Depreciation under Income Tax Act vs Companies Act

Depreciation under Income Tax Act vs Companies Act in India — WDV vs SLM, block of assets concept and current rates (15%, 40%) explained.

Why Two Different Depreciation Regimes Exist

Indian businesses must compute depreciation under two parallel laws — the Income Tax Act, 1961 for computing taxable income, and the Companies Act, 2013 for preparing financial statements. The two give very different numbers because their objectives differ — the Income Tax Act uses block depreciation to encourage investment, while the Companies Act prescribes useful-life based depreciation for true and fair presentation. The difference between the two creates "deferred tax" which has to be recognised under Ind AS 12 / AS 22. Proprietors and partnership firms only need to maintain the Income Tax version; companies must maintain both.

The Income Tax Block-of-Assets Concept

Under Section 32, assets are grouped into "blocks" based on identical depreciation rates rather than tracked individually. Plant and machinery (general) sits at 15%, computers and software at 40%, motor cars at 15% (30% for hire), furniture and fittings at 10%, intangible assets at 25%, and buildings (non-residential) at 10%. Additions used for less than 180 days get half depreciation. The block continues until every single asset in it is sold — gain or loss is only recognised when the entire block becomes empty (short-term capital gain under Section 50).

Companies Act 2013 — Schedule II Useful Life Method

The Companies Act discarded fixed rates in 2014 and moved to a useful-life model under Schedule II. General plant has a 15-year life, computers 3 years, vehicles 8–10 years, factory buildings 30 years and office furniture 10 years. A company can use either Straight Line Method (equal amount each year) or Written Down Value method (declining balance), as long as the asset is fully depreciated by the end of its useful life. Residual value is normally 5% of the original cost and cannot exceed that without disclosure.

Common Practical Issues and Mistakes

The most frequent error is claiming Companies Act depreciation in the income tax computation — always start the tax computation by adding back book depreciation and then deducting Section 32 depreciation. Second, the date of "put to use" matters more than the date of purchase — an asset bought on 30 September but installed only on 5 October gets full-year depreciation. Third, additional depreciation of 20% under Section 32(1)(iia) is available only to manufacturers and only on new plant. Finally, goodwill of a business is no longer depreciable from FY 2020-21 onwards.

Maintain a Reconciled Fixed Asset Register in BillBabu

A single fixed asset register that captures both the Companies Act useful life and the Income Tax block makes year-end closing trivial — you compute book depreciation and tax depreciation in two columns side by side and the deferred tax falls out automatically. BillBabu lets you record purchase date, put-to-use date, block, useful life and residual value against each asset, and generates the annual depreciation schedule with WDV at year-end. That schedule plugs straight into your balance sheet note and the Income Tax computation, saving auditors a full day of reconciliation.

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