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Tax Depreciation

Depreciation is the loss of value of an asset. The depreciable amount of an asset is its actual cost or any amount substituted for the actual cost, less the estimated residual value. This amount will be written off over the useful life of the depreciable asset.

Depreciation

You can set up depreciation in accordance with the Income Tax Act and the Companies Act. For more information, see How to: Set Up Tax Depreciation. You can claim depreciation for all assets that meet the following conditions:

  • You must own the asset.

  • You must use the asset for your business.

  • You must have used the asset during the year for which you claim the depreciation.

  • If the asset is an intangible asset, you must have acquired it after March 31, 1998.

Methods of Depreciation

According to the Companies Act, depreciation is calculated by using the following methods:

  • Straight line

  • Declining-Balance 1

  • Declining-Balance 2

  • Written down value

  • Estimate of useful life of assets

Using these five methods, depreciation must be calculated based on a 365 day year (or a 366 day year, in the case of a leap year). If posted, the monthly depreciation must be based on the actual number of days in a month. For an asset that is purchased or sold during the year, the proportionate depreciation must be calculated.

The Declining-Balance 1 method is an accelerated depreciation method that allocates the largest portion of the cost of an asset to the early years of its useful lifetime. You must enter a fixed yearly percentage. For more information, see Declining-Balance 1.

The Declining-Balance 2 method calculates the total depreciation amount every year. For more information, see Declining-Balance 2.

If you run the Calculate Depreciation batch job more than once a year, the Declining-Balance 1 method will result in equal depreciation amounts for each depreciation period. The Declining-Balance 2 method will result in depreciation amounts that decline for each period.

The Companies Act allows a company to use different depreciation methods for different types of assets. The same methods must be followed every year. A change in the depreciation method can be made only under the following circumstances:

  • If required by statute or for compliance with the accounting standards issued by the Institute of Chartered Accountants of India.

  • If the result would be presented more appropriately in the financial statements.

Block of Assets

Depreciation is allowed for a block of assets. A block of assets is a grouping of different types of assets that share the same percentage of depreciation. For a block of assets, there is little or no depreciation in the following cases:

  • If a block exists, and the written down value for the block is zero. A block value below zero implies short-term capital gain.

  • If a block ceases to exist, but the written down value still exists. The block value is considered to be a short-term capital loss.

  • The asset was put to use for less than 180 days in the year when it was acquired, so the depreciation rate is 50% of the normal rate. If the asset is then used in the subsequent year, the depreciation will be calculated at the normal rate.

Additional Depreciation

If an asset was acquired or installed after March 31, 2005, this asset is subject to additional depreciation. The additional depreciation rate is 20 percent. If the asset is put to use for less than 180 days in the acquired year, the rate is 10 percent. Additional depreciation is available only in the year in which the new equipment or machinery is first used.

Classification of Assets

According to Schedule VI of the Companies Act, fixed assets must be presented in the balance sheet classification as follows:

  • Goodwill

  • Land

  • Buildings

  • Leaseholds

  • Railway sidings

  • Plant and machinery

  • Furniture and fittings

  • Development of property

  • Patents, trademarks, and trade designs

  • Livestock

  • Vehicles

For more information, see Chart of Accounts Window.

Pro Rata Depreciation

If a change is made to add to or delete from an asset—such as selling, discarding, or destroying the asset—then the depreciation on the asset is calculated on a pro rata basis. The depreciation is calculated from the date of the addition of the asset, or it is calculated up to the date of the deletion of the asset, based on the actual number of days. If the financial year is more than 12 months or less than 12 months (and not exactly 12 months), then the rate of the depreciation of schedule XIV must be taken proportionately.

Depreciation in Multi-Shift Operations

In accordance with the Companies Act, calculation of the extra depreciation for double-shift and triple-shift work is performed separately. These calculations are made in proportion with the number of days that are added to the normal number of working days during the year.

Reports

You can generate reports for the depreciation schedule for the Companies Act and the depreciation schedule for the Income Tax Act. For more information, see How to: Print a Depreciation Schedule.

See Also

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