Additional depreciation is a tax benefit under Section 32(1)(iia) of the Income Tax Act that allows businesses engaged in manufacturing, production or power-related activities to claim an extra 20% depreciation on new plant and machinery, over and above normal depreciation, in the year of acquisition and use. For businesses in notified backward areas, the rate is 35%.
This deduction reduces taxable income, improves cash flow and makes large capital investments more financially viable.
Where additional depreciation applies
Additional depreciation is available in the following situations:
- Businesses engaged in the manufacturing or production of goods
- Enterprises involved in the generation and distribution of power
- New plant and machinery acquired and installed after 31 March 2005
- Assets used for business purposes
Where additional depreciation does not apply
The following assets and businesses are excluded from the benefit:
- Service-based businesses not involved in manufacturing or production
- Used or second-hand machinery
- Machinery used for office or administrative purposes
- Vehicles, furniture and fittings
- Assets installed outside India
- Office appliances and equipment
- Road transport vehicles
- Ships and aircraft
- Assets whose full cost is already allowed as a deduction under other sections
Additional depreciation for backward areas
Higher additional depreciation (up to 35%) is available for businesses setting up manufacturing units in notified backward areas. This applies to specific states and regions designated by the government and is available only if new machinery is acquired and installed within the prescribed time frame, subject to conditions related to the location and nature of business activity.
How to calculate additional depreciation
Formula:
Additional Depreciation = Actual Cost × Applicable Rate
Step-by-step calculation:
- Identify the actual cost of new plant and machinery acquired
- Confirm eligibility: new asset, manufacturing use and applicable sector
- Apply the additional depreciation rate: 20% for general cases or 35% for notified backward areas
- Verify the usage period:
- Used for more than 180 days: full additional depreciation allowed
- Used for less than 180 days: only 50% allowed in the first year with the balance carried forward to the next year
Example:
Machinery cost: ₹10,00,000 | Rate: 20%
- Used for more than 180 days: Additional Depreciation = ₹10,00,000 × 20% = ₹2,00,000
- Used for less than 180 days: Additional Depreciation = ₹10,00,000 × 10% = ₹1,00,000 (balance ₹1,00,000 claimed in the next year)
How to claim additional depreciation
The claim is made in the year in which the new plant and machinery is acquired and put to use for business purposes.
- Ensure the asset is new plant and machinery used in manufacturing or production
- Confirm the asset is owned by the business and used for business purposes
- Verify the asset is installed and put to use during the financial year
- Calculate the eligible additional depreciation at the applicable rate
- Include the claim in the depreciation schedule while filing the Income Tax Return
Documents required
Proper documentation is essential to support your claim for additional depreciation and ensure smooth assessment during tax scrutiny.
- Purchase invoice: Proof of acquisition showing cost and date of purchase
- Installation proof: Installation reports or certificates confirming the asset has been set up
- Usage evidence: Records demonstrating the asset was put to use during the financial year
- Fixed asset register: Detailed record of assets, including date of purchase, cost and depreciation claimed
- Business activity proof: Documents supporting that the business is engaged in manufacturing or production
- Tax audit report (if applicable): Audit documentation reflecting depreciation claims under the relevant provisions
Common mistakes to avoid
Being aware of common mistakes helps ensure accurate and compliant claims and avoid disallowances and penalties.
- Claiming on ineligible assets: Office equipment, vehicles and second-hand machinery do not qualify.
- Ignoring the 180-day rule: Full additional depreciation cannot be claimed when the asset is used for less than 180 days in the year of acquisition.
- Incorrect business classification: The benefit is not available to businesses not engaged in manufacturing or production.
- Claiming without actual usage: Assets must be put to use during the financial year; purchase alone is not sufficient.
- Improper documentation: Missing invoices, installation proof or asset records may lead to disallowance during scrutiny.
- Errors in calculation: Applying incorrect rates or miscalculating the eligible amount affects compliance.
- Overlooking the carry-forward provision: The remaining 50% depreciation must be claimed in the subsequent year when the 180-day rule applies in the first year.
Conclusion
Additional depreciation is a valuable tax incentive for manufacturing and production businesses. Accurate calculation, proper documentation and adherence to eligibility conditions are essential to claim the full benefit and avoid disallowances.
TallyPrime helps businesses track fixed assets, automate depreciation calculations and maintain the records needed for accurate tax filing and audit readiness.
