The depreciation rate as per the Income Tax Act (ITA) is the percentage used to calculate the decline in value of business assets under Section 32 of the Income Tax Act, 1961. Applying these rates to capital expenditure reduces your taxable profit within the law.
The rates depend on the nature of the asset as defined under Appendix I of the Income-tax Rules, 1962. Understanding them helps businesses estimate tax liability accurately and maintain compliant records.
How does the block of assets concept work?
The ITA mandates that depreciation be calculated on a block of assets rather than on individual items. A block of assets represents a group of assets within the same class that share the same depreciation rate.
Instead of tracking the wear and tear of a printer or a desk, you combine the Written Down Value (WDV) of all assets in that category. This method simplifies accounting and removes the need to calculate individual residual values.
To correctly form an asset block, categorise your purchases into the following main asset classes:
- Tangible assets such as buildings, machinery and furniture
- Intangible assets such as patents, copyrights, trademarks and licences
What are the current depreciation rates for major assets?
The government classifies assets into specific blocks and assigns fixed rates to each. Knowing these rates helps keep tax calculations accurate and compliant. Incorrect classification or applying the wrong rate can lead to under- or over-claiming of depreciation.
Here are the most common depreciation rates for business assets:
- Computers, laptops and computer software: 40%
- General plant and machinery, including motor cars used for business purposes: 15%
- Office furniture and electrical fittings: 10%
- Residential buildings used for employees: 5%
- Commercial buildings used as offices or factories: 10%
- Temporary wooden structures and air pollution control equipment: 40%
- Intangible assets such as franchises and trademarks: 25%
- Motor cars used in a business of running them on hire: 30%
Energy-saving devices and specified machinery are also eligible for a 40% rate, subject to classification under Appendix I of the Income-tax Rules. Most plant and machinery fall under the standard 15% rate, while only specific categories, such as energy-saving devices and pollution control equipment, qualify for higher rates.
Certain specialised assets may carry different rates based on their classification under the official depreciation schedule in Appendix I.
When does the 180-day rule apply to your assets?
The timing of your asset purchase directly affects the depreciation you can claim in a financial year. The ITA specifies that an asset must be used for at least 180 days during the year to qualify for the full depreciation rate. Purchasing an asset near the end of the year limits the depreciation you can claim.
When you acquire and use an asset for less than 180 days in a financial year, the following rule applies:
- The depreciation claim is restricted to 50% of the normal applicable rate
- An asset with a 40% rate will receive only a 20% deduction for that year
- The remaining value becomes part of the opening WDV for the next financial year, where normal rates apply
Incorrectly assessing the usage period can lead to excess or short claims, which may require adjustments during tax assessment.
Who can claim additional depreciation?
Certain businesses receive incentives to invest in new machinery and expand production capacity. Additional depreciation is an allowance provided in addition to the normal depreciation rate, allowing higher deductions in the year an asset is purchased.
To qualify for this 20% additional depreciation, a business must meet the following criteria:
- The enterprise must be engaged in the manufacture or production of any article or thing
- The business may also be engaged in the generation, transmission or distribution of power
- The asset must be new plant and machinery, not second-hand
- Ships, aircraft, office appliances and vehicles are excluded from this benefit
If the asset is used for less than 180 days in the year of purchase, only 10% additional depreciation can be claimed in that year. The remaining 10% can be claimed in the immediately succeeding financial year.
Incorrect classification of assets or claiming additional depreciation on ineligible items can lead to disallowances during tax assessment.
Final remarks
Accurate depreciation calculation helps your business stay compliant while maximising allowable tax deductions. Tracking purchase dates, classifying assets into the correct blocks and applying the half-year rule manually can lead to errors. A structured approach to recording these capital expenditures is essential for accurate tax reporting.
We support this process through TallyPrime by helping you categorise purchases under fixed asset groups and record depreciation through journal vouchers. With organised asset records, your financial statements reflect the correct position as your business grows. Start early to maintain consistency and avoid year-end adjustments.
