How to Calculate Depreciation as per Income Tax Act?

Are you curious about the process of

calculation of depreciation as per income tax act. Let me share some details about the same;

What is the Process of Depreciation Calculation as per Income Tax Act?

• Identify the assets eligible for depreciation. These are tangible assets used in business or profession such as buildings, machinery, vehicles, furniture, etc. Intangible assets like patents, copyrights, and trademarks are also eligible.

Assets are categorised into different classes based on their nature and useful life. Each class has a prescribed rate of depreciation under the Income Tax Act.

• Determine the applicable depreciation rate for each asset class as per the Income Tax Act. These rates vary depending on the type of asset and are specified in the Act or the Income Tax Rules.

• Use the following formula to calculate depreciation: Depreciation = Cost of Asset × Rate of Depreciation. For example, if the cost of machinery is ₹1,00,000 and the applicable depreciation rate is 10%, then depreciation for the year would be ₹1,00,000 × 10% = ₹10,000.

• The Income Tax Act specifies the useful life for each class of asset. Depreciation is calculated for each year based on the remaining useful life of the asset.

• For assets purchased during the year, the "half-year convention" is applied, which means depreciation is calculated at half the prescribed rate for the first year, regardless of the actual period the asset is used during the year.

• Assets costing less than ₹5,000 may be grouped together and depreciated at a prescribed rate.

• Maintain proper records of asset acquisition cost, depreciation calculations, and any changes in the asset's value or status.

• Depreciation is claimed as an expense in the Profit & Loss Account of the business or profession. It reduces the taxable income, thereby lowering the tax liability.

• Prepare a depreciation schedule showing the calculation of depreciation for each asset class and each year. This schedule is useful for tax compliance and financial reporting purposes.

This is the method for

calculation of depreciation as per income tax act

.

 Read more

According to Section 32 of the Income Tax Act, depreciation is the reduction in the asset value that is utilized by the assessee. People claim the deduction of depreciation for the relaxation of taxation. There are depreciation rates for tangible and intangible assets according to the Income Tax Act. You can claim the deduction for tangible assets like buildings, plants, and machinery. Intangible assets include patents, trademarks, copyright, license, franchise, other business or commercial rights for which you can claim the depreciation rate. Since depreciation helps to relax taxes we need to know how to calculate

depreciation as per income tax act

.

If an assessee utilizes the assets for 180 days in a year, then they can get 50% of depreciation in that same year.

The depreciation rate of the following assets include:

• Building for residential purpose: 5%

• Building for non-residential purposes: 10%

• Furniture and settings: 10%

• Computers and software set up: 40%

• Machinery and plants: 15%

• Motor vehicles for personal usage: 15%

• Motor vehicles for commercial usage: 30%

• Ships: 20%

• Aircraft: 40%

• Intangible assets: 25%

You can calculate the depreciation by using methods such as the straight-line method, or the written line method (WLM). The best way to calculate the depreciation rate is the written down value method (WDV).

The depreciation rate is calculated based on the book value of the asset. The actual cost of the assets which has been acquired by the assessee the previous year becomes the WDV. The actual cost which is the WDV helps in decreasing the tax rate.

The written down value method not only helps to calculate the tax but also helps in saving tax and finance management.

Hope you know how to calculate depreciation rate as per income tax act.