Section 32 of the Income Tax Act: Tax Benefits On Depreciation Of Assets
Section 32 of the Income Tax Act and Rule 5 of the Income Tax Rules deal with the tax benefits on the depreciation of assets. Depreciation refers to a decline in the valuation of an asset over time due to obsolescence or wear and tear.
An assessee can claim a tax deduction when there’s a fall in the valuation of an intangible or a tangible asset after its usage. Read on to get the details!
About Depreciation under Section 32
You can opt for a tax deduction on the depreciation of intangible and tangible assets. If it’s a tangible asset, then a deduction is applicable against machinery, plant and building. If it’s an intangible asset, then a deduction is available against the franchise, license, copyright, trademark, patents or any other commercial or business right.
As per this Section, you can claim a deduction on depreciation if the following terms and conditions are met:
- The asset should be utilised in the preceding year.
- The asset should be utilised for professional or business purposes.
- A taxpayer must own that asset (may not be a registered owner).
Eligibility Criteria under Section 32
Depreciation is permissible as an expenditure under the IT Act based on the block of assets. Here, a block of assets denotes an asset group falling under an asset class for which the same depreciation rate is applicable. A deduction on depreciation is calculated using WDV (Written Down Value) method.
The following are the basics of depreciation under Section 32 of the Income Tax Act:
- Land and goodwill do not qualify for depreciation.
- A lessee isn’t a property’s owner, and thus depreciation will be applicable to a lessor. However, if a lessee constructs furniture or any portion, then the lessee will be eligible for depreciation.
- If a taxpayer purchases a property through a hire purchase agreement, then the taxpayer can claim depreciation.
- If an asset involves co-owners, then deduction on depreciation will be permissible in the proportion of their ownership.
- In case a taxpayer does not claim the depreciation amount as a deduction, then the sum of Written Down Value brought forward to the succeeding year will be decreased by the amount of depreciation.
- Depreciation under the Companies Act, 1956 differs from that of the IT Act. So, the IT Department specifies the depreciation rates, regardless of the depreciation chargeable under the books of accounts.
- In case there are certain spare machines/parts that a taxpayer hasn’t utilised, then depreciation will be applicable to them.
- A taxpayer can claim depreciation at a lower rate. However, for the succeeding year, the tax authority will consider the WDV as decreased by the depreciation percentage specified.
- Depreciation is not applicable to the GST (Goods and Services Tax) component in case a taxpayer wishes to avail of Input Tax Credit (ITC) of the GST payable.
Depreciation during the Year of Purchase
The provisions for depreciation during a year in which a taxpayer has purchased an asset are as follows:
- Depreciation is applicable if an asset has been in use during the year of its purchase.
- The IT Department will not consider the degree of usage of those assets while estimating whether that asset has been in use or not. For instance, if a taxpayer has used it for a trial run, then Section 32 will consider it to be in use.
- In case an asset has been in use for below 180 days, a sum equivalent to 50% of the sum computed through normal rates of depreciation will be permissible as depreciation.
- This means that if an asset has been in use on or prior to October 3 of a year (October 4 for a leap year), 100% depreciation will be permissible, or else 50%.
Depreciation during Successive Years
The provisions for depreciation during the succeeding years are as follows:
- In case an asset has not been in use during the year of its purchase or has been in use for below 180 days, 100% depreciation will be permissible during the successive years subject to the fulfilment of the below-mentioned condition.
- Even when a taxpayer uses a single asset from a block of assets in a year, depreciation will be applicable to the entire block.
Prevailing Depreciation Rates
Depreciation rates allowable on the below-mentioned assets are as follows:
| Type of Asset | Rate of Depreciation |
| Copyright, license, patents, trademark, know-how, franchise or any other business or commercial rights | 25% |
| Books from a library business | 100% |
| Books (other than annual publications) that are owned by an assessee carrying on any profession | 60% |
| Books (only annual publications) that are owned by an assessee carrying on any profession | 100% |
| Computer software and computers | 40% |
| Motor buses/taxis/lorries running on hire (a business should purchase them prior to April 1 2020, but on or post August 23 2019. They should be put to use prior to April 1 2020.) | 45% |
| Motor buses/taxis/lorries from a business, running on hire | 30% |
| Motor cars (other than those from businesses that run them on a hire basis) purchased prior to April 1 2020, but on or post August 23 2019, and being put to use prior to April 1 2020 | 30% |
| Motor cars other than those from businesses that run them on a hire basis | 15% |
| Any furniture/fittings, inclusive of electrical fittings | 10% |
| Fully temporary constructions such as wooden structures | 40% |
| Hotels and boarding houses | 10% |
| Residential buildings other than hotels and boarding houses | 5% |
Section 32 of the Income Tax Act: Additional Depreciation
Additional depreciation will be allowed in the following cases:
- It will be applicable to new plants or machinery, excluding aircraft and ships. A taxpayer should have bought and installed that asset post March 31 2005.
- A taxpayer must be involved in the business of distribution and generation of power.
- In case a taxpayer installs a plant or machinery in any residential property (including a guest house) or office premises
- For a road transport vehicle or an office appliance
- Second-hand machinery and plant which, prior to installation, was in use whether outside and inside India
- Certain cases for which depreciation isn’t permissible
- Depreciation at the rate of 20% of the cost of assets will be allowable as an additional depreciation
- A taxpayer must be involved in the business of production and manufacturing of anything or article
Final Word
Section 32 of the Income Tax Act for AY 2021-22 ensures mandatory tax deductions with regard to depreciation. That said, assessees can claim deductions after the fulfilment of certain conditions. Make sure to go through the write-up to get a clear idea of the details related to this Section.
FAQs on Section 32 of the Income Tax
Ans: As per Section 32 of the Income Tax Act, a block of assets refers to an asset group falling under an asset class consisting of intangible and tangible assets. The Income Tax Department has categorised block of assets on the basis of nature, life, and usage of an asset.
Ans: WDV (Written Down Value) as per the IT Act denotes:
When a taxpayer has acquired an asset during the preceding year, he/she can treat that asset’s actual cost as WDV.
If a taxpayer has acquired an asset during an earlier year, then the WDV = Actual cost – Depreciation applicable.
Ans: If a taxpayer who is a manufacturer of a thing or an article on or post April 1 2015, in a specified backward region of West Bengal, Telangana, Bihar and Andhra Pradesh purchases and installs a new plant or machinery within April 1 2015 – March 31 2020, an additional depreciation @35% will be applicable.
Ans: In case of a loss from a profession or a business due to depreciation, there arises unabsorbed depreciation. A taxpayer can carry forward this unabsorbed depreciation. The person need not submit a return of loss for this purpose.
Ans: Depreciation will be allowable in case of demerger or amalgamation of a business. The depreciation allowance will be distributed between the amalgamated and the amalgamating company.
The calculation of the aggregate depreciation will be such as if an amalgamation didn’t take place. The depreciation amount will be apportioned depending on the duration for which the companies have used the assets.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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