What is Depreciation Rate As Per Income Tax Act

Quick Overview

• Depreciation under Section 32 is a tax deduction for the fall in value of tangible and intangible assets used in business or profession.
• It is mainly calculated using the WDV method, and depreciation is applied block-wise (assets are grouped by type and rate).
• Common FY 2025–26 rates include: Buildings 10% (general) / 5% (residential), Furniture 10%, Plant & Machinery 15%, Computers 40%, Books 40%, Intangibles 25%.
• Depreciation can be claimed only when conditions are met: ownership, business use, and correct block classification; land and goodwill are not eligible.
• The half-year rule applies when assets are used for less than 180 days, allowing only half depreciation for that year.

Introduction to Depreciation Under the Income Tax Act

Depreciation is one of those tax concepts that sounds technical, but it is really just a practical idea: assets lose value over time. Machines wear down, computers become outdated, furniture gets used, and even buildings go through a gradual decline.

Under the Income Tax Act, depreciation is treated as a legitimate deduction because businesses use assets to generate income. So, the law allows a portion of that asset cost to be claimed as an expense every year, based on prescribed rules and rates.

What is Depreciation as per Income Tax Act?

Depreciation under Section 32 of the Income Tax Act, 1961, is a tax deduction allowed for the decline in value of assets used for business or profession. It applies to both tangible assets (like buildings, machinery, and furniture) and intangible assets (like patents, trademarks, licences, know-how, copyrights, franchises, and similar business rights).

For tax purposes, depreciation is mostly calculated using the Written Down Value (WDV) method, and it is applied on a block of assets instead of each individual asset. That single point changes the entire way depreciation works under income tax.

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Why Depreciation is Allowed Under Income Tax Law

Depreciation is allowed because business profits should reflect the cost of using assets to earn revenue. If an asset is used for business operations year after year, it makes sense to spread its cost across those years rather than treating it as a one-time expense.

Another important point: depreciation under income tax is treated as allowed or deemed to be allowed (from AY 2002–03 onwards). So even if depreciation is not claimed in books or the return, the WDV is still reduced by the depreciation that would have been allowable.

That rule prevents taxpayers from skipping depreciation to keep WDV artificially high for future years.

Concept of Block of Assets Under Income Tax Act

Meaning of Block of Assets

Under the Income Tax Act, depreciation is computed on a block of assets, which means a group of assets that share the same nature and depreciation rate. Once assets are put into a block, they lose their individual identity for tax depreciation purposes.

Types of Asset Blocks

Blocks broadly fall into:

• Tangible assets: buildings, plant and machinery, furniture and fittings, ships
• Intangible assets: know-how, patents, copyrights, trademarks, licenses, franchises, and similar rights

The block system makes compliance simpler because depreciation is calculated on the closing WDV of the block after additions and disposals.

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Conditions for Claiming Depreciation Under the Income Tax Act

Ownership of Asset

The asset must be owned wholly or partly by the taxpayer. Co-ownership is allowed, and depreciation can be claimed in proportion to ownership share.

Use of Assets for Business or Profession

The asset must be used for business or a profession. If it is partly used for non-business purposes, depreciation is allowed proportionately. The assessing officer may determine the allowable portion under Section 38.

Asset Falling Under a Recognised Block

The asset must fall under an eligible block of assets. Assets like land and goodwill are specifically not eligible for depreciation under the resources shared.

Written Down Value (WDV) of Assets Explained

Meaning of WDV

WDV is the value on which depreciation is calculated. Under tax rules, depreciation is charged as a percentage of the WDV of the block.

WDV under the Income Tax Act means:

• If the asset is acquired in the current year: WDV = actual cost
• If the asset was acquired earlier: WDV = actual cost minus depreciation allowed under the Act

This is why depreciation reduces year after year: each year, the base becomes smaller.

Opening and Closing WDV Calculation

Opening WDV begins with the previous year’s closing WDV. Then additions and sales adjust the block before depreciation is applied.

Here is a simplified structure:

Stage	Block calculation
Opening WDV	Last year’s closing WDV
Add: purchases	Add eligible additions (full or half-year rule applies later)
Less: sales	Reduce by sale consideration as per block treatment
Depreciation	Apply the prescribed rate to arrive at the closing WDV

Amount of Depreciation Allowed Under the Income Tax Act

Depreciation under the Income Tax Act is primarily calculated using the WDV method, based on rates in Appendix I of the Income Tax Rules.

