claim the credit on depreciation, for which an assessee must use the asset during the fiscal year.
Thus, if the assessee uses the asset for a short amount of time within an accounting year, he is entitled to depreciation deductions. Take, for example, every seasonal factory.
Depreciable assets cannot be deducted by an assessee. If an object is sold, removed, or damaged in the same year that it was bought, the assessee is not eligible to receive the deduction.
If an asset has a co-owner, the co-owner may report depreciation on the asset as well.
Methods of Depreciation and the useful life of depreciable assets may vary from asset to asset. Based on asset type and industry, it can differ for accounting and taxation purposes also.
The most commonly employed methods of depreciation are the Straight Line Method and the Written Down Value Method. One of the basic differences between income tax depreciation calculation and companies' act depreciation other than rates of depreciation is the method of calculation.