Depreciation on Business Assets: Rules for Indian Business Owners

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Introduction

Every business that owns assets — machinery, vehicles, computers, furniture, buildings, or intangible assets such as patents and software — must grapple with a fundamental accounting and tax reality: assets lose value over time. This loss in value, caused by wear and tear, obsolescence, passage of time, or exhaustion, is what the law recognises as depreciation.

For Indian business owners, depreciation is not merely an accounting concept. It is a critical tool of tax planning and compliance that directly reduces taxable income, lowers tax liability, and improves the financial health of the business. Used correctly, depreciation can significantly reduce the tax outflow of a business in its early years when capital expenditure is high. Used incorrectly, or ignored entirely, it results in a business paying more tax than it legally owes and maintaining inaccurate financial records.

In India, depreciation is governed by two separate frameworks that apply simultaneously and independently of each other:

• The Income Tax Act, 1961, which governs depreciation for the purpose of computing taxable income and determining tax liability • The Companies Act, 2013, which governs depreciation for the purpose of preparing financial statements and presenting a true and fair view of a company’s financial position

These two frameworks use different methodologies, different rates, and serve different purposes. A business owner who confuses the two, or who assumes that the depreciation charged in the books of account is automatically the same as the depreciation allowable for income tax purposes, is likely to make errors in both financial reporting and tax filing.

This guide provides a complete, practical explanation of depreciation rules for Indian business owners in 2026, covering the income tax framework, the Companies Act framework, the methods of calculating depreciation, the rates applicable to different asset classes, the concept of block of assets, the treatment of additions and disposals, and the common mistakes that cost businesses money and create compliance risk.

What Is Depreciation and Why Does It Matter for Tax?

Depreciation is the systematic allocation of the cost of a tangible or intangible asset over its useful life. The underlying principle is straightforward: a machine purchased for ₹10,00,000 that has a useful life of 10 years does not provide its entire economic benefit in the year of purchase. It provides benefit over 10 years, and the cost should therefore be recognised as an expense over those 10 years, not in one lump sum at the time of purchase.

For income tax purposes in India, Section 32 of the Income Tax Act, 1961 allows a deduction for depreciation on assets owned and used for the purposes of business or profession. This deduction reduces the taxable income of the business, and therefore reduces the income tax payable. The depreciation deduction under the Income Tax Act follows strict rules regarding:

• Which assets qualify for depreciation • The method of calculating depreciation • The rates at which different assets are depreciated • The treatment of assets acquired or disposed of during the year • The carry forward of unabsorbed depreciation

For financial reporting purposes under the Companies Act, 2013, Schedule II prescribes the useful lives of different categories of assets, and companies are required to charge depreciation in their financial statements based on those useful lives. The depreciation charged in the books of account may differ from the depreciation allowable under the Income Tax Act, and this difference gives rise to deferred tax entries in the financial statements.

The Two Frameworks: Income Tax vs. Companies Act

Understanding the distinction between these two frameworks is essential for every Indian business owner:

Income Tax Framework (Section 32, Income Tax Act, 1961)

• Uses the Written Down Value (WDV) method as the primary method of depreciation for most assets • Groups assets into blocks rather than treating each asset individually • Applies prescribed rates of depreciation to the WDV of each block at the end of the year • Allows an additional depreciation deduction of 20% of the cost of new plant and machinery in the year of acquisition (subject to conditions) • Allows a deduction for scientific research assets, intangible assets, and certain other special categories • Permits the carry forward of unabsorbed depreciation indefinitely until it is fully set off against future income

Companies Act Framework (Schedule II, Companies Act, 2013)

• Requires companies to charge depreciation based on the useful life of the asset as prescribed in Schedule II • Allows either the Straight Line Method (SLM) or the Written Down Value method (WDV), with SLM being the more commonly used method in financial statements • Does not group assets into blocks; each asset or category of assets is treated individually • Requires the residual value of the asset (typically 5% of the original cost) to be retained at the end of the asset’s useful life and not depreciated • Allows companies to use a different useful life or residual value if they can justify it based on technical assessment

Methods of Calculating Depreciation

1. Written Down Value (WDV) Method

The WDV method applies the depreciation rate to the reducing balance of the asset each year. Because the depreciation is calculated on the declining book value, the depreciation charge is highest in the first year and reduces progressively over the life of the asset.

Example: • Cost of machine: ₹10,00,000 • WDV depreciation rate: 15%

• Year 1: Depreciation = 15% × ₹10,00,000 = ₹1,50,000 | Closing WDV = ₹8,50,000 • Year 2: Depreciation = 15% × ₹8,50,000 = ₹1,27,500 | Closing WDV = ₹7,22,500 • Year 3: Depreciation = 15% × ₹7,22,500 = ₹1,08,375 | Closing WDV = ₹6,14,125

The WDV method is mandated by the Income Tax Act, 1961 for most assets.

