Depreciation Rate as Per Income Tax Act

    • The depreciation rate is the percentage of an asset that is depreciated over its estimated useful life. It can also be defined as the percentage of a company's long-term investment in an asset that it recovers as a tax-deductible expense over its useful life. It depends on the asset class.

     

    Analysis: 

     

    •  First, let's understand the concepts related to depreciation:
    1. Service life: The maximum service life that an asset can be used following the law.
    2. Depreciation: Asset acquisition cost-residual value
    • iii. Residual value: Usually 5% or less of the original cost (Note 5 of Appendix II)
    1. Book value: Not defined by law
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The Income Tax Act allows the deduction in profit through the Straight-Line method or using the Written Down Value (WDV) way. Using UDV to calculate depreciation of an Asset Block is a common way to do so. A Block of Assets comprises of assets falling in the same class like:

 

  1. Tangible assets- property, machinery, and furniture
  2. Intangible assets- Patents, trademark, and franchises

 

Depreciation Rate Formula 

 

straight-line method

 

Formula:

 

 year depreciation rate: 1 / asset useful life

 year depreciation amount = (cost of asset-residual value of asset) / annual depreciation rate

 

Cost of asset: initial book value of the asset.

This includes taxes and shipping charges paid on the asset. 

 

Asset useful life: The useful life of an asset is the length of time that the asset can function properly. Beyond its useful life, the asset is considered economically viable or inoperable.

 

The relevant tax authorities determine the useful life of some assets such as computers and real estate. For example, a computer is depreciated over 5 years, while a vehicle is depreciated over 8 years.

 

Residual value: The value of an asset after the asset's useful life for which the company can sell the asset. Also called scrap value. Thus, the company does not have to consider the first year's cost. Otherwise, the company will incur losses in the year of purchase. It helps determine the correct market value of an asset by reflecting the possible wear and tear that the asset may have suffered due to its age.  

 

The useful life of an asset, and therefore its depreciation, depends on many other factors, including for assets such as IT assets that are upgraded from time to time; it is difficult to determine the actual depreciation rate because the value of the asset fluctuates during the useful life of the asset and the useful life of the asset changes.

 

This makes the calculation even more complicated. Inadequate calculation methods can distort both the income statement and the company's balance sheet. Therefore, it is very important to understand them fairly.

 

What Is An Asset?

 

An asset has the value of a dollar. The IRS also refers to an asset as "property." It may or may not be important. You can touch tangible assets-think office buildings, vans, or computers. You can't touch intangible assets, but you can buy or sell them. Examples are patents, copyrights, or other intellectual property.

 

Which Assets Can Be Depreciated?

 

The IRS sets guidelines for the types of assets that can be depreciated. You expect it to last for over a year Here are some common examples of assets that are amortised by small businesses: 4,444 vehicles, property, Device Office furniture computers.

 

What Is A Depreciation Plan? 

 

A depreciation schedule is a table that shows how much of an asset has been depreciated over the years. It usually contains the following information:

 

-Asset description 

-Purchase Date 

-Total amount paid for the asset 

-Expected useful life 

-Depreciation method used 

 

Let's Take A Look At The Options Available For Posting And Tax. 

 

The value is evenly distributed over the useful life of the asset.

 

Target audience: SMEs with a simple accounting system with no accountant or tax accountant to handle tax affairs.

 

Formula: (Investment Cost-Residual value) / Service life

 

Mechanism: Divide the equipment acquisition cost minus the residual value over the useful life. This determines the amount of depreciation to be deducted each year.

 

Double Depreciation Description

 

The double aggressive balance method is a slightly more complex method for depreciating assets. The value of an asset can be higher in the days immediately after purchase and less after that.

 

Target audience: Companies that want to increase the value of their assets in advance.

 

Formula: (2 x fixed depreciation rate) x (book value at the beginning of the year)

 

How it works: This approach depreciates assets in the first year and doubles the amount under the straight-line method. In subsequent years, this depreciation rate will be applied to the remaining carrying amount of the asset, not the original cost. The book value is the cost of the asset minus the amount already depreciated. Double aggressive accounting does not take into account residual value.

