The building depreciation rate is the percentage of a building’s value that businesses can claim as a deduction each year under the Income Tax Act. In India, this is typically 5% for residential buildings and 10% for commercial buildings, calculated using the Written-Down Value (WDV) method.
Businesses invest significantly in buildings such as offices, factories and warehouses. Over time, their value reduces due to usage, ageing and structural wear. Applying the correct building depreciation rate ensures accurate tax calculation, prevents overstated profits and supports compliance.
Depreciation rates for buildings under the Income Tax Act
The building depreciation rate depends on the type and usage of the asset:
|
S. No. |
Type of Building |
Description |
Depreciation Rate (%) |
|
1 |
Residential Buildings |
Buildings used mainly for residential purposes (excluding hotels & boarding houses) |
5% |
|
2 |
Non-Residential Buildings |
Buildings other than residential buildings |
10% |
|
3 |
Infrastructure Buildings (Water Projects) |
Buildings used for water supply/treatment systems under Section 80-IA |
40% |
|
4 |
Temporary Structures |
Purely temporary structures, such as wooden buildings |
40% |
Selecting the correct building depreciation rate is essential to ensure accurate tax deduction and compliance.
Depreciation of buildings under the Companies Act, 2013
For financial reporting, depreciation is based on useful life rather than fixed rates.
|
S. No. |
Type of Building |
Description |
Useful Life (Years) |
|
1 |
RCC Buildings (Non-factory) |
Offices and commercial spaces |
60 years |
|
2 |
Non-RCC Buildings |
Buildings without an RCC structure |
30 years |
|
3 |
Factory Buildings |
Manufacturing-related buildings |
30 years |
|
4 |
Temporary Structures |
Temporary buildings |
3 years |
|
5 |
Fences, Wells, Tube Wells |
Ancillary structures |
5 years |
|
6 |
Bridges, Culverts, Bunders |
Infrastructure structures |
30 years |
Note: Companies Act depreciation is used for accounting, while the Income Tax Act determines the applicable building depreciation rate for tax purposes.
How to calculate depreciation for buildings
Depreciation on buildings is calculated using the WDV method under the Income Tax Act:
Depreciation = Opening WDV × Depreciation Rate
Closing WDV = Opening WDV − Depreciation
Example:
If a building is valued at ₹50 lakh and the applicable depreciation rate is 10%, in the first year, the depreciation of ₹5 lakh reduces the taxable income by the same amount, resulting in an approximate tax saving of ₹1.5 lakh at a 30% tax rate.
Key steps:
- Group buildings into blocks based on the applicable building depreciation rate
- Start with the opening WDV of the block
- Add new assets and deduct disposals during the year
- Apply the relevant building depreciation rate
- Carry forward the reduced WDV to the next year
The WDV method allows higher depreciation in earlier years, helping reduce taxable income and improve cash flow.
For Companies Act reporting, businesses may use WDV or the Straight Line Method (SLM):
SLM Formula: (Cost − Residual Value) ÷ Useful Life
Conclusion
Applying the correct building depreciation rate is essential for accurate tax computation and compliance. It ensures that businesses do not overstate profits and can optimise tax deductions over time. Proper classification, calculation and record-keeping are critical for managing building-related assets effectively.
With TallyPrime, businesses can track asset values, apply the correct building depreciation rate automatically and maintain accurate records for reporting and compliance.