Special scenarios include:

• Power generation/generation and distribution undertakings can choose WDV or Straight-Line Method (SLM) if the option is exercised before the due date of filing the return.
• Amalgamation or demerger: Depreciation is computed as if restructuring did not occur and then apportioned by days of use.
• Finance lease (AS-19): The lessee capitalises the asset and is treated as a deemed owner for claiming depreciation.

Depreciation Rates as per Income Tax Act for FY 2025–26

This is the section most people want quickly, so it helps to keep it clear.

Depreciation Rates for Buildings

Buildings have different rates based on use.

Type of building (tax block)	Rate (FY 2025–26)
Buildings used primarily for residential purposes	5%
Buildings other than residential (general)	10%
Temporary erections (wooden structures)	40%
Buildings for specified water treatment/water supply infrastructure (specified cases)	40%

Depreciation Rates for Plant and Machinery

The plant and machinery depreciation rate, as per the Income Tax Act, generally falls under 15%, but many categories exist.

Plant & machinery category	Rate (FY 2025–26)
General plant and machinery (not covered elsewhere)	15%
Motor cars (not used on hire, specified cases)	15%
Computers, including software (listed under the machinery block in the rules)	40%
Certain specialised categories (pollution control, energy saving, renewables, etc.)	Often 40% as per the schedule

Depreciation Rates for Furniture and Fixtures

Asset block	Rate (FY 2025–26)
Furniture and fittings (including electrical fittings)	10%

Depreciation Rates for Intangible Assets

Intangible asset block	Rate (FY 2025–26)
Trademarks, patents, copyrights, licences, franchises, know-how, similar rights	25%

Popular Depreciation Rates for Commonly Used Assets

The rate of depreciation as per the Income Tax Act is as follows:

Asset	Depreciation rate (FY 2025–26)
Building (general)	10%
Furniture and fittings	10%
Plant and machinery (general)	15%
Computers (including software)	40%
Books (professional use)	40%
Intangible assets	25%

Comprehensive Depreciation Rate Chart as per Income Tax Act

The Income Tax Rules provide a detailed schedule with many asset types. Through this, the law recognises industry-specific assets and special-purpose equipment.

Category	What the schedule covers	Typical rates seen
Buildings	Residential, non-residential, temporary, special infra projects	5%, 10%, 40%
Furniture & fittings	Including electrical fittings	10%
Plant & machinery	General machinery, vehicles, industry-specific equipment	15%, 30%, 40% (varies by item)
Computers/software	Explicitly covered	40%
Renewable energy devices	Solar, wind and related devices	40%
Pollution control equipment	Air/water pollution control systems	40%
Intangibles	IP and business rights	25%

*If a business uses specialised equipment (like pollution control or renewable energy systems), the depreciation rate should be checked from the relevant schedule entry to confirm the correct block.

Methods of Calculating Depreciation Under Income Tax Act

Written Down Value (WDV) Method

WDV is the standard method used under income tax. Depreciation is calculated on the declining balance (block WDV), so the depreciation amount generally reduces over time.

This method is used across industries because it aligns with the block-of-assets structure.

Straight Line Method (SLM)

SLM is available as an option mainly for undertakings engaged in power generation or generation and distribution if they opt for it within the prescribed timeline.

Unlike WDV, SLM spreads depreciation evenly based on useful life and residual value assumptions.

Formula for Calculating Depreciation Under WDV Method

Under WDV:

Depreciation = WDV of the block × prescribed rate

The “prescribed rate” is the rate for that block (10%, 15%, 40%, etc.). The block WDV is adjusted for additions and disposals before depreciation is applied.

Formula for Calculating Depreciation Under Straight Line Method

As per the shared resource, the SLM formulas are:

SLM Rate of Depreciation = [(Original Cost – Residual Value) / Useful Life] × 100

Annual Depreciation = Original Cost × SLM Rate

Half-Year Rule for Depreciation Under Income Tax Act

The half-year rule is a practical rule used when assets are put to use for less than a specified period during the year. In the example shared, purchases made for less than 180 days were eligible only for half depreciation for that year.

Purchase timing	Depreciation allowed (general approach)
Asset used ≥ 180 days	Full rate on eligible WDV
Asset used < 180 days	Half of the normal depreciation

This rule matters a lot in March purchases, business expansions, and year-end procurement planning.

