What is Depreciation (Income Tax Act)?

The Income Tax Act uses a block-of-assets system for depreciation, which is fundamentally different from the useful-life-based approach under Schedule II of the Companies Act 2013. This creates timing differences that form the basis of deferred tax in company accounts.

**WDV block-of-assets method**

All assets of the same class (same prescribed rate) are grouped into a single 'block'. The depreciation for the year is calculated on the written-down value of the block at the beginning of the year, plus additions during the year (at 50% rate if acquired after 3 October), minus disposals.

**Key prescribed rates (Schedule XIV-equivalent under IT Act)**

| Asset Type | WDV Rate | |-----------|----------| | Residential buildings | 5% | | Non-residential (other) buildings | 10% | | Factory buildings | 10% | | Plant and machinery (general) | 15% | | Motor cars (not taxis) | 15% | | Heavy motor vehicles | 30% | | Computers and peripherals | 40% | | Software (including ERP, accounting software) | 40% | | Furniture and fittings | 10% | | Office equipment | 15% | | Intangibles (patents, trademarks, know-how, copyrights) | 25% |

**Additional depreciation (Section 32(1)(iia))**

Manufacturing companies can claim an additional 20% depreciation on new plant and machinery in the first year of use (on top of the regular WDV rate). This is available for new assets only, not second-hand.

**Differences from Companies Act depreciation**

Companies file financial statements under the Companies Act (straight-line or WDV over useful life per Schedule II), but compute taxable income using IT Act prescribed rates. The difference creates timing differences recognised as deferred tax in audited accounts.

**Terminal depreciation**

If the WDV of a block falls below zero due to asset disposals, the negative balance is treated as a short-term capital gain. If all assets in a block are sold and the WDV remains positive, the balance is a terminal depreciation (capital loss) deductible in that year.