 

Total Annual Depreciation

 

What is the Sum of The Year's Digits (SYD)?

 

Depreciation is another way to depreciate more values.

The annual sum method is used to accelerate the recording of depreciation. 

This method is more appropriate than the more common straight-line method if assets decline rapidly in the early years or if capacity grows with age. 

 

The application of this method may have an indirect impact on cash flow as accelerated depreciation reduces taxable income and may defer income tax payments to a later period.

 

What are the Conditions for Being Able to Claim Depreciation?

 

  • There should be some ownership of the asset.
  • There should be some use and utility for the asset
  • Any co-owner can claim an extent of the asset value owned
  • The land cost cannot be claimed as depreciation

 

Income tax depreciation rate for FY 2021-22

 

Particulars Rates

1. Apartment 

2. Residence

3. Other

4. Temporary construction

5. Mechanical Equipment

6. Navy ships

7. Airplanes

8. Computers and Computer Software

9. Novels and Books 

10. Contamination Prevention Systems

11. Furniture and Other Electrical Equipment

12. Intangible Assets

13. Vehicles acquired or used after April 1, 1990 (excluding those that fall under entry), excluding those used in the rental business 

14. Acquired after August 23, 2019, 4 The rental business before the 1st of the month is 2020, and it will be operated before the 1st of April 2020.

5%

10%

40%

20%

40%

40%

40%

40%

40%

15%

10%

25%

15%

 

30%

 

Depreciation Rates According to the Income Tax Act

 

Tangible Assets

 

S.No Asset Class and Type Depreciation Rate (%)
1 Buildings that are used primarily for residential reasons (excluding boarding houses and hotels) 5
2 Buildings not included under subitems 1 (above) and 3 (below) that are not utilized primarily for residential purposes (below) 10
3 Buildings were purchased on or after September 1, 2002, for the purpose of installing plant and machinery as part of a water treatment system or water supply project and utilized for the purpose of providing infrastructural facilities under clause I of subsection (4) of section 80-IA. 40
4 Temporary constructions, such as wood structures 40
5 Electrical fixtures are included with the furniture and fittings. 10
6 Excluding those listed below, plants and machinery 15
7 Motor vehicles purchased or put to use on or after April 1, 1990, excluding those utilized in a business of renting them out. 15
8 Motor automobiles bought on or after the 23rd of August 2019 but before the 1st of April 2020 and put to use before the 1st of April 2020, excluding those used in a business of operating them on lease. 15
9 Airplanes, Aero Engines 40
10

(a) Motor taxis, motor buses, and motor trucks utilized in the rental business


(b) Motor taxis, motor lorries, and motor buses purchased on or after August 23, 2019, for use in the business of renting them out. This should be before the 1st day of April 2020 and is put to use before the 1st day of April 2020.
30
11 A commercial vehicle purchased by the assessee on or after October 1, 1998, but before April 1, 1999, and used for any period previous to April 1, 1999, for the purpose of a career or business in accordance with the third proviso to clause (ii) of sub-section (1) of section 32. 45
12 New commercial vehicle procured on or after 1st October 1998, but before 1st April 1999, in replacement of condemned vehicle of more than 15 years of age and is utilized for any period previous to 1st April 1999, in accordance with the third proviso to clause (ii) of subsection (1) of section 32 for the purpose of business or profession 40
13 As per the second proviso to clause (ii) of subsection (1) of section 32, a new commercial vehicle procured on or after 1st April 1999, but before 1st April 2000, in replacement of a condemned vehicle of more than 15 years of age and put to use before 1st April 2000, for the purposes of profession or business. 40
14 New commercial vehicle purchased on or after April 1, 2001, but before April 1, 2002, and used for professional or business purposes before April 1, 2002 40
15 A  newly built vehicle purchased on or after the 1st of January 2009 but before the 1st of October 2009 and used in the course of business or profession before the 1st of October 2009 40
16 Molds used in the manufacture of plastic and rubber items 30
17