2. Straight Line Method (SLM)

The SLM method spreads the cost of the asset equally over its useful life. The same amount of depreciation is charged every year.

Example: • Cost of machine: ₹10,00,000 • Useful life: 10 years • Residual value: ₹50,000 (5%)

• Annual Depreciation = (₹10,00,000 − ₹50,000) ÷ 10 = ₹95,000 per year

The SLM method is commonly used for financial reporting under the Companies Act, 2013.

Depreciation Under the Income Tax Act, 1961

The Concept of Block of Assets

One of the most distinctive features of the income tax depreciation framework is the concept of block of assets. Under the Income Tax Act, assets are not depreciated individually. Instead, all assets of the same class and the same depreciation rate are grouped together into a single block, and depreciation is calculated on the aggregate WDV of the entire block.

This has several important practical consequences:

• When a new asset is added to the block during the year, its cost is added to the WDV of the block • When an asset belonging to the block is sold, the sale proceeds are deducted from the WDV of the block • If the sale proceeds exceed the WDV of the block, the excess is treated as a short-term capital gain (referred to as a deemed capital gain under Section 50) • If all assets in a block are sold and the WDV of the block exceeds the sale proceeds, the excess is treated as a terminal depreciation or short-term capital loss • Depreciation is calculated on the closing WDV of the block after all additions and deductions for the year

Blocks of Assets and Applicable Rates

The Income Tax Act prescribes the following primary blocks and rates (these rates are as per the Income Tax Rules, 1962, and are subject to change through government notifications):

Block 1 – Buildings • Residential buildings (other than hotels and boarding houses): 5% • Non-residential buildings, including office buildings, factories, and godowns: 10% • Temporary structures: 40%

Block 2 – Furniture and Fittings • All furniture and fittings including electrical fittings: 10%

Block 3 – Plant and Machinery • General plant and machinery not otherwise specified: 15% • Computers and computer software: 40% • Motor cars (other than those used in a business of running on hire): 15% • Motor buses, motor lorries, and motor taxis used in the business of running on hire: 30% • Ships: 20% • Aircraft: 40% • Energy-saving devices and pollution control equipment: 40% • Moulds used in rubber and plastic goods factories: 30%

Block 4 – Intangible Assets • Know-how, patents, copyrights, trademarks, licences, franchises, and any other business or commercial right of similar nature: 25%

Depreciation on New Assets: The Half-Year Rule

Under the Income Tax Act, if an asset is put to use for less than 180 days during the financial year in which it is acquired, the depreciation allowable for that year is 50% of the normal depreciation. If the asset is put to use for 180 days or more, full depreciation is allowable for the year.

Example: • A machine is purchased and put to use on 1 December 2025 • The financial year ends on 31 March 2026 • The machine is used for approximately 120 days, which is less than 180 days • Depreciation allowable for FY 2025-26 = 50% of normal depreciation

This rule applies only to the year of acquisition. From the next financial year onwards, full depreciation is charged regardless of when the asset was put to use.

Additional Depreciation Under Section 32(1)(iia)

In addition to normal depreciation, the Income Tax Act allows a deduction for additional depreciation of 20% of the cost of new plant and machinery acquired and installed by a manufacturing or power generation business, subject to the following conditions:

• The additional depreciation is available only on new plant and machinery, not second-hand assets • It is not available on office appliances, road transport vehicles, ships, aircraft, or any asset used in a business of generation or distribution of power • If the asset is put to use for less than 180 days in the year of acquisition, only 10% additional depreciation (i.e., 50% of 20%) is allowable in that year, and the remaining 10% is allowable in the subsequent year • The additional depreciation is available only to manufacturing companies and certain other specified businesses

Unabsorbed Depreciation: Carry Forward Rules

If the depreciation allowable in a particular year exceeds the business income of that year (i.e., the business is in a loss position after charging depreciation), the excess depreciation is treated as unabsorbed depreciation. The key features of unabsorbed depreciation are:

• It can be carried forward indefinitely (there is no time limit for carry forward, unlike business losses which can be carried forward for only 8 years) • It can be set off against income from any head of income in future years, not just business income • It is given priority in set-off — current year’s depreciation is set off first, followed by brought-forward unabsorbed depreciation

Depreciation Under the Companies Act, 2013

Schedule II and Useful Life

Schedule II of the Companies Act, 2013 prescribes the useful life of different categories of assets for the purpose of calculating depreciation in a company’s financial statements. Companies must charge depreciation over the useful life prescribed in Schedule II, or justify a different useful life based on technical assessment.

