Section 32 of the Income Tax Act

Section 32 of the Income Tax Act provides provisions related to the depreciation of assets for income tax purposes. This section outlines the methodology and rates for calculating depreciation on various assets owned by businesses or individuals. It is essential for you to understand Section 32 to consider depreciation expenses appropriately and optimize your financial planning.

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Introduction to Section 32 of the Income Tax Act

Section 32 of the Income Tax Act outlines the rules and rates for calculating depreciation on various assets used for business or profession. 

Depreciation is a deduction allowed for the wear and tear of both tangible and intangible assets over time. This allows you to reduce your taxable income while filing your income tax

The tangible assets that allow a deduction against depreciation can be as follows:

  • Machinery

  • Manufacturing plant

  • Building

The deduction is also available on the depreciation of intangible assets like:

  • Franchise

  • License

  • Copyright

  • Trademark

  • Patent

  • Other Commercial/ Business rights

This section allows you to reduce your taxable income while filing your income tax. Compliance with Section 32 is crucial for businesses to accurately reflect the true economic cost of using assets and to determine their tax liability.

Terms and Conditions to Claim Deduction on Depreciation under Section 32 of the IT Act:

  • The asset should have been used in the preceding year.

  • The asset should be used for professional or business purposes.

  • The taxpayer must have ownership of the asset, even if not registered.

By meeting these criteria, you can benefit from a deduction on the depreciation of your assets, ultimately reducing your taxable income.

Eligibility Criteria for Section 32

The eligibility criteria for claiming depreciation under Section 32 are as follows:

  1. The asset must be owned by the business:

    • This includes tangible assets like buildings, machinery, furniture, and vehicles.

    • Intangible assets like patents, trademarks, copyrights, and know-how are also eligible.

    • Land and goodwill are not eligible for depreciation.

  2. The asset must be used for business purposes:

    • Personal assets like cars used for commuting are not eligible.

    • Assets used for both business and personal purposes can be partially depreciated based on the business usage percentage.

  3. The asset must have a useful life:

    • This is the estimated time period over which the asset can be used productively.

    • The Income Tax Act prescribes useful life for different types of assets.

  4. The asset must be put to use in the current year:

    • Even if purchased in the current year, depreciation can only be claimed if the asset is used for at least some time during the year.

  5. Half depreciation for assets used less than 180 days:

    • If an asset is used for less than 180 days in the year of purchase, only half of the normal depreciation amount is allowed.

Provision for Depreciation During the Year of Purchase

The provisions for the depreciation of assets during the year of purchase under Section 32 are as follows:

  • Claim: You can claim depreciation only if the asset is used in the year of purchase (even for testing).

  • 180-day rule:

    • Full depreciation: Claim 100% if used for 180 days or more.

    • Half depreciation: Claim 50% if used for less than 180 days.

  • No usage, no claim: No depreciation if the asset is not used at all in the year.

  • Additional benefits: You might get further depreciation depending on the asset type and location.

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Provision for Depreciation During Successive Years

The provisions for depreciation of assets in successive years are as follows:

  • Fixed percentage method: Apply the prescribed rate (based on asset type) to the Written Down Value (WDV) each year.

  • WDV recalculation: After deducting each year's depreciation, subtract it from the original cost to get the WDV for the next year.

  • Claim till scrap: Keep depreciating till the WDV reaches the scrap value (minimal value).

  • No more depreciation: Stop claiming depreciation once the WDV reaches scrap value.

Latest Depreciation Rates in 2024

Asset Type Depreciation Rate Example
Intangible Assets (Copyright, license, patents, trademark, know-how, franchise, or any other business or commercial rights) 25% Copyright: Imagine your software has a 4-year lifespan. You can claim 25% depreciation yearly (1/4 * 25% = 6.25%).
Library Books 100% Claim 100% depreciation if used up in a year
Professional's Books (Excl. Annual) 60% Over 5 years, depreciate 60% (60% / 5 = 12% yearly).
Professional's Annual Publications 100% If publications depreciate by year-end, claim 100%
Software & Computers 40% Imagine a 2.5-year life; depreciate 16% per year (40% / 2.5).
Taxis/Buses/Lorries (Pre-2020) 45% Bought in 2019, used in 2020? Claim 45% in 2020!
Taxis/Buses/Lorries (Business-owned) 30% Depreciate gradually over 3.3 years (30% / 3.3).
Motor Cars (Pre-2020) 30% If a used car was purchased in 2019, you can enjoy 30% depreciation in 2020
Regular Motor Cars (Non-Hire) 15% Cards depreciate slowly at 15% per year.
Furniture & Fittings 10% Depreciate over 10 years (10% / 10 = 1% yearly).
Temporary Structures 40% When the lifespan of structures is short, claim 40% of the year you use it.
Hotels/Boarding Houses 10% Over 10 years, depreciate 10% yearly.
Regular Residential Buildings 5% If the property has a very long life, only 5% depreciation per year.

Additional Depreciation under Section 32 of the Income Tax Act

The following table gives you a quick overview of the additional depreciation benefits available under Section 32:

Criteria Description
Applicability This applies to new plants or machinery, excluding aircraft and ships.
Purchase Date The taxpayer must have bought and installed the asset after March 31, 2005
Business Involvement Taxpayers must be engaged in the business of power distribution and generation.
Installation Location Not applicable for installation in residential properties (including guest houses) or office premises
Specific Assets This applies to road transport vehicles or office appliances.
Second-hand Assets Include second-hand machinery used before installation, whether inside or outside India
Exceptions Certain cases where depreciation is not permissible
Additional Depreciation 20% additional depreciation allowed on the cost of assets
Business Focus Taxpayers must be involved in the business of production and manufacturing of any item or article.

Summing It Up

Section 32 of the Income Tax Act plays an essential role in determining the depreciation allowances for businesses. It provides a structured framework for calculating depreciation on assets. This helps to ensure fairness and consistency in taxation. The provisions outlined in this section significantly influence both businesses and individuals in their tax liabilities. Understanding and adhering to the guidelines set under Section 32 is crucial for you to optimize your depreciation claims and comply with tax regulations.

FAQ's

  • What is the 32 section?

    Section 32 of the Income Tax Act of India deals with depreciation, specifically the rules for claiming depreciation on various assets used in a business or profession. It includes:
    • Rates for different asset categories

    • Rules for first-year depreciation

    • Successive year calculations

  • What is Section 32 of the Income Tax Act?

    In the Income Tax Act of India, Section 32 deals with depreciation. It allows businesses and professionals to claim a deduction for the wear and tear of their assets used in generating income. This deduction reduces their taxable income and, therefore, lowers their tax liability.
  • What is Section 32 of the Companies Act?

    • In the Companies Act, 2013, Section 32 pertains to red herring prospectus: It allows a company planning to issue securities to release a preliminary document called a "red herring prospectus" before issuing the full prospectus.

    • For the older Companies Act, 1956, Section 32 dealt with offences by companies: It held both the company itself and any individuals responsible for its management liable for offences committed under the Act.

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