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​Under the Income Tax Act, depreciation is a deduction allowed for the wear and tear of tangible and intangible assets used in a business or profession. However, there are specific situations where claiming depreciation is either restricted or disallowed:​

1. Assets Not Owned by the Assessee: Depreciation can only be claimed on assets that are owned, wholly or partly, by the taxpayer. If the taxpayer does not have ownership of the asset, depreciation is not permissible.

2. Assets Not Used for Business or Professional Purposes: The asset must be employed in the taxpayer’s business or profession during the relevant financial year. Assets held for personal use or those not put to use during the year are ineligible for depreciation claims.

3. Land and Goodwill: Depreciation is not allowable on land, as it does not suffer wear and tear. Similarly, following amendments effective from April 1, 2021, goodwill of a business or profession is specifically excluded from the definition of a depreciable asset, and depreciation on goodwill is disallowed.

4. Assets Used for Charitable or Religious Purposes: For entities claiming exemption under sections 11 and 12, if the cost of acquiring an asset has been treated as an application of income (i.e., considered as expenditure towards charitable or religious purposes), depreciation cannot be claimed on such assets to prevent double deduction.

5. Assets Acquired and Sold Within the Same Financial Year: If an asset is purchased and disposed of within the same financial year, it is not eligible for depreciation, as it has not been used for business purposes during the year.

6. Personal or Non-Business Use: Assets used exclusively for personal purposes or not utilized for business or professional activities are not eligible for depreciation under the Income Tax Act.

When calculating depreciation for tax purposes, the Written Down Value (WDV) method is commonly used. This method allows you to claim depreciation on an asset based on its reduced value after accounting for previous depreciation.

Step-by-Step Calculation:

1. Determine the Cost of Acquisition:

   • Begin with the actual purchase price of the asset plus any incidental costs (such as installation, transportation, etc.).

   • This initial cost is your base cost for depreciation.

2. Calculate Depreciation for the Year:

   • Use the prescribed rate for the asset as defined under the Income Tax Act (refer to Section 32 for specific rates).

   • Depreciation for the Year = (Base Cost – Accumulated Depreciation) × Applicable Rate

3. Compute the WDV:

   • WDV at the End of the Year = (Cost of Acquisition) – (Total Depreciation Claimed to Date)

   • In simpler terms, the WDV is the original cost reduced by all the depreciation deductions that have been allowed in the previous years.

Example Illustration:

Suppose you purchase machinery for ₹10,00,000. The applicable depreciation rate for the machinery is 15% per annum.

• First Year Depreciation:
  Depreciation = ₹10,00,000 × 15% = ₹1,50,000
  WDV at end of Year 1 = ₹10,00,000 – ₹1,50,000 = ₹8,50,000

• Second Year Depreciation:
  Depreciation = ₹8,50,000 × 15% = ₹1,27,500
  WDV at end of Year 2 = ₹8,50,000 – ₹1,27,500 = ₹7,22,500

This process continues each year until the asset is fully depreciated or disposed of.

Under the Income Tax Act, depreciation is generally available only on assets that you own. Here’s how this rule applies to a building taken on lease:

• Operating Lease:
  If you lease a building under an operating lease, the building remains the property of the lessor.

  • Result: No depreciation can be claimed on the building itself since you do not own it.

• Finance Lease:
  In cases where the lease arrangement qualifies as a finance lease, the lessee is treated, for tax purposes, as the owner of the asset.

  • Result: You may be eligible to claim depreciation on the leased building.

• Leasehold Improvements:
  Even with an operating lease, if you incur expenses to improve the leased premises (and these improvements are capitalized as assets), you may claim depreciation on those improvements.