As we know that Income Tax does not provide the complete deduction of Capital assets in the year of purchase. Capital Assets are depreciated over the period of time. Income Tax Act 1961, has provided the methods and rates for each category of assets u/s 32 and assessee is required to calculate the Depreciation under Income Tax Act on the basis of such rate and method only.
The depreciation u/s 32 is allowed to get deducted from the income chargeable u/s 28 of the Profit and Gains of Business and Profession.
Depreciation is allowed on all tangible assets like building, furniture or fixtures, plant and Machinery and Intangible assets like know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature as well.
Section 32 of Income Tax Act rate of Depreciation
Ownership of Asset
The provisions of the Income Tax Act clearly states that the asset must be owned, either wholly or partly by the assessee and it must be used for the purposes of business and profession.
However, the registered owner of the asset is not necessary, even if the assessee is a beneficial owner then also he can claim the Depreciation on the assets.
Depreciation on the Block of Assets –
Under the Income Tax Act, 1961 assessee can claim depreciation –
- On the block of asset based on written down value method only except,
- Assessee engaged in the generation or generation and distribution of power can claim the depreciation on assets based on SLM rather than a block of assets based on WDV.
Let’s Understand the Block of Asset under sec 2(11) –
Income Tax Act has defined the block of assets u/s 2(11) and assessee instead of calculating depreciation on individual assets is required to compute the Depreciation on such block of an asset. In IT terms “Block of Assets” means a group of assets falling within the same class of assets and it contains –
- Tangible assets being building, plant and machinery, furniture and fittings and,
- Intangible assets being know-how, patents, copyrights, trademarks, licenses, franchises, or any other business and commercial rights of similar nature
For which the same rate of depreciation is prescribed under sec 32 of the Income Tax Act.
Rate Chart of Depreciation u/s 32 of the Income Tax Act –
This rate chart provided here covers the amended Rates of Depreciation according to the circular notified by the CBDT with notification no. 103/2016 dated 07/11/2016.
The highest rate covered in the below-given chart is 40% which was 60% before 01/04/2017. Have a look to the Rate chart of Depreciation given u/s 32 of IT Act and amended by the CBDT circular –
|Block of Asset||Rate of Depreciation|
|TANGIBLE ASSETS||BUILDING||Residential Building||5%|
|PLANT AND MACHINERY||Motor Buses, Motor Lorries, Motor Taxis used in the hiring business||30%|
|Aeroplanes, Aero Engines||40%|
|Specified Air, Water pollution equipment, solid waste control equipment, and solid waste recycling and resource recovery system||40%|
|Energy Saving Devices||40%|
|General Motor Cars other than used in hiring business||15%|
|Computers including Computer Software||40%|
|Books being annual publications owned by assessees carrying on a profession or assessees carrying on library business||40%|
|Books owned by assessees carrying on library business||40%|
|Books other than annual publications, owned by assessees carrying on a profession||40%|
|Life Saving Medical Equipments||40%|
|General Plant and Machinery||15%|
|FURNITURE AND FITTINGS||Furniture and Fittings including electrical fittings||10%|
|Vessels ordinarily operating on inland waters||20%|
|Speed Boats operating on inland water||20%|
|INTANGIBLE ASSETS||Know-How, Patents, Copyrights, Trademarks, Licences, Franchises||25%|
|Any other business or Commercial Rights of Similar Nature||25%|
Depreciation restricted to 50% if Put to use is lesser than 180 days –
If assessee during the previous year purchase and put to use the asset for Business and Profession lesser than a period of 180 days in such Previous Year then depreciation shall be restricted to 50%.
For ex-In the previous year, Mr. Sharma purchase the machinery on 1st May 2018 but put to use such on 1st Nov 2018, then depreciation here will be restricted to 7.5% instead of 15%.
Note – Where the assessee has purchased assets prior to the previous year and put to use the asset in the P.Y. and such put to use is less than 180 days then also assessee can claim depreciation at the full rate.
For Ex- Mr. Agarwal has purchased a machinery on 25/11/2017 but put to use such on 10/10/2018. In such a case, the asset has been put to use less than 180 days but still, depreciation will not be restricted to 50% and assessee can claim depreciation on the full rate.
Sec 32(2): Unabsorbed Depreciation –
Where the assessee has income under head PGBP less than depreciation allowed u/s 32(1), then such excess of depreciation over the income shall be treated as unabsorbed depreciation and it shall be carried to the following previous year or years and so on.
Note – Students shall note that there is no limit to carry forward unabsorbed depreciation by the assessee. Assessee can claim such up to an infinite number of years.
Additional Depreciation u/s 32(1)(iia) –
Besides Depreciation u/s 32 of the IT Act, assessee who are engaged in the business of Manufacture or production of any article or thing or in the business or generation or generation and distribution of power, such assessees can claim an additional depreciation u/s 32(1)(iia) at the rate of 20% on the actual cost of such new plant and machinery.
W.e.f. 01/04/2015, Govt has notified that rate of additional depreciation will be 35% instead of 20% for the undertaking set up by the assessee in notified backward areas being Andhra Pradesh, Bihar, Telangana and West Bengal and in respect of which any new plant and machinery has purchased.
Additional Depreciation is allowable in the year an asset is put to use and it shall also be restricted to 50% if the machine has been put to use lesser than 180 days in the previous year.
If assessee could not claim whole additional depreciation in the year of purchase due to put to use less than 180 days then remaining 50% shall be allowed in the immediately succeeding previous year.
- The assessee who is engaged in the business of generation or generation and distribution of power and claiming depreciation on SLM are not eligible to claim additional depreciation u/s 32(1)(iia) of the Income Tax Act.
- CBDT has also issued a circular in respect of the business of Printing and Publishing which states that printing and publishing business also amounts to manufacture and therefore they are eligible to claim additional depreciation on new plant and machinery purchased for their business.
Also Read: Sec 54, 54F & 54EC of Income Tax Act: Exemptions from LTCG with Examples