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.
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.
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.
The eligibility criteria for claiming depreciation under Section 32 are as follows:
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.
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.
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.
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.
If an asset is used for less than 180 days in the year of purchase, only half of the normal depreciation amount is allowed.
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.
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.
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. |
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. |
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.
Rates for different asset categories
Rules for first-year depreciation
Successive year calculations
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.
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
*All savings are provided by the insurer as per the IRDAI approved insurance plan.
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