Methods of Depreciation

Introduction

Income-tax Act prescribes two methods of depreciation – Written down value (WDV) method and Straight Line Method (SLM). Every taxpayer, who is not engaged in generation or generation and distribution of power, shall claim depreciation as per WDV method only. The SLM method can be used only by an assessee who is engaged in generation or generation and distribution of power. 1. How to calculate depreciation as per WDV?

1. How to calculate depreciation as per WDV?

The depreciation on a block of asset shall be calculated as per written down value method. However, an undertaking, engaged in generation or generation and distribution of power has an option to claim the depreciation either under this method or straight-line method. The depreciation to be claimed during the year shall be calculated in following steps:

Step 1: Classify assets into relevant blocks

Step 2: Calculate WDV at year end for calculation of depreciation

Step 3: Identify the applicable rate of depreciation

1.1. Create block of assets

The first step in calculating the depreciation is to identify the relevant blocks and classify all assets into these blocks. ‘Block of Assets’ means a group of assets, falling within a class of tangible or intangible assets, not being goodwill of a business or profession, in respect of which the same percentage of depreciation is prescribed.

While creating the relevant block of assets, one should ensure that assets falling within the same class and having same rate of depreciation are grouped under one block.

Example, factory building and furniture bear a rate of 10%. However, they cannot be grouped under one block because their class is different.

1.2. Calculate WDV at year end

As mentioned earlier a business entity can claim depreciation in respect of depreciable assets as per WDV method. Written down value shall mean the historical value of an asset as reduced by the amount of depreciation.

To calculate depreciation, the assessee needs to obtain the opening WDV at the beginning of the year plus the actual cost of new assets acquired during the year as reduced by the sale proceedsreceived during the year from sale or disposal of assets.

• Actual cost of new assets acquired during the tax year

• Sale proceeds received during the year when an asset is sold, discarded, demolished or destroyed

•  WDV of the assets, transferred under ‘slump sale’ falling under that block

1.3. Find the rate of depreciation

The rates of depreciation are prescribed in Appendix I to Income-tax Rules. The depreciation rates have been prescribed for the blocks. There are 9 blocks of assets which are classified into the following categories:

(a) Building

(b) Furniture & Fittings

(c) Machinery and Plant

(d) Ships

(e) Intangible Assets

The rate of depreciation shall be multiplied with the closing WDV as calculated in Step 2 to calculate the amount of depreciation. However, if an asset, purchased during the year, is put to use for less than 180 days, the rate of depreciation on such asset shall be reduced by 50%.

Example, machine X acquired on May 1, Year 00 is put to use on December 15, Year 00, rate of depreciation on such machinery shall be 50% of the normal rate.

2. How to calculate depreciation as per SLM?

An undertaking, engaged in generation or generation and distribution of power has an option to claim depreciation under any of the two methods i.e. Straight-line method or Written down Value method. This option may be exercised at any time before furnishing the return of income within the due date specified under Section 263(1) for the tax year in which such undertaking begins to generate power.

If depreciation is claimed under the straight line method, the total depreciation allowable during the working life of the asset shall not exceed the cost of acquisition of the asset. The depreciation as per the SLM method shall be calculated on tangible assets as per the prescribed depreciation rates. In case of intangible assets, not being goodwill of business or profession, depreciation cannot be claimed by a power generating unit on basis of straight-line method. In such case, intangible assets, not being goodwill of business or profession, are qualified for depreciation only on the basis of written down value method.

If an asset is sold during the term of its working life, the provisions of terminal depreciation or balancing charge may be operative to allow the unclaimed cost or to tax the surplus.

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.