Taxation of Depreciation Under the Income Tax Act


Depreciation is allowed under the Income Tax Act. The Income Tax Act defines depreciation as a reduction in the value of any tangible or intangible asset a taxpayer uses.

Depreciation Basics

The depreciation concept is primarily used to write off costs over the useful life of assets. An entity’s profit and loss statement must be reduced by depreciation whenever a depreciable asset is used, which can either be deducted using the straight-line method or by writing down the value. It is common to calculate depreciation using the written down value method. The straight-line method can be used by any company that generates or distributes power in the nearby area. 

It is also possible to deduct additional depreciation in the purchase year, depending on the circumstances.

Blocks of assets

In most cases, depreciation is calculated based on the written-down value of the asset block. Typically, the block of assets consists of tangible assets, such as building plant machinery or furniture, which are categorized as a class of assets.

Intangible assets include know-how patents, copyright licenses, trademarks, and franchises, among others.

It would depend on the natural life and similar use of the asset to identify the block of the asset. All asset classes should be considered for additional depreciation percentages. As a result, an asset block would be identified as a class of assets with the same income tax depreciation rates. The Income Tax Act eliminates the identity of individual assets, such as calculating depreciation on the asset block instead of the individual asset.

Depreciation Claims: Some Conditions

Income taxpayers should own part or all of the assets

In addition, the assets should be used for the business and another purpose as well, and depreciation should be proportional to the use of the business purpose. Under section 38 of the act, the income tax officer would also have the right to understand the proportionate part of the depreciation.

It is also possible for co-owners to claim depreciation for the value of an asset switch, which is owned by all co-owners.

Depreciation cannot be claimed on goodwill or land costs

From 2000 to 2003, depreciation is mandatory. Regardless of what the taxpayer claims in the profit and loss statement, it should be allowed or deemed to have been allowed as a deduction. After reducing depreciation, the taxpayer can always carry forward the written down value.

In a presumptive taxation scheme, deemed profit is taken into account depreciation’s effect.

Depreciation under the Companies Act 1956 differs from income tax depreciation. Thus, the depreciation rate would be prescribed under the Income Tax Act, which is allowed irrespective of the depreciation rate charged in the account box.

What Does The Written Down Value Mean?

In order to determine the asset’s written down value, the actual cost of the asset reference is taken into account. Calculating depreciation requires understanding the written-down value on actual cost. Under the Income Tax Act, written down value refers to the value at which the asset was acquired in the previous year, and return down value refers to the actual asset cost. Taking into account the depreciation allowed under the Income Tax Act, the return down value should be the actual cost minus the depreciation.

Depreciation Allowance

According to the written down value method, depreciation is calculated. There is an exception to this, when undertakings that are engaged in power generation or generation and distribution such as execution have the option of claiming depreciation by writing it down or by following a straight line method, that option must be exercised before the return filing deadline.

Depreciation Methods

In general, depreciable assets are depreciated in different ways and have different useful lives. Taxation and accounting can vary for all industries depending on the type of asset. The written-down value and straight-line methods are also commonly used in depreciation calculations. Apart from the depreciation rate, the main difference between depreciation calculations under the Income Tax Act and Companies Act is also the method used to calculate them.

According to the Companies Act 2013, there are four methods of depreciation: straight-line method, written down value method, and unit of production method.

Depreciation Formula

Divide the original cost of clothes minus the residual value by the useful life to arrive at the straight-line method of depreciation.

According to the SLM, depreciation would equal the original cost divided by the depreciation rate.

Taxation and accounting depreciation methods differ. The amount of depreciation would therefore differ, which would explain the difference in timing. Any financial statement should quantify such timing differences as assets or deferred tax liabilities. In accordance with accounting standard 22, deferred tax is primarily income tax payable or recoverable in the future. There is a temporary difference between the value of the asset or liability as shown on the balance sheets and the actual value.

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