What is Depreciation under Income Tax Act?

The section 32 in the Income Tax Act of 1961 allows for depreciation. Depreciation can be used to deduct the cost to an item during its time. Depreciation is an essential deduction for the statement of profits and losses and the Act permits determination using one of two ways: the Straight Line method, or the Written down value (WDV) technique. The article below will try to explain  depreciation as per income tax act.

What is depreciation?

The Income Tax Act of 1961 permits the depreciation of the tangible as well as intangible asset. If you have real support, you can deduct the costs of structure, plant, and machinery. In the event of the intangible assets, make deduction for trademarks, patents or copyrights franchises, licenses as well as any other comparable commercial or business right. This includes the claim for depreciation of assets that were used by the assessee to conduct work or profession in the preceding year.

If the asset was in use for longer than 180 calendar days, depreciation at 50% is permitted for the current year. The assessee doesn’t have to have utilized the asset in the prior year to qualify for the deduction for depreciation. If an assessee purchases an asset and leases it to a lessor the assessee is entitled to depreciation as per the Act. For instance, if the machine is purchased and then utilized by December 21 20th, 2020 the depreciation rate would be 15/2=7.5 percent.

Block of Assets

Asset grouping The WDV of the Block of Assets is utilized to determine depreciation. “Block of Asset” is a term used to describe a set of assets belonging to the same class of asset and comprise of the following:

Plants, buildings, machinery and furniture are all an example of tangible resources.

Intangible assets like knowledge, patents, trademarks, copyrights, licenses franchises, as well as any other commercial or business rights of a similar kind can be subject to the exact same amount depreciation.

The depreciation percentage within the asset class must be considered when dividing the assets in blocks. Every asset class that has the same percentage of depreciation will be classified as a block in the purchase.

Depreciation Method

The methods used to calculate depreciation as well as the useful lives of depreciable assets can differ between one asset and the next. Also, it can change for accounting and tax purposes based on the type of asset and industry. It is possible to alter the method for taxation and accounting purposes based on type of asset Straight Line Method and the Written Down Value Method are the two most commonly used depreciation techniques. The method for calculation is one of the main distinctions between income tax depreciation and corporate depreciation, apart from the depreciation rate. In accordance with the Companies Act of 1956, depreciation is calculated by using Straight Line Method, and the method of writing down value. As per the Companies Act of 2013, the Straight Line Method is used to calculate depreciation , while the unit used is Production Method Written Down Value Method

Click here  to find out more about depreciation’s impact on pension schemes and Form 10c of epf Form 10c online