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Additional Depreciation Under the Income Tax Act

The Income Tax Act allows additional depreciation in the year of purchase for certain new assets, particularly for manufacturing and production businesses, subject to specified conditions. This is a separate benefit from normal depreciation, and eligibility depends on conditions prescribed under the law.

Treatment of Depreciation on Sale of Assets

Under the block-of-assets system, sales and disposals affect the block as a whole. The sale value reduces the block value, and depreciation is then computed on the remaining block WDV.

A key practical takeaway from the block approach: individual assets do not remain separately identifiable once they are in the block. The block continues as long as at least one asset remains in that block at year-end.

Impact of Depreciation on Taxable Income

Depreciation reduces taxable profits, which reduces tax liability for that year. It is one of the most consistent deductions available to businesses because it is linked to asset ownership and business use, not to discretionary spending.

Also, because depreciation is deemed allowed even if not claimed, depreciation influences taxable computation and WDV continuity regardless of whether it is highlighted in books.

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Difference Between Income Tax Depreciation and Accounting Depreciation

Depreciation under income tax follows prescribed rates and the block approach. Depreciation under accounting standards and company law can follow different approaches based on useful life and reporting objectives.

Point	Income Tax Act (Sec 32)	Accounting / Company law
Basis	Prescribed rates	Useful life / policy-driven
Unit	Block of assets	Individual asset-wise often
Method	WDV (mostly), SLM for power sector option	SLM, WDV, Unit of Production (Companies Act 2013)
Goal	Tax computation	Fair financial reporting

Analysis of AS-22 / IND AS-12 With Reference to Depreciation

Since tax depreciation and book depreciation differ, the difference creates temporary differences that lead to Deferred Tax Asset (DTA) or Deferred Tax Liability (DTL) depending on direction.

For instance,

• Asset cost: ₹150
• Carrying amount: ₹100
• Cumulative tax depreciation: ₹90
• Tax rate: 25%
• Tax base: ₹150 – ₹90 = ₹60
• Temporary difference: Carrying amount ₹100 – tax base ₹60 = ₹40
• Tax on temporary difference: ₹40 × 25% = ₹10

That ₹10 represents the future tax impact when the carrying amount is recovered because the tax depreciation available is lower than the accounting recovery.

Common Mistakes While Claiming Depreciation

Some depreciation mistakes are surprisingly common, even in well-maintained accounts.

• Mixing up book depreciation rates with income tax rates
• Treating depreciation as optional, even though it is deemed allowed
• Claiming depreciation on land or goodwill, which are not eligible (as per shared resource)
• Forgetting proportionate restriction when an asset is partly used for non-business purposes
• Putting assets into the wrong block, especially when rate-driven classification is missed

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Conclusion: Understanding Depreciation Rates as per the Income Tax Act

Depreciation under Section 32 is one of the most structured deductions in the Income Tax Act. It follows the block-of-assets concept, uses WDV as the primary method, and relies on prescribed rates that remain stable for FY 2025–26 across major asset categories.

Once the block logic and WDV concept are clear, depreciation becomes less of a calculation problem and more of a classification and compliance exercise. The real wins come from placing assets in the correct block, tracking additions and disposals cleanly, and applying the half-year rule correctly.

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Frequently Asked Questions (FAQs)

What is the depreciation rate as per Income Tax Act?

Rates depend on the asset block. Common rates for FY 2025–26 include: building 10% (general), furniture 10%, plant and machinery 15% (general), computers 40%, books 40%, and intangible assets 25%.

Can depreciation be claimed if the asset is not used for the full year?

Yes. Depreciation is linked to use for business, and where applicable, the half-year rule may apply if the asset is put to use for less than 180 days, resulting in reduced depreciation for that year.

What is the half-year rule in depreciation?

It is a rule where assets put to use for less than 180 days in a year are generally eligible for only half the normal depreciation for that year, as reflected in common computation examples.

Is depreciation mandatory under the Income Tax Act?

From AY 2002–03, depreciation is treated as allowed or deemed allowed even if not claimed. WDV is reduced regardless, which effectively makes it non-optional for WDV continuity.

Can depreciation rates change every year?

Depreciation rates are prescribed in the Income Tax Rules. Changes can happen through amendments, but for FY 2025–26 the rates referenced above are the prescribed schedule rates shared in the resource.