Depreciation Under Income Tax Act: All You Need to Know for 2025

Depreciation is an essential concept under the Indian Income Tax Act, 1961. For many businesses, especially small and medium enterprises, understanding depreciation provisions in 2025 can result in significant tax savings. With economic environments evolving and taxation rules getting updated, smart use of depreciation can impact your taxable income, financial planning, and even your choice of assets.

This article provides a comprehensive yet simple guide to depreciation under the Income Tax Act, addressing frequently asked questions, sharing practical tips from first-hand experience, expert insights, examples, comparative data, and more. The focus is on making tax depreciation easy to grasp—even if you are new to business accounting or tax compliance in India.

What is Depreciation Under Income Tax Act?

Depreciation, for income tax purposes, is the gradual decrease in the value of tangible or intangible assets used for business or professional operations. The Income Tax Act, 1961, allows taxpayers to deduct this loss in value from their taxable income. This deduction is not a cash expense but represents the wear and tear, obsolescence, or usage of the asset over time.

Why is Depreciation Claimed for Taxation?

Depreciation ensures that the cost of an asset is allocated across its useful life. By claiming depreciation, businesses and professionals can reduce their net profit for tax calculations, thereby paying less income tax. It reflects the real expense of using the asset and aligns accounting profits with taxable profits under Indian tax law.

Key Features or Highlights:

• Can be claimed only for assets owned and used for business/profession.
• Only specified assets are eligible, as per Section 32.
• Depreciation rates are prescribed under Income Tax Rules, 1962.
• Additional depreciation allowed in certain cases (e.g., manufacturing).
• Used for both tangible (machinery, buildings, vehicles) and specified intangible assets (patents, trademarks).
• Not allowed for land, jewellery, or personal assets.

Pros and Cons:

• Pros:
  • Reduces overall tax liability
  • Encourages investment in business infrastructure and technology
  • Simplifies expense allocation across asset life
• Cons:
  • Asset must be in use for at least 180 days to claim full depreciation (except in special cases)
  • Some assets and methods not eligible under income tax rules

Expert Insight: “Many new entrepreneurs miss out on legitimate depreciation claims simply because they are unaware of asset classification and applicable rates. Regularly checking for updates in the depreciation schedule can make a difference in tax outflows,” shares Ramesh Patel, Chartered Accountant, Mumbai.

Which Assets are Eligible for Depreciation Allowance?

What kinds of assets qualify for depreciation tax deduction?

Assets eligible for depreciation under Income Tax Act are divided into tangible and intangible categories. Usually, these include:

Tangible Assets

• Plant and machinery (includes computers, equipment, vehicles)
• Buildings (factory, office, but excluding land)
• Furniture and fittings

Intangible Assets

• Licenses
• Patents and copyrights
• Trademarks and knowhow

Exclusions

• Goodwill (after recent amendments, not eligible)
• Land
• Personal use assets
• Raw material or stock

Points to Remember:

• The asset must be owned wholly or partly by the assessee.
• The asset must be used for business or profession during the relevant previous year.

Did You Know?
Until 2020, goodwill of business was eligible for depreciation. Budget 2021 removed this, so for Assessment Year 2025-26, you cannot claim depreciation on goodwill.

How is Asset Usage Period Important for Depreciation?

If you purchase an asset and use it for less than 180 days in a financial year, you can claim only 50 percent of the eligible depreciation rate. This encourages timely purchase and use of assets within the early part of the year.

• Assets used for full year: 100 percent of prescribed rate
• Assets used less than 180 days: 50 percent

People also ask:
Is it necessary for the asset to be new to claim depreciation?
No, even second-hand assets are eligible if they are used in the business, except in a few special schemes (like additional depreciation for new plant in manufacturing units).

How is Depreciation Calculated Under Income Tax Act?

What is the Method of Depreciation Under Income Tax Act 1961?

The Income Tax Act uses the Written Down Value (WDV) method for almost all depreciable assets. The WDV method depreciates the asset at a fixed percentage on the reducing balance every year. Straight Line Method (SLM) is allowed only for undertakings like power generation.

Depreciation Calculation Example (WDV):

Let’s say you purchase machinery for Rs 5,00,000 at a depreciation rate of 15%.
Year 1 depreciation: Rs 75,000 ( 15 percent of Rs 5,00,000 )
Year 2 depreciation: 15 percent of Rs 4,25,000 (WDV at start of Year 2) = Rs 63,750
…and so on

Expert Insight:
“Always maintain a fixed asset register and update when assets are sold. This helps ensure correct WDV calculation and avoids mistakes during tax assessments or audits,” says Rekha Sharma, senior accountant.

What Are Depreciation Rates As Per Income Tax For AY 2025 26?

Different block of assets have different depreciation rates. Here’s a summary table for Assessment Year 2025-26 (financial year 2024-25):

Note: These are as per the Income Tax Rules updates up to June 2024. Always check for recent circulars before filing.

People also ask:
How does depreciation under Companies Act differ from Income Tax Act?
The Companies Act allows both SLM and WDV, and rates differ. Depreciation for tax purposes is strictly as per Income Tax Act and Rules.

How Do You Claim Depreciation on Different Assets?

What Is Block of Assets Concept in Depreciation?

Under the Income Tax Act, assets are not depreciated individually but are grouped into “blocks of assets” having same depreciation rates. Depreciation is then claimed on the WDV of the entire block.

Practical Example:
If you buy two machines (each for Rs 2,00,000) and one is sold next year for Rs 1,00,000; you claim depreciation on net block WDV. If the block becomes NIL, any surplus is treated as capital gain.