Key useful lives prescribed under Schedule II include:

Buildings • Factory and non-factory buildings: 30 years • Temporary structures: 3 years • Fences, wells, tube wells: 5 years

Plant and Equipment • General plant and machinery: 15 years • Computers and data processing units: 3 years • Servers and networks: 6 years

Furniture and Fixtures • General furniture and fittings: 10 years • Furniture used in hotels, restaurants, or boarding houses: 8 years

Vehicles • Motor cycles, scooters, and other mopeds: 10 years • Motor buses, motor lorries, and motor cars used in a business of running on hire: 6 years • Other motor cars: 8 years

Intangible Assets • The Companies Act does not prescribe specific useful lives for intangible assets. Companies are required to assess and amortise intangible assets over their estimated useful lives in accordance with applicable Accounting Standards (Ind AS 38 for Ind AS companies, AS 26 for companies following Indian GAAP).

Residual Value

Under the Companies Act framework, companies must assume a residual value of at least 5% of the original cost of the asset. This means that only 95% of the asset’s cost is depreciated over its useful life. The remaining 5% is retained as the asset’s residual value in the books of account.

Component Accounting

For significant assets where different components have different useful lives, the Companies Act framework requires component accounting, where each significant component of the asset is depreciated separately over its own useful life. This is particularly relevant for large machinery, aircraft, and ships where components such as engines, airframes, or hulls have different replacement cycles.

Treatment of Capital Expenditure vs. Revenue Expenditure

A critical distinction in the context of depreciation is between capital expenditure and revenue expenditure:

• Capital expenditure is expenditure on the acquisition, creation, or improvement of an asset that provides benefit over more than one accounting period. Capital expenditure is not deductible as an expense in the year of incurrence; instead, it is capitalised as an asset and depreciated over its useful life.

• Revenue expenditure is expenditure that provides benefit only in the current accounting period, such as repairs and maintenance, consumables, and routine operating costs. Revenue expenditure is deductible as an expense in the year in which it is incurred.

Misclassifying capital expenditure as revenue expenditure (or vice versa) is a common tax audit issue and can result in disallowance of deductions and assessment of additional tax.

The key test for distinguishing capital from revenue expenditure is whether the expenditure creates a new asset, brings into existence a new advantage, or merely maintains or restores the existing asset or advantage. Expenditure that upgrades an asset’s capability beyond its original specification is generally capital expenditure, while expenditure that merely restores the asset to its original working condition is generally revenue expenditure.

Depreciation on Specific Asset Categories

Computers and Software

• Under the Income Tax Act: 40% WDV depreciation • Under the Companies Act: Computers — 3 years useful life; Servers — 6 years useful life • Purchased software is treated as an intangible asset and amortised over its useful life; for income tax purposes, software is included in the block of intangible assets at 25% WDV

Vehicles

• Motor cars (not for hire) under the Income Tax Act: 15% WDV • Commercial vehicles used for hire under the Income Tax Act: 30% WDV • Under the Companies Act: Motor cars — 8 years useful life; commercial vehicles used for hire — 6 years useful life • Vehicles used partly for business and partly for personal use: only the business use proportion is allowable as depreciation for income tax purposes

Buildings

• Under the Income Tax Act: Residential — 5% WDV; Non-residential — 10% WDV • Under the Companies Act: Factory buildings — 30 years useful life • Land is not depreciable under either framework. Only the building or structure on the land is depreciable. The cost of land must be separately identified and excluded from the depreciable base.

Leased Assets

• For finance leases, the lessee recognises the asset on its balance sheet and charges depreciation • For operating leases, the asset remains on the lessor’s balance sheet, and the lessor charges depreciation • Under Ind AS 16, most leases are recognised on the lessee’s balance sheet with a corresponding right-of-use asset, which is depreciated over the lease term or the asset’s useful life, whichever is shorter

Common Mistakes in Claiming Depreciation

Not maintaining an asset register: Businesses that do not maintain a proper asset register with details of each asset, its cost, date of acquisition, date of commissioning, and WDV are unable to accurately compute depreciation and are vulnerable to disallowance in tax assessments.

Claiming depreciation on assets not used for business: Depreciation under the Income Tax Act is allowable only on assets used for the purposes of business or profession. Assets that are owned by the business but not used for business purposes, including idle assets, assets under installation, and assets used for personal purposes, do not qualify for depreciation.

Depreciating land: Land is not a depreciable asset. Its value does not diminish over time in the same way as other assets. Claiming depreciation on the cost of land is an error that will be disallowed in assessment.

Incorrect classification of assets into blocks: Each asset must be correctly classified into its appropriate block based on the nature of the asset and the applicable depreciation rate. Incorrect classification results in depreciation being claimed at the wrong rate.

Not applying the half-year rule correctly: The 50% restriction on depreciation for assets used for less than 180 days applies in the year of acquisition and is frequently misapplied or overlooked entirely.

Claiming depreciation on fully written off assets: Once the WDV of a block of assets reaches zero or the block ceases to exist (because all assets in the block have been sold), no further depreciation can be claimed on that block.

