• banner
  • banner
  • banner

Article Details

Depreciation and Block of Fixed Assets (under Income Tax Act)

Depreciation and Block of Fixed Assets (under Income Tax Act)

 
First of all, let’s understand what is Depreciation. In simple term, over the period an asset’s value reduces due to wear & tear and that reduction in value is called Depreciation.
 
 
Primarily there are two conditions to claim Depreciation on any asset. First one is person shall be the owner and another is must be used for the purpose of business. Ownership can be wholly or partially. Depreciation will be proportionately allowed in case where the asset is used for business purpose as well as personal purpose. One important thing to consider here is, only half depreciation will be allowed if asset is used less than 180 days.
        
Depreciation is a mandatory deduction under Income Tax. Generally, Depreciation is calculated on Written Down Value (WDV) of Block of Asset under Income Tax. However, Entities engaged in generation & distribution of power are allowed to claim depreciation as per Straight Line Method (SLM).
 
 
Now, let’s understand, what are SLM & WDV Methods??
 
Under SLM Method Depreciation is calculated by dividing the difference between an asset’s cost and its resale value at the end of its useful life by the number of years it is expected to be used.
Where under WDV Method Depreciation is charged at a fixed rate on the value after deducting depreciation which is called Written Down Value (WDV).
 
Following will be helpful to understand above:
 
Machine’ Cost: Rs.500000, Salvage Value: Rs.20000, Useful life: 10 years, Depreciation Rate: 15%
Year
Straight Line Method
Written Down Value Method
 
 
Depreciation
 
Depreciation
1
 
 
          500000 - 20000
                 10
 
Rs.48000
(500000 – 0) x 15%
 
Rs.75000
2
Rs.48000
(500000 - 75000) x 15%
 
Rs.63750
3
Rs.48000
(500000 - 75000-63750) x 15%
Rs.54187.5
 
From above table we can also conclude that in Straight Line Method depreciation will remains same for each year but in case of Written Down Value Method depreciation amount is higher in starting years. However, Total amount of depreciation over the life of one asset will remain same under both methods.
 
 
                              

BLOCK OF ASSETS

 
 
 
When we say block of assets it means group of assets belongs to same class and have same depreciation rate. There are lots of people who don’t understand this concept and making block only on the basis of rate of depreciation. It is very clear that assets belong to same class and have same rate of depreciation too then only it will be grouped as a block.
 
 
As per Income Tax Act there are five class of assets which is as follows:
1.       Buildings;
2.       Furniture and Fittings;
3.       Machinery and Plant;
4.       Ships; and
5.       Intangible Assets.
 
For Depreciation rate of above assets, you can refer following link:
 
 
Asset1
Depreciation Rate
Asset2
Depreciation Rate
Block???
Building
5%
Building
10%
Cannot be in single block because both building have different rate of depreciation.
 
Building
10%
Furniture
10%
Depreciation rate is same for both asset but both belongs to different class so cannot be in single block.
 
Building
40%
Building
40%
Yes, these will be grouped as single block (same class and same depreciation rate).
 
Furniture
10%
Furniture
10%
Yes, these will be grouped as single block (same class and same depreciation rate).
 
               
Prepared and compiled by

UDAY DHAVAL
Kotwani Anil Kumar & Associates (KAKA)
Chartered Accountants
A-73, Lajpat Nagar-2,
New Delhi-110024

Disclaimer: Above article is true and complete to the best of our knowledge. It is our interpretation of law, others may take different opinion or view.
 
 

News & Events

22/02/2024
RBI to examine overseas investment rules
Chartered Accountants from UK, Canada might be allowed to Practice in India - ICAI
20/02/2024
CBDT drops small tax demands but not TCS, TDS Claims
NFRA set to Initiate first Annual Inspection of Key Audit Firms by April, 2024
16/02/2024
SC refused to interfere in High Court's Guidelines on Reopening of Income Tax Assessments
15/02/2024
Delhi HC upholds TDS on external development charges
RBI asks Visa, Mastercard to stop card-based commercial payments
14/02/2024
SEBI Issues caution against unregistered entities promising High Returns
SC issues notice to central govt on GST anti-profiteering provisions
 
23/02/2024
Inclusion of Clearing Corporation of India Limited as a Financial Information Provider under Account Aggregator Framework
21/02/2024
Formation of new district in the State of Assam – Assignment of Lead Bank Responsibility
16/02/2024
Exclusion of “Rupee Co-operative Bank Limited” from the Second Schedule to the Reserve Bank of India Act, 1934
10/02/2024
Review of Fixed Remuneration granted to Non-Executive Directors (NEDs)
Participation of Indian Banks on India International Bullion Exchange IFSC Limited (IIBX)
09/02/2024
Implementation of Section 51A of UAPA, 1967: Updates to UNSC’s 1267/ 1989 ISIL (Da'esh) & Al-Qaida Sanctions List: Amendments in 85 Entries