Depreciation Rates Applicable for Financial Year 2021-22 as per Income Tax Act, 1961

Depreciation means a reduction in the real value of tangible used by the assessee in the course of business or profession. Depreciation can be claimed as a deduction by the assessee for investing in assets like furniture, plant & machinery or other such tangible assets, for the previous year.

The concept of depreciation was introduced under the Income Tax Act for writing off the cost of an asset over its useful life. Depreciation is a compulsory deduction that can be claimed by a taxpayer. There are different methods for calculating depreciation on assets, the most popular ones being – Straight-line method (SLM) and the Written Down Value method (WDV).

Here in this article, we will discuss about the Applicability of depreciation; Different type of methods to calculate depreciation and Rates of depreciation as per Income Tax Act, 1961.

Depreciation – An Overview

Section 32 of the Income Tax Act, 1961[1] regulates & governs the depreciation in respect of:

• Tangible assets such as building, furniture, plant & machinery, etc.
• Intangible assets such as patent, trademark, copyrights, know-how, licenses, franchises, etc.

It is pertinent to mention that these assets must be used in connection with business or profession and should be owned, either wholly or partly, by the assessee.

Allowance of Depreciation

Allowance of depreciation is calculated as per the WDV method with the exception of an undertaking that is engaged in the generation of power or distribution of power.

• If the undertaking is engaged in the business of generation of power or distribution of power, depreciation can be calculated as a percentage of the actual cost.
• In any other case, depreciation can be calculated as a percentage of written down value.

Depreciation allowance is apportioned in case of amalgamation or demerger of two companies. Such allowance is proportionate between an amalgamated and amalgamating company in case of amalgamation. And in the case of demerger, it is proportioned between demerged and the resulting company.

As per the Accounting Standard-19, in the case of financial lease transactions, the right to claim depreciation is allowed to lessee as he exercises such rights in the capacity of the owner.

Applicability of Depreciation

It is well known that depreciation is a non-cash expense and the benefit of it can be enjoyed just like the other expense but the major thing is that what are the circumstances when this depreciation can be calculated or the cost of asset is eligible to be allowed as depreciation.

On the basis of number of days used

• When the assets are purchased and put to use within a financial year but the asset is used less than 180 days in business then only 50% of the applicable depreciation rate will be allowed. For example, an asset is purchase and is put to use in business from 01.01.2020, then the asset is used for 91 days. Hence, the depreciation will be calculated on the basis of 50% of the rate of depreciation on the asset.
• When the assets are purchased and put to use within a financial year and the asset is used more than 180 days in business then 100% of the applicable depreciation rate will be allowed. For example, an asset is purchase and is put to use in business from 31.08.2019, then the asset is used for 244 days. Hence, the depreciation will be calculated on the basis of 100% of the rate of depreciation on the asset

NOTE: – The number of days used in business are calculated not from the date of purchase or delivery but from the date on which the asset is ready to use and is initialized in the business place.

On the basis of block of assets

Here assets are divided into two categories on the basis of similarity in usage of work as follows;

• Tangible assets, like building, machinery, plant or furniture.
• Intangible assets, like patents, copyrights, trademarks, etc.

After that the applicable rates be applied on the net WDV of the asset block to calculate depreciation.

On the basis of usage

When the asset is purchased on the name of business but the is used for personal use then the depreciation is not allowed as exemption.

When the asset purchased and used in the business premises then only the depreciation is allowed for depreciation.

Methods to calculate depreciation.

To calculate depreciation there are several methods described by the law, but mainly the below discussed methods are used: –

• Straight Line Method: Under this method, the rate of depreciation is to be applied on the original cost of asset every year to calculate the amount of depreciation. For example, an asset is purchased for Rs. 200000 as on 01.04.2020 and initialized on the same day in the premises of business. Rate of depreciation applicable on the asset is 14%. Now the amount of depreciation is Rs. 28000 for every year.
• Written Down Value: Under this method, the rate of depreciation will be applied on the written down value of the asset to calculate the amount of depreciation. For example, an asset is purchased for Rs. 200000 as on 01.04.2020 and initialized on the same day in the premises of business. Rate of depreciation applicable on the asset is 10%. Now the amount of depreciation is as follows:

And the table continues till the value of asset is equal to or less than 90% of the original price of the asset.

Rates of depreciation applicable for F.Y. 2021-22

The rates of depreciation applicable for the assets are in the below table: –

Conditions for claiming depreciation

• Asset must be owned by the business only.
• If the case is of co-ownership of asset, then each co-owner can claim depreciation on asset up to the proportion of value of asset owned by them.
• Cost of land is not eligible to be claimed for depreciation.
• Depreciation is mandatory from A.Y. 2002-03 and shall be treated as deemed to be allowed if the taxpayer has not claimed it while calculating its net profit.

Conclusion

Depreciation plays a vital role in taxation of businesses as it is a genuine and allowable deduction against business income as per Section 32(1) of Income Tax act. If the assessee fails to claim depreciation in any F.Y. then he cannot claim it any further as per the provisions of the act. In many cases when assessee is claiming depreciation it further reduces the net Income under the head “PGBP” and thus results as a tax saving option. But the way depreciation is being charged as per the provisions of the Income Tax Act needs to be looked upon once again as there are several points which result in unnecessary litigation such as – days of put to use, rates of depreciation, methods of depreciation etc. Although the most important point is if the assessee fails to claim depreciation in one F.Y. then he cannot claim depreciation any further which is not beneficial on the part of the taxpayer that means if by mistake a return is being filed by the assessee without claiming depreciation then he cannot claim depreciation in subsequent years.