Not claiming additional depreciation: Manufacturing businesses frequently overlook the additional depreciation benefit available under Section 32(1)(iia), particularly on assets acquired close to the year-end where the 180-day condition may require the additional depreciation to be split across two years.

Mixing income tax and Companies Act depreciation: Depreciation for income tax purposes is calculated on the WDV of blocks of assets as per the Income Tax Rules. Depreciation for financial reporting purposes is calculated on individual assets over their Schedule II useful lives. These are separate calculations and one cannot be substituted for the other.

Deferred Tax: The Bridge Between the Two Frameworks

Because depreciation for income tax purposes (WDV method, Income Tax Act rates) and depreciation for financial reporting purposes (SLM method, Schedule II useful lives) almost always differ, a timing difference arises between the tax base of the asset and its carrying value in the financial statements. This timing difference gives rise to a deferred tax liability or asset in the company’s financial statements.

• Where income tax depreciation exceeds book depreciation in the early years of an asset’s life (which is typical under the WDV method), the tax base of the asset is lower than its book value. This creates a deferred tax liability, representing tax that will be payable in future years when the timing difference reverses.

• Where book depreciation exceeds income tax depreciation (which can occur in the later years of an asset’s life or where Schedule II useful lives are shorter than the income tax depreciation period), a deferred tax asset arises.

Deferred tax accounting is required for all companies following Ind AS and Indian GAAP and must be reflected in the company’s financial statements.

Frequently Asked Questions

Can a partnership firm or proprietorship claim depreciation under the Income Tax Act? Yes. Depreciation under Section 32 of the Income Tax Act is available to all taxpayers carrying on a business or profession, including companies, partnership firms, LLPs, and individual proprietors. The same blocks of assets and depreciation rates apply.

What happens to depreciation if the business makes a loss? If the depreciation allowable exceeds the business income, the excess becomes unabsorbed depreciation that can be carried forward indefinitely and set off against income from any head in future years. There is no time limit on carry forward of unabsorbed depreciation, unlike the 8-year limit applicable to business losses.

Can depreciation be claimed on a car used partly for personal purposes? Only the proportion of the car’s use that is attributable to business can be claimed as depreciation. The business use proportion must be documented and justified. If the car is used 60% for business and 40% for personal purposes, only 60% of the depreciation is allowable.

Is goodwill a depreciable asset under the Income Tax Act? Following the amendment introduced by the Finance Act, 2021, goodwill is no longer a depreciable asset under the Income Tax Act, 1961. Goodwill acquired on or after 1 April 2021 cannot be depreciated. Goodwill that was part of a block of intangible assets as on 1 April 2020 is treated as a separate block and any depreciation thereon is governed by the transitional provisions.

What is the depreciation rate for mobile phones used for business? Mobile phones are classified as part of plant and machinery. If they qualify as computers or computer peripherals, they may attract the 40% depreciation rate. Otherwise, they are classified under the general plant and machinery block at 15%. The Income Tax Department’s interpretation of mobile phones as computers or general plant and machinery has been subject to some litigation and professional opinion varies.

Can a business claim depreciation on an asset it does not legally own but uses under a finance lease? Under the income tax framework, depreciation is available to the owner of the asset. In the case of a finance lease, the question of who is treated as the owner for depreciation purposes depends on the terms of the lease. Generally, if the lease is structured such that ownership effectively transfers to the lessee, the lessee may be treated as the owner for depreciation purposes.

Conclusion

Depreciation is one of the most powerful tax deductions available to Indian business owners, yet it is also one of the most frequently misunderstood and misapplied. The dual framework of the Income Tax Act and the Companies Act, the concept of block of assets, the distinction between WDV and SLM methods, the half-year rule, additional depreciation, and the treatment of unabsorbed depreciation together create a complex but navigable landscape.

For the business owner, the practical imperatives are clear:

• Maintain a proper asset register with complete details of every asset owned by the business • Correctly classify every asset into the appropriate income tax block and the appropriate Companies Act category • Apply the half-year rule accurately in the year of acquisition • Claim additional depreciation wherever it is available • Never depreciate land, and always separate land cost from building cost • Reconcile income tax depreciation and book depreciation and account for the resulting deferred tax • File on time and claim the full depreciation available to the business every year

Depreciation deductions foregone cannot typically be reclaimed in subsequent years. Every rupee of legitimate depreciation that goes unclaimed is a rupee of additional tax paid unnecessarily.

Know your assets. Know your rates. Claim what the law allows. And manage your business tax position with the same rigour you bring to your business operations.

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Aryan Yadav

I’m Aryan Yadav, passionate about SEO and Digital Marketing with a strong interest in helping businesses grow online. I enjoy learning new strategies, exploring digital trends, and creating ideas that deliver value. I believe in continuous growth, creativity, and building meaningful results through smart work and dedication.