Depreciation under the Companies Act, 2013, is not based on fixed rates. It is calculated based on the useful life of assets as defined in Schedule II. This has a direct bearing on the way profits are reported and whether dividends can be declared under Section 123.
To calculate depreciation accurately, businesses need to consider the cost of the asset, its useful life, residual value, as well as the method used. Any mistake in this process can cause errors in financial reporting and compliance problems. This blog explains how the Companies Act, 2013, applies to depreciation, the applicable rules, methods, and how they are applied correctly in practice.
How the depreciation rate is calculated under the Companies Act, 2013
The Act does not prescribe fixed depreciation rates. Instead, depreciation is derived from the useful life of an asset as defined in Schedule II (Part C). The rate is computed based on how long the asset is expected to be used.
- Useful life as the primary basis: Depreciation must be calculated based on the useful life specified in Part C. It should not ordinarily differ from the prescribed life unless justified.
- Residual value cap: The residual value of an asset must not exceed 5% of its original cost. Any deviation from this limit requires proper justification.
Note: If a company adopts a different useful life or residual value, it must disclose the variation in the financial statements and provide a clear justification supported by technical advice.
Useful life and indicative rate of depreciation under Schedule II
Schedule II provides useful life and indicative depreciation rates in detail. Here are some commonly used assets for practical reference:
|
Asset Category |
Useful Life |
|
Buildings (RCC structure) |
60 years |
|
Buildings (other than RCC) |
30 years |
|
Bridges, culverts, bunders, etc. |
30 years |
|
Furniture and fittings (general) |
10 years |
|
Plant and machinery (general) |
15 years |
|
Continuous process plant |
25 years |
|
Office equipment |
5 years |
|
Computers (end-user devices) |
3 years |
|
Servers and networks |
6 years |
|
Electrical equipment |
10 years |
|
Motor vehicles (non-hire use) |
8 years |
|
Motor vehicles (hire use) |
6 years |
|
Ships (Bulk Carriers) |
25 years |
|
Aircraft/helicopters |
20 years |
|
Railway sidings |
15 years |
|
Ropeway structures |
15 years |
|
Power generation plant |
40 years |
|
Wind power plant |
22 years |
|
Laboratory equipment (general) |
10 years |
|
Laboratory equipment used in educational institutions |
5 years |
|
Medical equipment (diagnostic) |
13 years |
|
Hydraulic works, pipelines, and sluices |
15 years |
|
Carpeted Roads-RCC |
10 years |
|
Carpeted Roads, other than RCC |
5 years |
|
Non-carpeted roads |
3 years |
Note: Refer to Schedule II (Part C) for complete classification of assets, including industry-specific categories and sub-components.
Shift-based depreciation and the NESD concept
Depreciation also depends upon the intensity of use of an asset.
- Single shift basis: Useful life is based on single shift usage.
- Double shift basis: Depreciation is increased by 50% for double shift usage.
- Triple shift basis: Depreciation is increased by 100% for the triple shift usage.
- NESD assets: For some assets that are marked as NESD, no further depreciation is permissible even if they are used in more than one shift.
Special treatment of intangible assets
Under the Companies Act, 2013, intangible assets are amortised based on their economic benefits, often using a revenue-based approach, especially for concession-based assets such as toll roads.
- Mode of amortisation: The amortisation is calculated using a revenue-based formula:
Amortisation Rate = (Amortisation Amount ÷ Cost of Intangible Asset) × 100 - Amortisation amount calculation: The amortisation amount is determined as:
(Cost of Intangible Asset × Actual Revenue for the Year) ÷ Projected Revenue from the Intangible Asset (over the concession period) - Key components explained:
- Cost of Intangible Asset (A): Total cost incurred by the company as per applicable accounting standards
- Actual Revenue for the Year (B): Revenue earned during the accounting year, such as toll collections
- Projected Revenue (C): Total expected revenue from the asset over its concession period, as estimated at the time of financial closure or agreement
This method ensures that amortisation aligns with the actual economic benefits derived from the intangible asset over time.
Common mistakes in calculating depreciation
Errors in depreciation can have direct financial statements and compliance implications.
Common issues include:
- Incorrect asset classification: Leads to wrong useful life and incorrect depreciation.
- Ignoring disclosure requirements: Ignoring the requirement of justification for deviation can result in audit observations.
- Misapplication of shift rules: Incorrect application of NESD and extra shift depreciation.
- Poor documentation: Missing records cause problems in the statutory audit.
Conclusion
Getting depreciation right is less about memorising rules and more about applying them consistently with clarity. When useful life, residual value, and method are aligned with Schedule II and supported with proper documentation, financial reporting becomes far more reliable and defensible. It also reduces the risk of audit observations and ensures that profits and distributions are based on accurate numbers.
In practice, the challenge often lies in maintaining this consistency across multiple assets, tracking usage patterns, and ensuring timely disclosures. This is where having a dependable system makes a real difference. With TallyPrime, businesses can simplify depreciation calculations, stay aligned with statutory requirements, and keep financial records accurate without manual complexity.
