# 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

#### Quick Contact

Lets Get In Touch Now

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.

#### 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%

Tangible Assets

### 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.