18/01/2026
"Decode Depreciation: Master Section 32 of the Income Tax Act with Clarity and Confidence"
📘 Understanding Section 32 – Depreciation under Income Tax (India)
🔹 What is Section 32?
Section 32 allows depreciation as a deduction while computing business or professional income for assets owned and used for business.
🔹 Assets Eligible for Depreciation
Depreciation is allowed on:
Buildings
Plant & Machinery
Furniture & Fixtures
Intangible Assets (know-how, patents, copyrights, trademarks, licenses, goodwill*)
Goodwill depreciation subject to judicial restrictions.
🔹 Key Conditions (Must Remember)
✔ Asset must be owned (fully or partly)
✔ Asset must be used for business or profession
✔ Depreciation calculated on Block of Assets
✔ WDV Method only (SLM not allowed for tax)
🔹 Concept of Block of Assets
Assets having the same depreciation rate are grouped together.
Depreciation = Opening WDV + Additions – Sales × Rate
👉 Individual asset value is not required once it enters the block.
🔹 Depreciation Rates (Common)
🔹 Half-Year Rule
If an asset is put to use for less than 180 days:
➡ Only 50% of normal depreciation allowed in that year.
🔹 Additional Depreciation – Section 32(1)(iia)
Applicable to:
Manufacturing / production businesses
New plant & machinery (not second-hand)
Rate:
✔ 20% (normal)
✔ 10% if used < 180 days (balance 10% next year)
🔹 Unabsorbed Depreciation – Section 32(2)
If depreciation cannot be fully adjusted due to loss or low profit,
It can be carried forward indefinitely.
Can be set off against any head of income (except salary).
🔹 Main Types of Depreciation
1️⃣ Straight Line Method (SLM)
Equal amount charged every year.
Based on cost – scrap value.
Simple and widely used in books.
Formula: (Cost − Scrap) ÷ Useful Life
Example: Machine ₹1,00,000, life 5 years
➡ Depreciation = ₹20,000 per year
✔ Used in Companies Act (Books)
2️⃣ Written Down Value Method (WDV)
Depreciation charged on opening balance.
Higher depreciation in early years.
Most common for Income Tax.
Formula: Opening WDV × Rate
✔ Mandatory under Income-tax Act (India)
3️⃣ Units of Production Method
Based on actual usage/output.
Suitable for manufacturing units.
Example: Depreciation per unit × Units produced.
✔ Best when wear & tear depends on usage.
4️⃣ Annuity Method
Considers interest on capital invested.
Total charge = Depreciation + Interest.
✔ Rarely used today.
5️⃣ Sinking Fund Method
Depreciation amount is invested every year.
Helps create funds for asset replacement.
✔ Used by public utilities.
6️⃣ Depletion Method
Used for natural resources – Mines, oil wells, quarries.
✔ Based on quantity extracted.
7️⃣ Insurance Policy Method
Depreciation recovered through insurance maturity.
Used for high-value assets.
Why Depreciation is Needed?
🔹 1️⃣ Shows True & Fair Value of Assets
Assets like machinery, vehicles, computers lose value over time.
Depreciation ensures assets are shown at realistic value, not overstated.
👉 Without depreciation: Balance Sheet becomes misleading.
🔹 2️⃣ Matches Expense with Revenue (Matching Principle)
Assets are used to earn income over many years.
Depreciation spreads the cost of asset over its useful life.
📌 This follows the matching concept of accounting.
🔹 3️⃣ Calculates Correct Profit or Loss
If depreciation is not charged:
Expenses will be understated
Profit will be overstated
👉 Leads to wrong business decisions.
🔹 4️⃣ Reduces Tax Liability (Legal Deduction)
Under Section 32 of Income-tax Act, depreciation is an allowable expense.
✔ Lower profit → lower tax
✔ Even allowed during loss year
🔹 5️⃣ Helps in Asset Replacement Planning
Depreciation creates awareness of asset life.
Businesses can plan future replacement or upgradation.
🔹 6️⃣ Follows Accounting Standards & Law
Charging depreciation is mandatory under:
Accounting Standards
Companies Act
Income-tax Act
📌 Non-charging may lead to audit qualification.
🔹 7️⃣ Prevents Capital Loss Being Shown as Profit
If asset cost is charged fully in one year:
First year loss
Later years false profit
Depreciation ensures fair distribution of cost.
Depreciation under Income Tax (India)
✔ Applicable Law
Depreciation is allowed under Section 32 of the Income-tax Act, 1961.
✔ Method Allowed
👉 Written Down Value (WDV) Method only (SLM not allowed for tax).
✔ Concept of Block of Assets
Assets are grouped into blocks based on same depreciation rate, e.g.:
Building
Plant & Machinery
Furniture
Computers
Depreciation is calculated on the block, not individual assets.
🔹 Half-Year Rule
If an asset is used for less than 180 days in the year:
➡ Only 50% of normal depreciation allowed.
🔹 Example (Income Tax)
Machinery purchased: ₹10,00,000
Rate: 15%
Used for full year
Depreciation = ₹10,00,000 × 15% = ₹1,50,000
If used < 180 days:
➡ ₹75,000 only
🔹 Depreciation in Books of Accounts
In accounting (AS / Ind AS):
SLM or WDV both allowed
Rate & useful life based on Schedule II of Companies Act, 2013
📌 Hence:
Book depreciation ≠ Income tax depreciation
