The concept of depreciation is used for the purpose of writing off the cost of assets over their useful life. Depreciation is thus the decrease in the value of assets and the method used to reallocate or written down the cost of tangible assets over its useful life span.
Businesses depreciate long-term assets for both accounting and tax purposes, for this they use Depreciation Rates as defined under the respected Act. Hereunder this post, we will let you know about the depreciation rates as per the Companies and Income Tax Act.
Depreciation Rates as per Companies Act 2013
As per companies act 2013, “Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life, where the depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value.
Schedule II of Companies Act 2013, is indicative in nature as it indicates instead of specifying the rates of depreciation for various assets and specifies that depreciation should be provided based on the useful life of assets. It also provides 3 depreciation calculation methods, e.g., straight-line method (SLM), Written Down Value Method (WDV), and Unit of Production method.
Companies Act 2013, is applicable for the purpose of depreciation of assets, with effect from 1st April 2014 in the case of a company. The method of computation of depreciation has changed with the implementation of Schedule II. From a rate-based approach, the shifting is made towards the useful life of assets as a basis for determining the rate of depreciation.
Depreciation Rates as per Income Tax Act 1961
In taxation, depreciation refers to a reduction in the value of assets due to the wear and tear of the assets. you can claim the deduction on depreciation on those assets which have been used by the assessee for the purpose of business or profession during the previous year.
Depreciation for assets purchased in cash
In one line, no depreciation as per Income Tax Act will be allowed if an asset is acquired in cash.
Clause (1) of section 43 defines the “actual cost of fixed assets” for the purpose of claiming depreciation. Whereas the second proviso to section 43(1), made disallowance of depreciation, where cash payment is exceeding Rs. 10,000 to claim depreciation.
The second proviso to section 43(1) provides that if the assessee incurs any expenditure for acquisition of any asset or part thereof in respect of which a payment or aggregate of payments made to a person in a day, by cash, exceeds Rs. 10,000, such expenditure shall be ignored for the purposes of determination of actual cost.
In other words, if an asset is acquired and the same is paid in cash of more than Rs. 10,000 in a day then such cost will not form the actual cost of the asset and hence depreciation cannot be claimed on the part of the asset which is paid in cash.
The depreciation rate is the percentage rate at which assets are depreciated across the estimated productive life of assets.
|Depreciable Assets||Depreciation Rates As per Income Tax Act||Depreciation Rates As per Companies Act|
|Plant & Machinery||15%||18.10%|
|Air Conditioner- AC*||10%||25.89%|
|Mobile Phone||15%||18.10 %|
* Here Air Conditioner and TV considered under Electric Fitting Category
The above depreciation rates are for those assets which are common in nature and used in most of the places, for a complete chart of the assets, you can follow the below link and get the complete list of depreciation rates-
How to Calculate Depreciation Rate as per Companies act, 2013
Schedule II of the companies act, 2013 prescribes the useful life of assets as a base for calculating depreciation. The rate of depreciation shall be determined on the basis of the useful life of an asset using formula as follow-
Straight Line Method (SLM) Formula For Calculating Depreciation
Depreciation Rates = [(Original Cost – Residual Value)/useful Life] * 100 Original Cost
Depreciation = Original Cost * Rate of Depreciation under SLM
Written Down Value (WDV) Formula For Calculating Depreciation
Depreciation Rates = [1-(s/c) U 1/n] * 100
s = Scrap value of assets at the end of useful life
c = Original cost of assets
n = Useful life of assets
Depreciation = WDV * Rate of Depreciation under WDV
Also Know About-
Points to Remember
For calculating Depreciation as per the Companies Act, the following points need to remember:-
- Depreciation is calculated by considering the useful life of assets, cost, and residual value.
- Any method WDV or SLM can be used.
- Depreciation method used needs to be disclosed in accounts.
- The useful life of assets needs to be disclosed when it is taken differently from Schedule II.
- If there is any change in assets, which means to say assets are sold, discarded, demolished, or destroyed then the calculation is made according to the date of such events.
How to Calculate Depreciation Rate as per Income Tax Act, 1961
As per section 32(1), of the Income Tax Act, 1961 the depreciation should be computed at the prescribed percentage on the WDV of the assets, which in turn is calculated with reference to the actual cost of the assets. When an assessee is acquiring the assets in the previous year then the actual cost becomes the WDV. While the assets acquired in earlier year WDV shall be equal to the actual cost incurred less depreciation allowed under the act. This can be easily understood with an example-
Depreciable assets on 01.04.2017 on which depreciation is available at the same rate of 25%.-
|Particulars||Amount in Rs.|
|Less- Depreciation @ 25% of Rs. 15,00,000||(3,75,000)|
|WDV- Written down value on 01.04.2018 of a block of assets||11,25,000|
|Add- Cost of assets purchase during 2018-19||6,00,000|
|Assets B sold during the year 2018-19||(6,75,000)|
|Balance Left after-sale||10,50,000|
|Less- Depreciation for 2018-19 @ 25% of Rs. 10,50,000||2,62,500|
|WDV- Written down value of all assets on 01.04.2019||7,87,500|
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Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author does not own any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.
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Compiled by- CA Chirag Agarwal (Practicing Chartered Accountants)