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.