Key Features of Block System

• Simplifies calculation and tracking
• Loss/Profit on sale of assets within the block is not recognized until the block ceases to exist

Did You Know?
An “online depreciation calculator” for WDV is available on various Indian online marketplaces and tax portal sites. This helps small businesses compare and estimate potential tax deductions before purchasing capital equipment.

Can You Claim Additional Depreciation Under Section 32(1)(iia)?

Yes, additional depreciation is allowed for “new machinery or plant” acquired and installed by manufacturers or certain power sector businesses, at 20 percent (10 percent if used for less than 180 days).

Conditions for Additional Depreciation:

• Only for production or manufacture of any article or thing
• Excludes office appliances, vehicles, and buildings

How is Unabsorbed Depreciation Treated?

Unabsorbed depreciation—when depreciation exceeds profits—can be carried forward indefinitely and set off against any head of income (except salary). This provides businesses cushion during loss years.

People also ask:
Can depreciation be claimed if the asset is not used for business in a financial year?
No, simple ownership is not enough. The asset must be actually used during the year. However, “passive use” (asset ready for use when needed) may also qualify in specific cases.

What Documents and Compliance are Needed for Claiming Depreciation?

Which Records Are Required for Depreciation Claims?

To substantiate depreciation claims during tax scrutiny or audit:

• Fixed asset register with clear details and date of purchase
• Invoices and proof of payment
• Asset usage records (logbooks for vehicles, etc)
• Proof of continued business use

What Are Common Mistakes to Avoid?

• Incorrect asset classification or rate application
• Not updating WDV after partial sale or scrappage
• Claiming for assets not exclusively used for business
• Missing additional depreciation benefits for eligible new assets
• Over-depreciation (claiming more than the block allows)

First-hand Experience:
“My friend set up a printing press in 2023. By keeping meticulous records and using an online tax platform to compare depreciation rates and updates, she claimed full benefit of 15 percent rate for her machines and carried forward unabsorbed depreciation in her first loss year. This helped lower tax payments and improved cash flow in her all-important starting phase.”

Did You Know?
Online marketplaces now let businesses compare depreciation rates and tax impacts when shopping for machinery and equipment, making planning easier and saving hours of manual calculation.

People also ask:
Can you revise a depreciation claim in case of mistakes?
Yes, errors can be rectified by filing a revised return within permitted timelines, provided assessment is not complete.

What is the Impact of Depreciation on Business Tax Planning in 2025?

How Depreciation Influences Business Growth and Investment Decisions?

• Depreciation lowers taxable income, which means higher post-tax profits
• Promotes replacement and modernization of business assets
• Influences decisions regarding lease versus buy
• Strong impact in capital-intensive sectors like manufacturing, power, and logistics

Pros:

• Encourages capital investment
• Improves competitiveness through fiscal relief
• Allows for easier compliance, thanks to simplified block concept

Cons:

• Over-dependence may affect actual profitability
• Asset sale within same block may reduce the claimable value

Are There Any Special Provisions for Startups and MSMEs?

While depreciation rules are uniform, startups and MSMEs can maximize benefits by clubbing additional depreciation with government schemes like Section 80 IAC (for eligible startups), and using MSME-dedicated online marketplaces to compare depreciation and purchase assets smartly.

Expert Insight:
“Don’t ignore the power of compounding in depreciation claims. Over five years, consistent reinvestment and correct depreciation claiming snowballs your tax savings and strengthens your balance sheet,” says S. Agarwal, CFO of a mid-sized manufacturing firm.

People also ask:
Is depreciation mandatory under the Income Tax Act, or can you skip a year?
You can skip claiming depreciation, but if so, the WDV will not change and you lose the deduction for that year permanently. Hence, always claim eligible depreciation.

Comparison Table: Depreciation Under Income Tax vs Companies Act

People also ask:
Can companies use different depreciation methods for Companies Act and Income Tax Act purposes?
Yes, they can. For accounting, they may use SLM or component approach, but for tax computation, must follow IT Act WDV/block rates.

TL;DR or Quick Recap

• Depreciation under Income Tax Act is mandatory for business assets, claimed using the WDV method.
• Rates and eligible assets are given in IT Rules, 1962, updated last by June 2024. Check current tables.
• Additional depreciation is allowed for new plant and machinery in manufacturing.
• Unabsorbed depreciation can be carried forward indefinitely.
• Keep updated records and use online platforms to compare and manage depreciation optimally.
• Consult professionals or use expert-backed tools to avoid common errors.

People Also Ask: FAQs on Depreciation Under Indian Income Tax Act

Q1. Can a taxpayer claim depreciation on partially used assets in their business?
Yes, but if asset is used for less than 180 days, only half the eligible rate can be claimed.

Q2. Does land qualify for depreciation under Income Tax Act?
No, land is not a depreciable asset. Even if building includes land value, only building portion gets depreciated.

Q3. What if you do not claim depreciation in a year?
You cannot claim missed depreciation for previous years later. The Written Down Value for subsequent years will be calculated as if depreciation had been claimed.

Q4. Do leasehold assets qualify for depreciation?
Only if the taxpayer is the deemed owner and fulfills other eligibility criteria.

Q5. Should depreciation be claimed in revised tax regime (Section 115BAC)?
Yes, but certain benefits like additional depreciation are not available if opting for concessional rates under Section 115BAC.

If you are unsure about maximizing depreciation benefits or want to plan asset purchases tax-efficiently, online marketplaces and tax platforms now allow easy comparison of rates and block systems for 2025. This can help even if you are new to business or tax filing.

Source and Further Reading:

• Income Tax India - Rules and Forms
• CBDT Circulars and Notifications
• Companies Act Depreciation Schedule