Depreciation Section 32 Income Tax: The idea of depreciation is practised for the prospect of writing off the cost of an asset over its useful life. Depreciation is a mandatory deduction in an entity’s profit and loss statements, and the Act permits deduction either in Written Down Value (WDV) or Straight-Line method.
Under the WDV method is universally used except for undertaking involved in generation or generation as well as distribution of power, for the calculation for depreciation. If one doesn’t know what it is depreciation, then you can read about it here – What are depreciation and common methods/types of depreciation.
- Basics Of Depreciation
- Depreciation In The Asset Is Purchased Year:
- Depreciation In Subsequent Years
- Additional Depreciation Under Section 32(1)(IiA)
- Calculation Of Depreciation
- Calculation of purchase cost of an asset
- Apportionment in case of amalgamation/demerger/succession of the business
- Additional Points
Basics Of Depreciation
Depreciation is allowable as an investment in the Income Tax Act, 1961, based on the block of assets on the Written Down Value (WDV) method. The Straight Line Method (SLM) is not allowed in Depreciation.
The Act also, in certain circumstances, permits a deduction for additional depreciation in the year of purchase. To learn about further depreciation, visit the official site for Additional Depreciation Under the Income Tax Act.
Block of assets means the group of assets falling within a class of assets for which the same depreciation rate is commanded.
- Depreciation does not accept GOODWILL & LAND.
- Only the owner of the asset allows the Depreciation.
- A lessee is not considered as the owner of the property; therefore, depreciation is permitted only to the lessor. Depreciation on that is granted to the lessee if furniture or any part is constructed by the lessee.
- If the property bought under the hire purchase contract, then depreciation is granted to the purchaser.
- In the matter of co-ownership, depreciation is permissible in the ratio of their ownership.
- An asset must be used for the objective of a profession or business.
- If the assessee as a deduction doesn’t claim the amount of depreciation even then, the amount of WDV moved forward to next year is reduced by the amount of depreciation.
- Under section 44AD or 44AE, if profit is calculated on the basis of presumption, then under section 32, such reported profit is considering after all the expenses and depreciation allowable.
- Depreciation under Income Tax Act is separate from that of the Companies Act, 1956. Therefore depreciation rates designated under income tax is only permissible whatever the depreciation is accredited in books of accounts.
- If a new addition is made to an existing asset, it is considered an asset if it reduces per-unit cost or increases the capacity of the current asset; otherwise, it should be excised as an expense.
- If there are some spare machines/parts and they are not actually used, depreciation is permissible on them because they are used for the purpose of the profession/business.
- Lower Depreciation: As per the income tax act, Depreciation can be declared at a lower rate. But for the next year, an individual’s wdv will be acknowledged as reduced by the prescribed percentage of depreciation. For e.g., 80% depreciation is prescribed for the asset if an asset is of Rs. 1 lakh, and as depreciation, one charge only rs. 30,000; in this matter, next year wdv will be regarded as rs. 20,000 only, not rs. 70,000.
- If the individual wants to claim Input Tax Credit of such GST paid, Depreciation is not allowed on the GST component.
Depreciation In The Asset Is Purchased Year
- Deprecation is permitted only if the asset is put to practice in the year of purchase.
- Degree of the utilisation of assets will not be counted while deciding whether the asset is made to use or not. For example, if the asset is utilised for a trial run, then it is deemed the asset is put to use.
- An amount equal to 50% of the amount calculated using normal depreciating rates is allowed as depreciation if the asset is made to use for less than 180 days.
- e. Asset 100% depreciation is allowed when put to use on or before (4th Oct in case of leap year) 3rd Oct of the year, otherwise 50%.
- Deprecation will be permitted on the basis of the block of asset method.
Depreciation In Subsequent Years
Full depreciation is permitted in the subsequent years if an asset is not put to use in the year of the purchase or put to use for less than 180 days, condition satisfies.
If only an individual asset in that block is utilised during the year at any point in time, depreciation is allowed on a whole block of the asset.
Additional Depreciation Under Section 32(1)(IiA)
- Additional depreciation shall be permitted if the following condition is achieved by the assessee:
- Additional deprecation is allowed only on new plant or machinery excluding ships and aircraft which has been purchased and fitted after 31-03-2005
- The assessee shall be involved in the business of production and manufacturing of any article or thing (computers are eligible for additional depreciation when used for data processing in industrial premises). Additional depreciation is also permitted to assessees engaged in the business of generation and distribution of power from the financial year 2016-17.
- Publishing and Printing are also considered manufacturing.
- Depreciation at the rate of 20% of the original cost of assets is recognised as additional depreciation.
- If assessee is involved in production or manufacturer of anything or article on or after 1st Apr 2015 in any mentioned backward area of Telangana, West Bengal, Andhra Pradesh, Bihar and installs and acquires any new plant or machinery during 1st April 2015 to 31st March 2020 then additional depreciation is permitted at the rate of 35%.
