Depreciation Methods in India: Complete Accounting Guide

Rajesh’s Machinery Confusion

Rajesh bought manufacturing machinery for ₹10 lakhs. His accountant told him:

“For accounts, depreciation is ₹1 lakh per year (10 years life). For income tax, depreciation is ₹1.5 lakhs this year (15% WDV).”

Rajesh was confused. “How can the same machine have two different depreciations?”

The accountant smiled. “Welcome to Indian accounting. Same asset, different rules, different purposes.”

Book depreciation: What makes accounting sense Tax depreciation: What the Income Tax Act allows

Understanding both is crucial for every business.

What is Depreciation?

Definition

Depreciation is the systematic allocation of the cost of a tangible fixed asset over its useful life.

Why Depreciate?

The Basic Formula

Depreciation = Cost of Asset - Residual Value
               ────────────────────────────────
                      Useful Life

Two Main Methods in India

Straight Line Method (SLM)

Equal depreciation every year.

Annual Depreciation = (Cost - Residual Value) / Useful Life

Characteristics:

• Same amount each year
• Used for assets with uniform utility
• Preferred under Companies Act

Written Down Value Method (WDV)

Depreciation on reducing balance.

Depreciation = WDV at beginning of year × Rate %

Characteristics:

• Higher depreciation in early years
• Used under Income Tax Act
• Reflects faster wear in initial years

SLM vs WDV Comparison

Example: Asset of ₹10,00,000

SLM @ 10%:

WDV @ 15%:

Graphical Comparison

Depreciation Amount Over Years:

SLM:   ████████████  ████████████  ████████████  ████████████
WDV:   ██████████████████  █████████████  ██████████  ████████

       Year 1        Year 2        Year 3        Year 4

Depreciation Under Companies Act 2013

Schedule II Requirements

The Companies Act 2013, Schedule II specifies:

• Useful life of assets
• SLM or WDV method can be used
• Component accounting required for significant parts

Useful Life as per Schedule II

Residual Value

• Maximum: 5% of original cost
• Companies can justify higher residual value

SLM Rate Calculation

SLM Rate = (1 - Residual Value %) / Useful Life × 100

Example: Furniture (10 years, 5% residual)
Rate = (1 - 0.05) / 10 × 100 = 9.5%

WDV Rate Calculation

WDV Rate = 1 - (Residual Value / Cost)^(1/n) × 100

Example: Computer (3 years, 5% residual)
Rate = 1 - (0.05)^(1/3) × 100 = 63.16%

Depreciation Under Income Tax Act

Block of Assets Concept

Income Tax groups assets into “blocks” based on depreciation rate.

Additional Depreciation

WDV of Block Calculation

Opening WDV of Block
+ Additions during the year
- Sales/Deletions during the year
= Adjusted WDV
× Depreciation Rate
= Depreciation for the year

Example: Block of Assets

15% Block (Plant & Machinery):

Half-Year Convention

Under Companies Act (Old)

Previously, if asset was used for less than 180 days in the first year, half depreciation was allowed.

Under Schedule II (Current)

Depreciation is calculated based on actual number of days the asset was used.

Depreciation = Annual Depreciation × (Days used / 365)

Under Income Tax Act

Example

Computer purchased on 1st November, cost ₹3,00,000

Companies Act (SLM):

Days used = 1st Nov to 31st March = 151 days
Depreciation = ₹3,00,000 × 33.33% × (151/365) = ₹41,357

Income Tax (WDV):

Less than 180 days, so 50% rate
Depreciation = ₹3,00,000 × 30% × 50% = ₹45,000

Depreciation Accounting Entries

Basic Entry

Depreciation Expense A/c      Dr.  1,00,000
    To Accumulated Depreciation A/c       1,00,000
(Being depreciation for the year)

Fixed Asset Register Entry

Sale of Asset Entry

Sold machinery (Cost: ₹5,00,000, Acc. Dep: ₹3,00,000) for ₹1,50,000

Bank A/c                      Dr.  1,50,000
Accumulated Depreciation A/c  Dr.  3,00,000
Loss on Sale of Asset A/c     Dr.    50,000
    To Machinery A/c                        5,00,000
(Being machinery sold at a loss)

If sold for ₹2,50,000 (profit):

Bank A/c                      Dr.  2,50,000
Accumulated Depreciation A/c  Dr.  3,00,000
    To Machinery A/c                        5,00,000
    To Profit on Sale of Asset A/c            50,000
(Being machinery sold at profit)

Component Accounting

Concept

Under Schedule II, significant parts of an asset with different useful lives must be depreciated separately.

Example

Building: ₹50,00,000

Without component accounting: ₹50,00,000 / 60 = ₹83,333

Difference: Component accounting shows higher, more accurate depreciation.

Deferred Tax Due to Depreciation

Why Deferred Tax Arises

Different depreciation methods (SLM for books, WDV for tax) create timing differences.