Air pollution control equipment

Felt filtering system

Electrostatic system for precipitation

Scrubbers

Countercurrent / packed bed / venture / cyclonic scrubbers

Dust collection systems

Evacuating systems and systems for handling as

40
18

Water pollution control equipment

Aerated chambers

Screen system

Mechanical systems for the removal of grease and oil

Flash mixing systems and for chemical feed

reactors and mechanical

aerated sludge/systems for diffused air

Biofilters and systems of aerated lagoons

systems for air floatation

recovery digesters

Steam stripping contraption

and others...

40
19

a) Solid waste management and control equipment Recovery system for cryolite, mineral, lime, caustic, and chrome

(b) Systems for resource recovery and solid waste recycling

40
20 Except for those covered below, plant and machinery used in the semiconductor industry cover all integrated circuits (ICs) ranging from small scale integration (SSI) to large scale integration / very large scale integration (LSI/VLSI) as well as discrete semiconductor devices such as diodes, triacs, thyristors, transistors, and so on. 30
21

Life-Saving medical equipment


Fiberoptic endoscopes include audit resectoscope/pediatric resectoscope, Haemodialysis, arthroscope, Cobalt therapy unit, peritoneoscopy, Angiography,  fiberoptic flexible nasopharynx, Surgical laser, micro laryngoscope, D.C Defibrillators, video laryngo, Colour Doppler, fiberoptic flexible laryngo bronchoscope, Spect Gamma Camera, and others
40
22 Plastic and glass refill containers 40
23 Computers and software 40
24 Plant & machinery, used in weaving, processing, and garment sector of the textile industry, which is bought under TUFS on or after 1st April 2001, but prior to 1st April 2004, but has been used before 1st April 1, 2004 40
25 Plant and machinery purchased and installed in a water filtration system or a water supply project on or after September 1, 2002, and used for the purpose of providing infrastructural facilities under clause I of sub-section (4) of section 80-IA. 40
26
  1. Wooden parts for silk manufacturing
  2. Match and frames
  3. Cinematic films, bulbs of lights in the studio
  4. Saltworks, condensers, salt pans, reservoirs, etc., made of clayey, sandy, or earthy material, or any other similar material
  5. Mines and quarry: pipes for sand stowing, ropes for winding, tubs, and ropes for haulage, lamps used for safety
  6. mills, rollers for flour
  7. rollers and other machinery for sugar work
  8. mill rolls for steel
40
27

Energy-saving devices

Furnaces and specialized boilers

40
28

Instrumentation system for monitoring flow of energy

(i) Digital heat loss meters

(ii) Automatic load monitoring system

(iii) Infrared thermography

(iv) Microprocessor based control systems

(v) Meters that measure heat loss, the flow of steam, oil flow in the furnace, power, and electricity

(vi) Exhaust gas analysers

(vii) Indicator of maximum demand and power meters

(viii) Fuel oil pump test bench

40
29

Waste heat recovery equipment

(i) Air pre-heaters and recuperators

(ii) Feedwater heaters and economizers

(iii) Thermal energy wheel for low and high-temperature heat recovery

(iv) Heat pumps

40
30

Cogeneration systems

(i) extraction, pressure pass out, extraction, and condensing turbine for a generation with pressure boilers

(ii) Organic Rankine cycle power systems

(iii) Vapour absorption refrigeration systems

(iv) Low inlet pressure small steam turbines

40
31

Electrical equipment

(i) Shunt capacitors and Synchronous condenser systems

(ii) Relays (automatic power cut off devices)

(iii) Power factor controller for AC motors

(iv) Automatic voltage controller

(v) Solid state devices for controlling motor speeds

(vi) FACT (Flexible AC Transmission) devices, Thyristor controlled series compensation equipment

