Depreciation under income tax act: An overview in 2025

Depreciation is a crucial term based on the Indian Income Tax Act, 1961. In most cases, small and medium enterprises can save a lot of taxes by learning about the depreciation provisions in 2025. As the economic environment changes and taxation rules are modified, depreciation can be used intelligently to affect the taxable income, financial planning and even asset selection.

This article is a simple, but detailed guide on depreciation under the Income Tax Act to answer some of the most common questions, give some practical tips on depreciation based on real life example, expert opinion, statistics, and comparisons. We are concerned with simplification of tax depreciation to make it understandable even by first-time business accounting or tax compliance in India.

What do you mean by Depreciation Under Income Tax Act?

Income tax Depreciation is the reduction in the value of tangible or intangible assets employed in carrying on a business or profession. The Income Tax Act, 1961, gives the taxpayers the option of claiming this loss in value against their taxable income. This is not a cash expense but is an indication of wear and tear, obsoletion or usage of the asset over time.

Why Depreciation is claimed as Taxation?

Depreciation allows depreciation of the cost of an asset to be spread over its useful life. Businesses and professionals can claim depreciation to lower the amount of net profit that they calculate when paying taxes, thus paying less income tax. It shows the true cost of using the asset and it brings in accounting profits and taxable profits that are in line with the Indian taxation rules.

The points of interest or major characteristics

• Can only be claimed on assets that are owned and used in business/profession.
• As per Section 32, only specified assets can be used.
• The rates of depreciation are stipulated in 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).
• Prohibited on land or on jewels or on personal property.

Explain the Pros and Cons:

Pros:

• Reduces taxation in a general manner
• Promotes the investment in technological and business infrastructure
• Makes it easier toParagraphs to distribute the costs of assets during their life

Cons:

• Asset must be in use for at least 180 days to claim full depreciation (except in special cases)
• The assets and techniques that are not qualifying under income tax regulations

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.

What are the assets that can enjoy depreciation allowance?

Under Income Tax Act, the assets that can be written off are tangible and intangible. These are usually.

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
• Assets of personal use
• Material or inventory Raw material or stock

Fun Facts

• The asset should be possessed by the assessee either full or partially
• The asset should also be used in business or profession in the preceding year.
• Promotes trade and modernisation of business assets
• Depreciation of goodwill of business was allowed till 2020. Budget 2021 has done away with this and hence, in Assessment Year 2025-26, you cannot claim depreciation on goodwill.

What is the significance of Asset Usage Period to Depreciation?

In cases where you own an asset and utilize it within a financial year without having used it more than 180 days, you can only claim 50 percent of the allowable depreciation rate. This will promote early buying and utilization of assets at the beginning of the year.

• Asset that has less than 180 days of use: 50 percent
• Computers/ Computer Software 40

Does the asset have to be new in order 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).

What is the Depreciation Under Income Tax Act?

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

Depreciation Calculation Example (WDV):

Assume you buy machinery at a cost of 5,00,000 at a 15 percent depreciation rate.
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 keep a fixed asset register and update when the assets are sold. This assists in ensuring that there is no error in calculating the WDV and in computing tax or during tax assessment or audit,” adds Sharma.

What are the Depreciation Rates as per the Income Tax of AY 2025 26?

The rates of depreciation are different in different blocks of assets. Here’s a summary table for Assessment Year 2025-26 (financial year 2024-25):

These are according to the Income Tax Rules as updated up to June 2024. It is always advisable to check out the latest circulars prior to filing.

What is the difference between depreciation under Companies Act and Income Tax Act?

Both SLM and WDV are permitted by the Companies Act and the rates vary. Depreciation as per Income Tax Act and Rules is strictly as per the tax.

What is the concept of block of assets in depreciation?

Income Tax Act does not allow individual depreciation of assets but rather they are pooled into blocks of assets with similar rates of depreciation. The WDV of the whole block is then depreciated.

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. In case the block is made NIL, any excess is considered to be capital gain.

Features of Block System

Fun Fact
Until the block is no more, loss/profit on sale of assets in the block is not recognized
Promotes trade and modernisation of business assets
There is an online depreciation calculator of WDV in different Indian online market places and tax portal websites. This assists small businesses to compare and estimate the amount of tax they can write off before their purchase of 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).

Particulars of fixed assets register and date of purchase

• Only in case of production or manufacture of any article or thing
• Office appliances, vehicles, buildings are excluded

What is the Treatment of Unabsorbed Depreciation?

