# What is Depreciation (Income Tax Act)?

Country: India

Depreciation under the Income Tax Act 1961 (Section 32) reduces taxable profit for wear and tear on business assets. Unlike Companies Act depreciation (useful life-based), Income Tax Act depreciation uses written-down value (WDV) block-of-assets method with prescribed rates: 15% for most plant and machinery, 40% for computers/software, 10% for buildings, 60% for certain energy-saving equipment. A new asset used for less than 180 days in the year gets 50% of the applicable rate.

## Current rate (FY 2025-26 (AY 2026-27))

Buildings: 5-40%; Plant and machinery: 15-40%; Computers and software: 40%; Furniture: 10%; Vehicles: 15-30% depending on type.

## Example

A company buys computers worth INR 10 lakh on 1 April 2025. WDV at year-end = INR 10L x (1-40%) = INR 6 lakh. Depreciation claimed = INR 4 lakh, reducing taxable profit by that amount. If bought after 3 October (less than 180 days), only 20% is allowed = INR 2 lakh.

## How Depreciation (Income Tax Act) works in India

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.

Source: https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable-1

## Related terms

- [Corporate Income Tax (India)](https://accounts-os.com/in/glossary/corporate-income-tax-in)
- [ITR-6 (Income Tax Return for Companies)](https://accounts-os.com/in/glossary/itr-6-in)