Depreciation in India: SLM vs WDV, and Companies Act vs Income-tax Act

Depreciation is the systematic spreading of an asset's cost over the years it serves the business. Buy a delivery van for ₹8,00,000 and it would be misleading to show the whole cost as an expense in year one — the van will earn revenue for years. Depreciation matches a slice of the cost against each year's income, which is exactly what the matching principle in our accounting principles tutorial demands.

Method 1: Straight Line Method (SLM)

SLM charges an equal amount every year. Formula: (Cost − Residual value) ÷ Useful life.

Example: A machine costs ₹5,00,000, expected to last 10 years with a scrap value of ₹50,000. Annual depreciation = (5,00,000 − 50,000) ÷ 10 = ₹45,000 per year, every year, until the book value reaches ₹50,000.

SLM is simple, predictable, and suits assets that deliver fairly even service over life — buildings, furniture, leasehold improvements.

Method 2: Written Down Value (WDV)

WDV (also called reducing or diminishing balance) applies a fixed percentage to the opening book value, so the charge is highest in early years and shrinks over time.

Example: The same ₹5,00,000 machine at, say, 20% WDV:

WDV mirrors reality for assets that lose value fastest when new — vehicles, computers, machinery — and front-loads the expense (and the tax deduction).

SLM vs WDV at a glance

The journal entry

Whichever method you choose, the year-end entry is the same shape — depreciation is an expense (nominal account):

• Depreciation A/c Dr. ₹45,000
•     To Machinery A/c ₹45,000 (or To Provision for Depreciation A/c, if you keep the asset at gross cost)

Depreciation then moves to the debit of the Profit & Loss account. Refresh the mechanics in our journal entries tutorial.

Companies Act view: useful lives, not fixed rates

For companies, Schedule II of the Companies Act, 2013 prescribes the useful life of each class of asset (for example, general plant and machinery, office equipment, computers each have a specified life) rather than a flat rate. The company then computes depreciation — by SLM or WDV, as its accounting policy chooses — so that the asset is written off over that useful life, leaving residual value (ordinarily capped at 5% of cost). Key points:

• Depreciation is charged from the date the asset is ready for use, and pro-rated for part of the year.
• A company may use a different useful life than Schedule II if it can technically justify it, with disclosure.
• Assets are depreciated individually, and profit or loss on sale of each asset is computed separately.
• The current Schedule II useful lives are published with the Act on mca.gov.in — always check the notified schedule rather than relying on memory.

Proprietorships and partnership firms are not bound by Schedule II, but following a consistent, reasonable method keeps their financial statements meaningful.

Income-tax view: WDV on a block of assets

Section 32 of the Income-tax Act works very differently:

• Method is (almost always) WDV — prescribed rates applied to the written-down value. (A notable exception: certain power-sector undertakings may opt for SLM.)
• Assets are grouped into "blocks" — all assets of the same class carrying the same rate form one block. You depreciate the block, not each machine.
• Buy an asset, the block grows; sell one, the sale price is deducted from the block. Individual profit/loss on sale usually does not arise unless the block is emptied or turns negative (capital-gains rules then apply).
• The 180-day rule: an asset put to use for less than 180 days in the year of purchase earns only half the year's depreciation.
• Additional depreciation may be available on new plant and machinery for manufacturing businesses, subject to conditions.
• The rate table is in the Income-tax Rules — check the current rates on incometax.gov.in before computing; do not assume last year's figures.

Note for small taxpayers: if you declare income on a presumptive basis under Section 44AD, depreciation is deemed to have been allowed — you do not claim it separately, but you must still track the WDV of your assets. For everyone else, depreciation is a key deduction claimed while filing your business ITR.

Why two sets of figures — and how to live with them

A company might charge ₹45,000 depreciation in its books (Schedule II useful life, SLM) while claiming, say, ₹75,000 for the same asset under the Income-tax Act (WDV block). Both are correct in their own domain. The gap creates a timing difference, which companies account for as deferred tax. In practice:

1. Maintain a fixed asset register: purchase date, cost, location, book method and tax block for every asset.
2. Compute book depreciation for the P&L and balance sheet.
3. Compute tax depreciation separately at return-filing time on the block values.
4. Keep both computations with your working papers — auditors and assessing officers ask for exactly this reconciliation.

Practical tips

• Capitalise everything that gets the asset ready for use — freight, installation, non-creditable taxes — not just the invoice price.
• If you claim GST input tax credit on a capital good, do not also capitalise that GST and depreciate it — the law bars claiming both.
• Be consistent: changing methods is permitted but needs justification and disclosure.
• Let software carry the register: iAccounting keeps your fixed-asset schedule and posts the annual depreciation entries automatically, so books and tax workings never drift apart.

The short version

SLM spreads cost evenly; WDV front-loads it. The Companies Act asks companies to depreciate each asset over a prescribed useful life; the Income-tax Act depreciates blocks of assets at notified WDV rates. Keep both computations, look up current lives and rates on mca.gov.in and incometax.gov.in, and your depreciation will stand up to any audit.