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How to Calculate Depreciation U/s 32 of Income Tax Act

How to Calculate Depreciation U/s 32 of Income Tax Act. In the previous article, we have given How to Check Income Tax Refund Status Online and How to Calculate Advance Tax, Due Dates, and PaymentToday we are providing the complete details of Deprecation under section 32 of Income tax act. Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses. however, businesses must depreciate these assets in accordance with IRS rules about how and when the deduction may be taken.

How to Calculate Depreciation U/s 32 of Income Tax Act

How to Calculate Depreciation U/s 32 of Income Tax Act

The depreciation computed on the tax return according to the income tax code and regulations. This amount is usually different from the depreciation used in the financial statements (book depreciation).

What is book depreciation?

The depreciation expense in each year will be different, but the total of all of the years’ depreciation expense associated with a specific asset will likely add up to the same total—the cost of the asset. The book depreciation expense is the amount recorded on the “books” and reported on the financial statements.

What is the block of assets and how depreciation is calculated on block?

Block of Assets is used for charging the same rate of depreciation to a particular class of assets having same or similar characteristics. Income Tax Act has prescribed different rates for charging depreciation for different blocks
These are two blocks of the asset whatever asset purchased or sold by the assessee should be added or deducted within these blocks of the asset.

  • The tangible asset includes building, machinery, plant, office equipment, furniture.
  • The intangible asset includes patents, goodwill, know-how, copyright, license.
  • GOODWILL & LAND is not eligible for depreciation
  • Depreciation is allowable only to the owner of the asset.
In the case of Lease
  • , Depreciation is allowed only to a lessor, a lessee is not the owner of the property.If the lessee constructs furniture or any part, then depreciation on that is allowed to less
In case of Hire Purchase
  • Depreciation is allowed to the purchaser
In case of Co-ownership
  • Depreciation is allowable in the ratio of their ownership
  • The asset on which Depreciation is calculating must be used for the purpose of business or profession
  • If the assessee doesn’t claim the deduction of depreciation, even then the amount of WDV carried forward to next year is reduced by the depreciation amount.
  • In case of profit is calculated on presumptive basis u/s 44AD or 44AE, then such reported profit is considering after all the expenses and depreciation allowable under section 32.
  • Depreciation under Income Tax Act is different from that of Companies Act, 1956. Therefore depreciation rates prescribed under income tax is only allowable whatever the depreciation is charged in books of accounts.
  • If a new addition is made in an existing asset then it is considered as an asset if it increases the capacity of the existing asset or reduces per unit cost otherwise, it should be treated as an expense.
  • Depreciation can be claimed at a lower rate as per income tax act. But for the next year your WDV will be considered as reduced by the percentage of depreciation prescribed.

Calculation of Depreciation

In the Year of Asset Purchase
  • Depreciation is allowed only if the asset is put to use in the year of purchase.
  • The degree of utilization of assets will not be considered while determining whether the asset is put to use or not.
  • If the asset is put to use for less than 180 days then amount equal to 50% of the amount calculated using normal depreciating rates is allowed as depreciation.
  • Depreciation will be allowed on the basis of a block of asset method.

 

In Subsequent Years
  • If the asset is not put to use in the year of purchase or put to use for less than 180 days even then, full depreciation is allowed in the subsequent years if the below condition satisfies.
  • Depreciation is allowed on the whole block of the asset even if only a single asset in that block is used during the year at any point in time

Calculation of Depreciation Format

Particulars

Amount in Rs.
Opening WDV of all the assets falling within
that block of the year
XXX
Add: Actual cost of any assets falling within block
acquired during the previous
XXX
Less: Money received or receivable in respect of any
asset in the block which is sold, discarded, demolished
or destroyed during the previous year
(XXX)
WDV at the end of the year XXX
Less: Depreciation at block rate (if WDV at the end of year is positive) (XXX)
Closing value of block of asset at the end of the year XXX

If WDV is negative then no depreciation is allowed, and the same will be considered as capital gain and the closing WDV will be zero.

If such amount is positive and no asset exists in the block, then such amount will be treated as a short-term capital loss and no depreciation is allowed

Calculation of Capital Gain on Sale of Depreciable Asset

The capital gain/loss from depreciable assets is always treated as short term irrespective of the fact that asset is held for more than three years or not.

Calculation of Capital Gain/Loss

Particulars Amount in Rs.
Opening WDV of all the assets falling within
that block
XXX
Add: Actual cost of any assets falling within block
acquired during the previous year
XXX
Less: Money received or receivable in respect of any
asset in the block which is sold, discarded, demolished
or destroyed during the previous year
(XXX)
WDV at the end of the year XXX

From the above calculations if the result is a negative WDV, then such amount will be considered as short-term capital gains.

If such amount is positive and no asset exists in the block, then such amount will be treated as a short-term capital loss.

Additional Depreciation U/S 32 OF INCOME TAX ACT 1961

SECTION 32(1)(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing [or in the business of generation or generation and distribution of power], a further sum equal 20% of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii)

And purpose of additional depreciation is to boost to the manufacturing sector.

Provision does not say that both should be same year, provisions means that both conditions of Acquisition and Installation should satisfy it may be in same or it can be in different year.Because of some reasons installation may not be possible in same year and if it will not be allowed only because that it is installed in different year it may become unfair for such enterprises.

Additional Depreciation @ 20% is available in first year of purchase for

  1. An Industrial Undertaking
  2. For Assessees engaged in Power Generation Business Only
  3. For Assessees engaged in Power Generation and Distribution Business Only
  4. For Assesses engaged in Power Transmission Business (Newly Amended)

In Case, Asset used for less than 180 days, then half depreciation i,e, 1/2 of 20% i.e.10% Depreciation available (Balance 50% of Additional Depreciation can be claimed in next year)

Non Applicability

  1. Additional Depreciation is only on Plant and Machinery, not other assets like Furniture and Buildings
  2. On Following Plant and Machinery (P&M) also, no Additional Deprecation
  • Ships and Aircraft
  • Second hand P& M
  • P& M used in Office/Home/Guest house
  • Office Appliances
  • Road Transport Vehicles(Car etc)
  • 100% Depreciable Assets (like Pollution Control Equipments)

Format of Depreciation Calculation

Particulars Amount in Rs.
Opening Value XXX
ADD: Purchases 180 days or more XXX
ADD: Purchase Less than 180 days XXX
LESS: Sales During Year (XXX)
LESS: Cl-Value before Depreciation (XXX)
LESS: Depreciation (XXX)
LESS: Additional Depreciation (XXX)
Closing WDV(after Dep) XXX

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