Example

Deferred Tax Entry

Year 1: Tax depreciation ₹50,000 higher (tax saving now, payable later)

Income Tax Expense A/c        Dr.    15,000
    To Deferred Tax Liability A/c          15,000
(Being DTL created @ 30% on ₹50,000 timing difference)

Year 4: Book depreciation higher (tax payable now, already paid)

Deferred Tax Liability A/c    Dr.     2,364
    To Income Tax Expense A/c               2,364
(Being DTL reversed @ 30% on ₹7,881)

Special Depreciation Scenarios

Asset Acquired Free / Reduced Rate

If asset acquired at no cost or subsidized:

• Government grants: Reduce from asset cost or treat as deferred income
• Gift: Fair value becomes cost for depreciation

Revalued Assets

If asset is revalued upward:

• Depreciate on revalued amount
• Transfer revaluation reserve to retained earnings proportionately

Impairment

If asset’s recoverable amount < carrying amount:

• Recognize impairment loss
• Depreciate reduced amount going forward

Change in Useful Life

If useful life estimate changes:

• Prospective application (current year onwards)
• No retrospective adjustment

Depreciation Rate Tables

Companies Act 2013 - Schedule II (Selected)

Income Tax Act - Block Rates

Practical Depreciation Calculation

Step-by-Step Process

1. Identify Asset Details

   • Cost
   • Date of acquisition
   • Category

2. Determine Method

   • SLM for books (Companies Act)
   • WDV for tax (Income Tax Act)

3. Find Rate/Useful Life

   • Schedule II for Companies Act
   • Block rates for Income Tax

4. Calculate Depreciation

   • Apply formula
   • Consider pro-rata if applicable

5. Record Entry

   • Debit Depreciation Expense
   • Credit Accumulated Depreciation

Example: Complete Calculation

Asset: Computer System Cost: ₹1,80,000 Date of Purchase: 15th September 2024 Year End: 31st March 2025

For Books (Companies Act - SLM):

Useful life: 3 years
Residual value: 5% = ₹9,000
Depreciable amount: ₹1,71,000
Annual depreciation: ₹57,000

Days from 15/9/24 to 31/3/25: 198 days
Pro-rata: ₹57,000 × 198/365 = ₹30,926

For Tax (Income Tax - WDV):

Block: 30% (Computers)
Days: Less than 180 days
Depreciation: ₹1,80,000 × 30% × 50% = ₹27,000

Common Mistakes

Mistake 1: Using Same Rates for Both

Error: Using Companies Act rates for tax calculation Impact: Wrong taxable income Solution: Maintain separate depreciation schedules

Mistake 2: Forgetting Pro-rata

Error: Taking full year depreciation for partial year Impact: Overstated depreciation Solution: Calculate based on days used

Mistake 3: Wrong Residual Value

Error: Using 0% residual value Impact: Schedule II requires considering residual Solution: Use at least 0% but maximum 5%

Mistake 4: Not Updating for Changes

Error: Same depreciation after asset revaluation Impact: Misstated financials Solution: Update depreciation post-revaluation

Depreciation in Financial Statements

Balance Sheet Presentation

Fixed Assets (Property, Plant & Equipment):

P&L Presentation

Depreciation and Amortization Expense: ₹12,50,000

Notes to Accounts

• Depreciation method used
• Useful lives applied
• Any change in estimates
• Fully depreciated assets still in use

Disclaimer

This guide is for educational purposes. Depreciation calculations should follow current Companies Act Schedule II and Income Tax Act provisions. Consult a qualified Chartered Accountant for specific asset categorization and rate determination.

Summary

Depreciation accounting in India requires understanding:

1. Two Methods: SLM (even) vs WDV (reducing)
2. Two Purposes: Books (Companies Act) vs Tax (Income Tax)
3. Different Rates: Schedule II vs Block rates
4. Pro-rata: Based on days or 180-day rule
5. Deferred Tax: Timing differences create DTL/DTA

Key Rule: Same asset, different books, different rates. Track both meticulously.

Social Media Posts

LinkedIn: “Bought a computer for ₹1,80,000

Books depreciation (SLM, 3 years): ₹57,000/year Tax depreciation (WDV, 30%): ₹54,000 in Year 1

Same computer. Different rules. Different amounts.

Why? 📚 Books: Show true expense matching revenue 💰 Tax: Incentivize investment with front-loaded deduction

This creates ‘Deferred Tax’ in your financials.

Accountants must maintain TWO depreciation schedules - one for each purpose. Welcome to Indian accounting! #Depreciation #IndianAccounting”

Twitter/X: “Depreciation Rates Quick Reference:

Companies Act (SLM): • Building: 1.6-3.2% • P&M: 6.3% • Computer: 31.7% • Furniture: 9.5%

Income Tax (WDV): • Building: 5-10% • P&M: 15% • Computer: 30-60% • Vehicle: 30%

Same asset. Different books. Track both! #AccountingIndia”

Instagram: “Why does my CA talk about TWO depreciations? 🤔

Same machine = 2 depreciations:

📚 FOR BOOKS (Companies Act): • SLM method preferred • Based on useful life • Shows ’true’ accounting expense

💰 FOR TAX (Income Tax): • WDV method mandatory • Higher depreciation initially • Reduces tax in early years

EXAMPLE (₹10 lakh machine): Year 1 - Books: ₹1 lakh | Tax: ₹1.5 lakh

The difference? It’s called Deferred Tax!

#DepreciationExplained #IndianAccounting”