Depreciation Calculator

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life, representing the wear and tear, obsolescence, or reduction in value of the asset. Under Section 32 of the Income Tax Act, businesses in India can claim depreciation as a deduction from taxable income, reducing their overall tax liability. Claiming depreciation is mandatory — you cannot defer or skip it. The depreciation rates and methods are prescribed by the Income Tax Act and are different from those under the Companies Act for accounting purposes.

The Written Down Value (WDV) method calculates depreciation on the reducing balance of the asset each year. Under WDV, the depreciation amount is higher in initial years and decreases over time, making it the mandatory method for income tax purposes in India. The Straight Line Method (SLM) charges a fixed percentage of the original cost every year, resulting in equal annual depreciation charges. SLM is commonly used under the Companies Act for financial reporting. For example, a ₹1 Lakh asset with 15% depreciation: WDV Year 1 = ₹15,000 (15% of ₹1L), Year 2 = ₹12,750 (15% of ₹85,000); SLM Year 1 = ₹15,000, Year 2 = ₹15,000.

The Income Tax Act prescribes depreciation rates under three categories: (1) Block 1 — 40% rate: Computers, software, laptops, routers, and office equipment; (2) Block 2 — 25% rate: Motor cars (excluding those used in hire business), furniture, fittings, and plant & machinery not covered elsewhere; (3) Block 3 — 15% rate: Buildings, furniture & fittings in hotels, pipelines, and cold storage plant. Additional rates include 100% for pollution control equipment, 60% for energy-saving devices, and 80% for computers acquired between March 2020-2024 under Section 32AD for specified businesses.

Under Section 32, depreciation is calculated on the Written Down Value (WDV) of a block of assets. A block refers to a group of assets falling within the same depreciation rate category. The formula is: Depreciation = WDV of the block at the beginning of the year + Cost of assets acquired during the year – Net sale proceeds of assets sold during the year × Applicable rate. If the WDV of a block becomes zero or negative (when sale proceeds exceed the opening WDV plus new acquisitions), no depreciation is allowed. For assets used for less than 180 days in a year, only 50% of the normal depreciation rate applies.

Additional depreciation of 20% (in addition to normal depreciation) is available under Section 32(1)(iia) for new plant and machinery acquired and installed by an assessee engaged in manufacturing or production of any article or thing. This 20% additional depreciation is allowed in the year of installation itself, accelerating the tax benefit. For assets used for less than 180 days, only 10% additional depreciation is allowed. This benefit is not available to undertakings in specified zones under Section 80-IA/80-IB, as they already enjoy tax holiday benefits.

Depreciation under the Income Tax Act uses the WDV method with rates prescribed in Block of Assets concept (15%, 25%, 40%), while the Companies Act, 2013 allows both SLM and WDV methods with rates based on useful life of assets (Schedule II). Under the Companies Act, residual value is limited to 5% of original cost, and depreciation is calculated per asset. Under the Income Tax Act, depreciation is calculated on the entire block of assets collectively. This creates a difference between book depreciation (financial statements) and tax depreciation (ITR filing), which is reconciled through deferred tax assets or liabilities under AS-22/Ind AS 12.

Yes, depreciation on leased assets can be claimed, but the eligibility depends on the type of lease. For operating leases, the lessor (owner) claims depreciation, while the lessee claims the lease rental as an expense. For finance leases, the lessee treats the asset as owned and claims depreciation, while the lessor does not. The Income Tax Act follows the legal ownership principle — the registered owner of the asset claims depreciation. However, courts have held that in certain cases, the economic owner (lessee in a finance lease) may be entitled to claim depreciation based on the substance of the transaction.

When an asset is sold, the sale proceeds are deducted from the WDV of the entire block of assets. If the net WDV (after deducting sale proceeds) is positive, normal depreciation continues on the remaining balance. If the sale proceeds exceed the total WDV of the block (including new acquisitions), the excess is treated as Short Term Capital Gain (STCG) under Section 50(2) and taxed accordingly. If all assets in a block are sold and the WDV remains positive, the balance is treated as Short Term Capital Loss. No Long Term Capital Gain arises from depreciable assets since they are always treated as short-term.