Depreciation in the Income Tax Act, as discussed in Section 32 of the Income Tax Act of 1961, refers to the allowance for the decrease in the value of assets over time due to wear and tear, obsolescence, or the passage of time. This concept is important for tax purposes and allows individuals and businesses to claim deductions for this reduction in the value of their assets when calculating their taxable income. Depreciation deductions are crucial because they reflect the true economic cost of using and eventually replacing these assets.

Under the Income Tax Act 1961, depreciation can be claimed for both tangible and intangible properties. In the case of a capital asset, the depreciation can be deducted from the original cost of the asset, such as a building, machinery, factory equipment, or furnishings. For intangible assets, the deduction can be claimed against assets like patents, trademarks, copyrights, warrants, franchises, and other similar corporate or contractual rights.

Depreciation is calculated based on the Written Down Value (WDV) of a Block of assets. A block of assets is essentially a collection of assets that belong to the same asset class and have similar characteristics. This can include both tangible assets, such as buildings, machinery, plants, and furnishings, as well as intangible assets like patents, copyrights, trademarks, licenses, franchises, and other similar business or commercial rights.

The specific asset block is determined based on factors like the asset’s expected useful life, type, and common use. The depreciation percentage for each asset class within a block of assets must also be considered for proper asset classification. Assets within the same block that share the same depreciation rate are grouped together for depreciation calculation.

It’s important to note that, under the Income Tax Act, individual assets within a block lose their individual identity for the purpose of depreciation calculation. Instead, depreciation is calculated collectively for the entire block of assets, streamlining the depreciation process for tax purposes.

Rates of depreciation on assets-