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
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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
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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
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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
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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
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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
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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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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:
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See lessOperating 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.