Depreciation Under Income Tax

What is Depreciation?

Depreciation is the gradual reduction in the value of a business asset over its useful life. When you buy a ₹50,000 laptop, you don't expense the whole ₹50,000 in Year 1 — instead you write off a portion each year until the asset is fully depreciated.

The Income Tax Act allows depreciation as a deduction under Section 32. The rules — rates, methods, blocks — are very different from how depreciation is computed under the Companies Act for accounting purposes. For income tax, always use Income Tax Act rates.

The Written-Down Value (WDV) Method

The Income Tax Act mandates the Written-Down Value method for all assets except specific power-sector assets (which can use Straight-Line).

Formula:

Depreciation = Opening WDV × Rate%

Where Opening WDV (Year n) = Closing WDV of (Year n−1).

Example

You buy machinery for ₹1,00,000 on 1 April 2024. Depreciation rate: 15%.

Depreciation reduces every year as WDV reduces. Asset never fully depreciates to zero (it asymptotes).

The Block of Assets Concept

The Income Tax Act doesn't track depreciation asset-by-asset. Instead, all assets of the same type and rate are pooled into a "block" — one block for "Plant & Machinery @ 15%", another for "Furniture @ 10%", and so on.

How a block works:

• Block opening WDV = total carried forward from last year.
• + Additions during the year (assets purchased).
• − Sale value of any asset from that block sold during the year.
• = Block's WDV for depreciation calculation.
• Depreciation = Block WDV × rate.

Key Depreciation Rates Under Income Tax Act

The 180-Day Rule (Half-Rate Depreciation)

If an asset is put to use for less than 180 days in the year of acquisition, you get only half the rate for that year.

Example

You buy a new machine for ₹5,00,000 on 1 December 2025 (after 4 Oct).

Normal rate: 15%
Applied rate this year: 15% ÷ 2 = 7.5%
Depreciation FY 2025-26 = ₹5,00,000 × 7.5% = ₹37,500
Next year onwards: full 15% on WDV.

Additional Depreciation (Sec 32(1)(iia))

If you're in manufacturing or production business and buy new plant & machinery (not second-hand), you get an extra 20% depreciation in the first year on top of normal rate.

Conditions:

• You manufacture or produce articles.
• The machinery is new (not second-hand).
• Not used previously by any person.
• Not used for office/residence/guesthouse.
• Half rate (10%) if put to use after 4 October.

Example

Manufacturer buys new machine on 1 May 2025 for ₹10,00,000.

Normal depreciation: 15% × ₹10L = ₹1,50,000
Additional depreciation (Sec 32(1)(iia)): 20% × ₹10L = ₹2,00,000
Total Year 1 depreciation = ₹3,50,000
Year 2 onwards: 15% on the reduced WDV (additional depreciation only in Year 1).

When a Block Reaches Zero

Case 1 — Sale value exceeds block WDV

If you sell assets from a block and the sale value exceeds the block's WDV, the block becomes zero. The excess is treated as Short-Term Capital Gain (taxable in the same year).

Case 2 — All assets in block sold

If you sell every single asset in a block (block is empty), and there's still WDV remaining, that remaining WDV is a Short-Term Capital Loss.

Where to Report Depreciation in ITR-3

In ITR-3, the Schedule DPM (Plant & Machinery) and Schedule DOA (Other Assets) capture block-wise details:

• Opening WDV of each block.
• Additions during the year (with date — to determine half-rate eligibility).
• Deductions (sales).
• Depreciation rate.
• Depreciation amount.
• Closing WDV.

The auto-summary then carries depreciation into the P&L schedule.

What if You're Under Section 44AD?

If you've opted for presumptive taxation under Sec 44AD or 44ADA, depreciation is deemed to be claimed and allowed in the 6%/8%/50% rate. You don't claim it separately, BUT — you must still track WDV notionally in your records. Why? Because when you exit 44AD and start claiming actual depreciation, you need the correct WDV to start from.

Common Depreciation Mistakes

1. Using Companies Act rates instead of IT Act rates in the ITR. Always reconcile both.
2. Not applying the 180-day half-rate rule for late-year purchases.
3. Forgetting additional depreciation for manufacturing units (bonus 20% in Year 1).
4. Claiming on assets not yet put to use (e.g., machinery still in transit or installation).
5. Claiming on second-hand assets at additional 20% rate (not allowed).
6. Mixing personal vehicle use — claim only the business portion.
7. Claiming depreciation on land — land is not depreciable.
8. Claiming depreciation on goodwill — disallowed since 1 April 2021.
9. Not removing fully sold blocks from depreciation schedule.

Depreciation Checklist

1. Each asset assigned to the correct block at the correct IT Act rate
2. Date of "put to use" recorded (not just purchase date)
3. Half-rate applied for assets put to use after 3 October
4. Additional depreciation claimed where eligible (manufacturing, new machinery)
5. Sales properly deducted from block; gain/loss computed if block emptied
6. Land and goodwill excluded
7. Notional WDV tracked even under 44AD
8. Both books depreciation and IT depreciation reconciled in ITR

What's Next?

• All Other Allowable Business Deductions
• Section 44AD — Skip Depreciation Headaches
• Filing ITR-3 with Schedule DPM & DOA