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Ramesh Sharma
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  1. CA Vishnu Ram Enlightened

    Depreciation allowance is a deduction available under Section 32 of the Income Tax Act, 1961, allowing businesses to claim a portion of the cost of assets used in their operations. This deduction recognizes the wear and tear or obsolescence of assets over time and helps in reducing taxable income. KRead more

    Depreciation allowance is a deduction available under Section 32 of the Income Tax Act, 1961, allowing businesses to claim a portion of the cost of assets used in their operations. This deduction recognizes the wear and tear or obsolescence of assets over time and helps in reducing taxable income.

    Key Aspects of Depreciation Allowance

    1. Eligible Assets

    Depreciation can be claimed on the following assets:

    • Tangible Assets: Buildings, machinery, plant, furniture, etc.

    • Intangible Assets: Patents, copyrights, trademarks, licenses, and other similar business rights.

    2. Conditions for Claiming Depreciation

    To avail of depreciation allowance, the following conditions must be met:

    • The asset must be owned (wholly or partly) by the taxpayer.

    • It must be used for business or professional purposes during the relevant financial year.

    3. Block of Assets Concept

    Depreciation is calculated based on the block of assets approach, where assets of similar nature and usage are grouped together. The entire block is subject to depreciation, rather than individual assets.

    4. Depreciation Rates

    The Income Tax Act specifies different depreciation rates depending on the type of asset:

    • Buildings: 5% (residential) or 10% (commercial)

    • Plant & Machinery: 15% (general machinery, higher for specific equipment)

    • Furniture & Fittings: 10%

    • Computers & Software: 40%

    • Intangible Assets: 25%

    5. Methods of Depreciation

    • Written Down Value (WDV) Method: Used for most businesses where depreciation is applied to the asset’s reduced value each year.

    • Straight-Line Method (SLM): Available only to certain undertakings (e.g., power generation units), where depreciation is equally spread over the asset’s life.

    6. Additional Depreciation

    For businesses engaged in manufacturing or power generation, additional depreciation may be available on new plant and machinery, subject to conditions.

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Ramesh Sharma
Enlightened
Asked: In:

  1. CA Vishnu Ram Enlightened

    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: Determine the Cost of Acquisition: Begin witRead more

    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.

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Ramesh Sharma
Enlightened
Asked: In:

  1. CA Vishnu Ram Enlightened

    In simple terms, a block of assets is a grouping of similar assets that are used for the same business purpose, on which depreciation is calculated collectively rather than individually. This concept is crucial for ensuring a uniform method of depreciation and avoiding the cumbersome process of calcRead more

    In simple terms, a block of assets is a grouping of similar assets that are used for the same business purpose, on which depreciation is calculated collectively rather than individually. This concept is crucial for ensuring a uniform method of depreciation and avoiding the cumbersome process of calculating depreciation for each asset separately.

    Key Points:

    • Definition & Purpose:
      The Income Tax Act, 1961 (particularly under Section 32) groups together assets that are similar in nature and use, such as all machinery, all computers, or all vehicles used in a business, into what is called a block of assets.

      • This approach simplifies the calculation of depreciation by applying the same depreciation rate to the entire group.

    • How It Works:

      • Cost Accumulation: The cost of all assets in a block is combined.

      • Depreciation Calculation: Depreciation is then computed on the entire block’s cost, and the written down value is carried forward from one year to the next for the entire block.

      • Adjustments: When new assets are added or old assets are disposed of, the block’s cost is adjusted accordingly.

    • Benefits:

      • Simplification: This method reduces administrative burden, especially for businesses with a large number of similar assets.

      • Uniformity: It ensures consistency in how depreciation is claimed over time.

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Ramesh Sharma
Enlightened
Asked: In:

  1. CA Vishnu Ram Enlightened

    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 claiRead more

    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.

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Ramesh Sharma
Enlightened
Asked: In:

  1. CA Sanjiv Kumar Enlightened Chartered Accountant

    Depreciation allows you to spread the cost of a capital asset over its useful life. Under the Income Tax Act, this deduction is primarily governed by Section 32, and the most common method used is the Written Down Value (WDV) method. Here’s a straightforward guide on how to calculate it: Step 1: DetRead more

    Depreciation allows you to spread the cost of a capital asset over its useful life. Under the Income Tax Act, this deduction is primarily governed by Section 32, and the most common method used is the Written Down Value (WDV) method. Here’s a straightforward guide on how to calculate it:

    Step 1: Determine the Cost of Acquisition

    • Starting Point:
      Begin with the purchase price of the asset. Add any incidental expenses (like installation, transportation, and registration fees) that are directly attributable to acquiring the asset. This gives you the asset’s total cost.

    Step 2: Classify the Asset

    • Type of Asset:
      Assets are generally classified as tangible (buildings, machinery, vehicles) or intangible (patents, copyrights).

    • Depreciable vs. Non-Depreciable:
      Note that certain assets, such as land and goodwill (as per current provisions), are not eligible for depreciation.

    Step 3: Choose the Appropriate Depreciation Method

    • Written Down Value (WDV) Method:
      Under this method, depreciation is calculated on the remaining value of the asset after deducting depreciation claimed in previous years.

      • Calculation for the Year:

        Depreciation=(Cost of Asset−Accumulated Depreciation)×Prescribed Rate\text{Depreciation} = (\text{Cost of Asset} – \text{Accumulated Depreciation}) \times \text{Prescribed Rate}Depreciation=(Cost of Asset−Accumulated Depreciation)×Prescribed Rate

    • Straight-Line Method (SLM):
      In certain cases (like some power generation undertakings), the Straight-Line Method is applicable, where depreciation is spread evenly over the asset’s useful life.

    Step 4: Apply the Prescribed Depreciation Rate

    • Rate Determination:
      The Income Tax Act specifies different rates for various types of assets. For example, buildings, machinery, and computers each have their own rates.

    • Example:
      If a machine costs ₹10 lakh and the prescribed rate is 15% under the WDV method, the first year’s depreciation would be:

      ₹10,00,000×15%=₹1,50,000₹10,00,000 \times 15\% = ₹1,50,000₹10,00,000×15%=₹1,50,000

      The Written Down Value at the end of the first year would then be:

      ₹10,00,000−₹1,50,000=₹8,50,000₹10,00,000 – ₹1,50,000 = ₹8,50,000₹10,00,000−₹1,50,000=₹8,50,000

      In the second year, you’d calculate depreciation on ₹8,50,000 using the same rate.

    Step 5: Record and Carry Forward

    • Documentation:
      Maintain detailed records of the asset’s cost, the depreciation claimed each year, and the resulting Written Down Value.

    • Continuity:
      These records ensure that the depreciation is correctly calculated over the asset’s useful life and help in future tax assessments.

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