(vii) Thermally energy-efficient centers

(viii) Series compensation equipment

(ix) TOD (Time of Day) energy meters

(x) Intelligent electronic devices/remote terminal units, computer software/hardware, bridges/router, other required equipment, and associated communication systems for data acquisition systems and distribution management systems, supervisory control, and energy management systems for power transmission systems

(xi) energy meters, especially  for ABT

40
32

Burners

(i) Zero to ten percent excess air burners

(ii) Burners with very high preheating temperature (over 300° Celsius)

(iii) Emulsion burners

40
33

Other equipment

(i) Mechanical vapor recompression

(ii) Wet air oxidation apparatus for heat and chemical recovery

(iii) Automatic microprocessor-based load controllers

(iv) Thin film evaporators

(v) Fluid couplings and fluid drives

(vi) Coal based producer gas plants

(vii) Superchargers/turbochargers

(viii) For radiation processing plants, sealed radiation sources are required.

40
34

Gas cylinders - regulators and valves

Concerns with glass manufacture, direct fire glass melting furnaces

40
35

Mineral oil concerns

(i) Plant for distribution of returnable packages in field activities (above ground).

(ii) Plant used in field operations (below ground), but not including kerbside pumps including tanks and  fittings used in field operations (distribution) by mineral oil concerns

40
36

Renewable energy devices

(i) Pipe type and concentrating solar collectors

(iii) Solar cookers

(iv) Air/fluid/gas heating systems

(v) Solar water heaters and systems

(vi) Solar crop drivers and systems

(vii) Solar steels and desalination systems

(viii) Solar refrigeration, air conditioners, and cold storages

(ix)Sun pumps using photovoltaic and solar thermal conversion.

(x) Solar power generating systems

(xi) Solar photovoltaic panels and modules are available for water pumping and other uses.

40
37

Windmills, as well as any other particularly constructed wind-powered equipment (equipped on or after April 1, 2014)


Any particular wind-powered apparatus, such as electric pumps and generators (equipped on or after April 1, 2014)

40
38

Books owned by assessees carrying on any profession

(i) Books, being annual publications

(ii) Books except for ones under (i)

(iii) Books held by assessees who manage lending libraries for a living

40 
39

Tugs, survey launches,  barges, dredgers, and other similar ocean-going ships intended primarily for dredging, as well as sighing boats with a wooden hull

 

Vessels that are ordinarily operating on inland waters, not covered below.

 

Speed boats are the most common vessels that operate on inland waters.

 

20

 

Computation of Depreciation

 

Asset Name Block 1 Block 2 Block 3
 

Machine – 15%

Furniture – 10%

Car -15%

Opening Value

0

0

0

Add- Purchases (>or = 180 days) Purchase (<180 days)

5,00,000

40,000

20,000

3,00,000

Less- Sold during the year

0

0

0

Closing value of block before depreciation

5,40,000

20,000

3,00,000

Depreciation

78,000


(500000 x 15% + 40000 x 15% x 1/2)

2,000


(20000 x 10%)

22,500


(300000 x 15% x  1/2)

Closing WDV after depreciation

4,62,000

18,000

2,77,500

 

What are Different Methods For Calculating Depreciation?

 

Calculation based on Specified Rates- Companies Act (1956)

  • Straight Line Method
  • Written Down Value Method

 

Calculation based on Specified Rates- Income Tax Act (1961)

  • Written Down Value Method (Block wise)
  • Straight Line Method for Power Generating Units

Calculation based on Useful Life of Assets- Companies Act (2013)

  • Straight Line Method
  • Unit of Production Method
  • Written Down Value Method

 

Following Is The Depreciation Rates As Per Companies’ Act 2013

 

The companies act depreciation rates require that assets be depreciated over their useful lives, as opposed to Appendix XIV of the Companies Act 1956, which sets the minimum depreciation rate that a company must provide. Mandatory entities that need to comply with the accounting standards required by the new law typically have to amortise their assets over their statutory useful life, but there is no enforcement.