- However, additional deprecation will be allowed if the asset is put to use for less than 180 days at half of the actual rate, i.e. 10% or 17.5% as the case may be.
- The remaining half depreciation is allowed in the succeeding year if additional depreciation is allowed in the year of put to use at half of the rate From the financial year 2015-16.
- Specific cases in which depreciation is not permitted
- Second-hand machinery and plant – Machinery and plant which, before installation by assessee, was used whether inside and outside India by any individual.
- Any road transport vehicle or office appliance.
- Any plant or machinery installed in any residential accommodation or any office premises, including accommodation in the nature of the guest house.
- Any machinery and plant, the whole of the original cost of which is acknowledged as a deduction (whether by way of otherwise or depreciation) in computing income chargeable under the head “Profits and gains of profession or business” of any on the previous year.
Calculation Of Depreciation
WDV of an asset = Real cost to the assessee – All depreciation actually permitted to the individual (included unabsorbed depreciation, if any)
WDV of Block of Assets:
The aggregate of WDV of all the assets falling within that block at the beginning of the year of an amount- XXX
Add: Real costof any assets falling within the block acquired during the previous year of an amount- XXX.
Less: Money receivable or received in respect of any asset in the block which is sold, demolished, discarded, or destroyed during the previous year of an amount- XXX
WDV at the end of the year of an amount- XXX
Less: Depreciation at a rate of a block (if WDV at the end of the year is positive) of an amount- XXX
The closing value of the block of the asset at the end of the year of an amount- XXX
No depreciation is allowed if the amount of WDV comes at a negative amount, and the closing WDV will be zero, and the amount will be considered as a capital gain.
If such an amount is positive and no asset exists in the block, then such an amount will be managed as short term capital loss, and no depreciation is permitted.
Calculation of Purchase Cost of an Asset
Calculation of Capital Gain On Sale Of A Depreciable Asset: The capital gain/loss from assets are invariably treated as short term irrespective of the case that the asset is retained for more than 3 years or not.
Calculation of Capital Gain/Loss
The aggregate of WDV of all the assets falling within that block at the beginning of the year of an amount- XXX
Add: Real cost of any assets falling within the block acquired during the previous year of an amount- XXX.
Less: Money receivable or received in respect of any asset in the block which is sold, demolished, discarded, or destroyed during the previous year of an amount- XXX
WDV At The End Of The Year
An amount will be considered as short term capital gains if the above calculations result in a negative WDV. If such an amount holds no asset exists in the block and is positive, then such an amount will be employed as short term capital loss.
WDV In Case Of Slum Sale
WDV of Block of assets- XXX
Less: Deduction on account of slump sale- XXX
WDV of a block of assets eligible for depreciation- XXX
Rate of Depreciation
See this list for all depreciation rates.
Unabsorbed Depreciation
The Depreciation is called unabsorbed deprecation if there is a loss under business and profession and the reason for such loss is depreciation, and it shall be permitted to be moved forward.
Deduction on Account Of Slump Sale
The actual cost of assets falling in the block, which is transferred by slump sale- XXX
Less: Depreciation that would have been permitted if that asset was the only
One in the block- XXX
Deprecation on account of slump sale- XXX
Apportionment In Case Of Amalgamation/Demerger/Succession Of The Business
Depreciation shall be permitted as per the following provision in case of succession of the proprietary or firm concern by a company or in case of demerger or amalgamation of a company:-
The total amount of depreciation permitted to both the company should not exceed the amount if there were no such conversion or succession
Depreciation will be allocated between the successor and the predecessor in the ratio of a total number of days for which the property or assets were utilised by the successor and the predecessor.
Additional Points
The depreciation shall be moved forward even the profession/business associated with the profession/business, not in existence.
Return of loss is not obligated to be submitted for conducting forward of unabsorbed depreciation.
The assessee should set off brought forward losses in the following manner: –
First of all, the current year depreciation will be adjusted.
Then carried forward, business losses will be set off (non-speculative or speculative)
Then, against business income, unabsorbed depreciation will be set off.
For an indefinite number of years, unabsorbed depreciation can be carried forward.
From any head of income other than Capital Gain and Salary in any year, unabsorbed depreciation can be set off.
Examples for Calculation Of Unabsorbed Depreciation
Example-1
Profit from business before depreciation- 4,00,000
Depreciation- 6,00,000
Income from house property- 1,00,000
Unabsorbed depreciation- 1,00,000
Example-2
Loss from business before depreciation- 4,00,000
Depreciation- 6,00,000
Income from house property- 1,00,000
Unabsorbed depreciation- 6,00,000
Carried forward business loss- 3,00,000
Example-3
Profit from business before depreciation- 4,00,000
Depreciation- 6,00,000
Unabsorbed depreciation- 2,00,000