Unabsorbed depreciation—when depreciation exceeds profits—can be carried forward indefinitely and set off against any head of income (except salary). This gives the businesses a buffer during the years of losses

What happens in case of depreciation when the asset is not utilized in business in a financial year?

No, mere ownership is not enough. The asset should be used throughout the year However, “passive use” (asset ready for use when needed) may also qualify in specific cases.

What Documents and Compliance are required in claiming depreciation?

To justify claims of depreciation in the course of tax scrutiny or audit

• Further business applications
• Invoices and receipts
• Asset usage records (logbooks for vehicles, etc)
• Wrong classification of assets or wrong rates on assets

What Are Some of the Mistakes that Should be Avoided?

• Non-delivery of Content WDV after partial sale or scrappage
• Non-business-only asset tax deductions
• The foregone depreciation allowances on new qualifying property

You know did you know!
Over-depreciation (claiming more than the block allows)

First-hand Experience:

In 2023, a printing press was established by my friend. By maintaining impeccable records and by comparing the depreciation rates and updates on the online tax platform, she was able to avail the full benefit of 15 percent rate of her machines and carried forward the unabsorbed depreciation in the first loss year. This reduced the tax payments she had to make and enhanced the cash flow during her critical initial stages.”

Promotes trade and modernisation of business assets
Businesses can now compare depreciation rates and tax implications when purchasing machinery and equipment in online marketplaces, and it saves time calculating the rates manually.

Is it possible to correct a claim of depreciation in case of errors?

There is always a chance of making mistakes, which can be corrected with a corrected return within permissible time limits, as long as the assessment has not been made.

How does Depreciation Affect the Tax Planning of Businesses in 2025?

• Depreciation reduces the amount of income that is subject to taxation thus increasing post-tax profits
• Instructs the decision making of whether to source a lease or a buy
• Encourages investment of capital
• Powerful influence in the capital-intensive industries such as manufacturing, power and logistics

Pros:

• This raises competition through low taxation
• Block Asset Grouping Asset Grouping
• Makes it easier to comply with, due to simplified block concept

Cons:

• There might be over dependence as far as actual profitability is concerned
• Sale of asset in the same block can lower the amount that can be claimed

Are there any Special Provisions of 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.

Is depreciation compulsory under the Income Tax Act or can a year be skipped?

You have the option not to claim depreciation, but in that case, the WDV will not be reduced and you will never have the deduction on that year. Therefore, never miss out on claiming depreciation.

Comparison Table Depreciation under Income Tax and Companies Act

Are there any depreciation methods that companies can apply to Companies Act and Income Tax Act?

Yes, they are able to. They can use SLM or component method to calculate the accounting but the tax should be calculated based on WDV/block rates in IT Act.

Current tables

Under Income Tax Act, depreciation is a requirement of business assets and these are claimed as per the WDV method.
The rates and eligible assets are provided in IT Rules, 1962, updated last in June 2024.

People Also Ask: Most Asked Questions about Depreciation in Indian Income Tax Act

• New plant and machinery in manufacturing has additional depreciation.
• The unabsorbed depreciation can be carried forward to an unlimited period.
• Maintain records and use internet platforms to compare and manage depreciation in the best way possible.
• Turn to experts or rely on tools that have been developed by the professionals to eliminate the most frequent mistakes.

Are there depreciation on leasehold?

Q1. Is it possible to claim depreciation on partially used assets by a taxpayer in his/her business?
That is right, though in case of less than 180 days of use only half the eligible rate can be claimed.

Q2. Is depreciation allowed on land as per Income Tax Act?
No, land is not depreciable asset. Although building is combined with land value, only building part will be depreciated.

Q3. What happens when you do not take depreciation in a year?
You are not allowed to take back depreciation that you missed in prior years. The Written Down Value of future years will be computed assuming that depreciation had been claimed.

Q4. Income Tax India Rules and Forms
Only when the deemed owner is the taxpayer and when he/she meets other eligibility requirements.

Q5. Should depreciation be claimed in revised tax regime (Section 115BAC)?
However, some of the benefits such as extra depreciation cannot be availed in case of concessional rates under Section 115BAC.

In case you are uncertain about the best way to maximize the depreciation advantages or need to plan the purchase of assets tax-efficiently, online marketplaces and tax platforms can now compare rates and block systems in 2025. This can be of assistance even when you are a first-time business person or tax filer.

Sources

• CBDT Circulars and Notification
• Income Tax India - Tax Rules and Forms
• Circulars and Notifications issued by CBDT
• Depreciation Schedule of the Companies Act