 

You can depreciate an asset with a shorter useful life, but this should be noted in the "Invoice Note" along with the reason for using such a shorter useful life. Other companies may also depreciate an asset with a shorter useful life, but keep in mind that the useful life cannot exceed the legally required useful life. 

 

PART `A` 

 

1. Depreciation is the systematic distribution of depreciation over the useful life of an asset. The depreciation of an asset is the cost of the asset or any other amount that replaces the cost minus its residual value. The useful life of an asset is the period for which the asset is expected to be available by the company or the number of productions or similar units that the company expects to acquire from the asset.

2. For this appendix, depreciation includes depreciation.

3.. For a company of such class that can be stipulated and whose annual financial statements comply with the accounting standards set forth for this class of company following Article 133, the asset's useful life usually deviates from the useful life. It should not be done. Also, suppose such a company uses a useful life or a different residual value that is different from the residual value or useful life specified therein. In that case, the residual value is specified in Part C, provided that the reason must be disclosed.

In other companies, the useful life of an asset must not exceed its useful life, and its residual value must not exceed the value specified.

iii. For intangible assets, the provisions of the accounting standards outlined in letters (i) and (ii) apply.

 

Part'B' 

 

The useful life or residual value of a particular asset reported for accounting purposes by parliamentary law or a regulatory agency established by the central government is used to calculate the depreciation of that asset, regardless of increasing requirements.

 

 Note 

  1. “Factory Building” does not include offices, go-downs, or staff quarters.
  2. If an asset is added or disposed of, disposed of, dismantled, or destroyed during a fiscal year, the depreciation of the asset will be demolished proportionally from such an additional date or until the date the asset is disposed of. Shall be. Or destroyed.
  3. The following information must also be included in the bookkeeping: -
  4. The depreciation method used. And
  5. The asset's useful life for the depreciation calculation (if it deviates from the useful life specified in the note).
  6. The useful life specified in Part C of the Appendix applies to the entire asset. Suppose the cost of a portion of the asset accounts for a significant proportion of the total cost of the asset, and the useful life of this portion differs from the useful life of the remaining assets. In that case, the useful life of this important portion must be determined individually.
  7. Depreciation is the cost of an asset or any other amount that replaces the cost of an asset minus the residual value. Usually, the residual value of an asset is often negligible, but usually, it should not exceed 5% of the asset's original cost.
  8. The useful life of the assets working in the shift is determined within the facility based on the operation of one shift, except for assets that do not allow additional shift depreciation (identified by NESD in Part C above) if the asset is used for 2 shifts and 3 shifts depreciation during the year, that period. Depreciation will increase by 50%. This period is calculated at 100%.
  9. From the effective date of this appendix, the book value of the asset for that day will be applied-
  10. According to this schedule, it will be amortized over the asset's remaining useful life, born after withholding the residual value of the opening balance sheet of retained earnings if the asset has zero remaining useful life.

 

FAQ’s Related to the Depreciation Rate

 

Can we change the depreciation rate? 

Management needs to review the depreciation method at the end of each year. Therefore, the depreciation method can be changed retroactively or retroactively. 

 

How is the depreciation rate determined?

The depreciation rate for this method is calculated by dividing the total cost of the asset by the estimated capacity of the asset. Then multiply that rate by the production for each period to get the depreciation expense. 

 

How do you record depreciation?

The basic depreciation journal is to debit the depreciation expense account (displayed in the P & L account) and reduce the accumulated depreciation account.

 

What are the three depreciation methods? 

Interim accounting textbooks describe several different depreciation methods. The three are time-based: a straight line, a regression, and a sum of the digits of the year. The final unit of production is based on the actual physical use of fixed assets. 

 

Does depreciation reduce profits? 

When the cost of an asset is assigned to the income statement, depreciation reduces net income. Depreciation is used to describe the depreciation of an asset over time. As a result, the depreciation amount that affects expenses reduces the company's annual surplus.