What Is Depreciation Under Indian Tax Law?

Depreciation is basically the way the tax law lets you claim a deduction for the wear and tear of your assets. When you buy machinery, equipment, buildings, or vehicles for your business, they lose value over time. The Income Tax Act, 1961 allows you to recover that lost value through annual depreciation deductions.

And here's the thing—depreciation is one of the biggest tax benefits available to businesses. It's a non-cash expense, meaning you don't actually spend money each year, but you still get to reduce your taxable income. So what does this mean for you? If you're not claiming depreciation properly, you're leaving money on the table.

Section 32 of the Income Tax Act is the main section that covers depreciation. It applies to businesses, professionals, and anyone earning income from business or profession. The rules are straightforward once you understand them.

Who Can Claim Depreciation?

Not everyone can claim depreciation. You need to be in business or profession. Salaried people can't claim depreciation on personal assets. But if you're running a business—whether it's a sole proprietorship, partnership, or company—you can claim it.

• Sole proprietors with business income
• Partnership firms and LLPs
• Private and public companies
• Medical and legal professionals
• Consultants and contractors
• Manufacturing and trading businesses

The asset must be used for business purposes. Personal use assets don't qualify. And the asset must have a definite life span—land, for example, doesn't depreciate because it doesn't wear out.

Standard Depreciation Rates as Per Income Tax Act

The Income Tax Act specifies fixed depreciation rates for different classes of assets. These rates are applied to the written down value (WDV) of the asset. Put simply, you calculate depreciation on what the asset is worth after deducting previous years' depreciation.

Here are the main depreciation rates you need to know about:

These rates apply when you use the written down value method. There's also a straight-line method available for certain assets, but WDV is more common in India.

How to Calculate Depreciation: Step by Step

Let me walk you through how depreciation actually works in practice. The calculation is simple once you get the hang of it.

Step 1: Identify the asset cost - This is the original purchase price including all expenses to bring the asset into use (freight, installation, etc.).

Step 2: Determine the depreciation rate - Use the rate from the table above based on your asset type.

Step 3: Calculate depreciation - Multiply the WDV by the depreciation rate. In the first year, WDV equals the asset cost.

Step 4: Reduce the WDV - Subtract the depreciation from the WDV to get the new WDV for next year.

Here's a practical example. Say you buy a computer for ₹1,00,000 on 1 April 2026. The depreciation rate for computers is 40%.

• Year 1 (2026-27): Depreciation = ₹1,00,000 × 40% = ₹40,000. New WDV = ₹60,000
• Year 2 (2027-28): Depreciation = ₹60,000 × 40% = ₹24,000. New WDV = ₹36,000
• Year 3 (2028-29): Depreciation = ₹36,000 × 40% = ₹14,400. New WDV = ₹21,600

See how the depreciation amount goes down each year? That's because you're calculating it on a smaller base. This method is called the written down value method, and it's the standard in India.

Special Depreciation Rules You Should Know

The basic rules are straightforward, but there are some special situations you need to be aware of. These can significantly impact your tax position.

First Year Depreciation (Half Year Rule) - If you buy an asset during the financial year, you get depreciation for only half the year in the first year. So if you buy machinery on 1 December 2026, you get depreciation for only 4 months in that year.

Assets Sold During the Year - When you sell an asset, you get depreciation up to the date of sale. The calculation becomes a bit more complex, but the principle is the same.

Additions to Existing Assets - If you add to or improve an asset (like extending a building), the cost of improvement is treated as a separate asset and depreciated accordingly.

Shift in Use - If you change an asset from personal use to business use, you can only depreciate from the year it's put to business use. The cost for depreciation is the fair market value at that time.

Lease vs. Purchase - If you lease equipment, you can't claim depreciation. But you can claim the lease rental as an expense. This is really important to understand because it changes your tax position.

Assets That Don't Qualify for Depreciation

Not every asset you buy for your business qualifies for depreciation. Knowing what doesn't qualify is just as important as knowing what does.

• Land (it doesn't wear out, so it can't depreciate)
• Stock-in-trade or inventory (these are expensed, not depreciated)
• Goodwill and intangible assets without definite life
• Leasehold land (though buildings on leasehold land can depreciate)
• Personal assets used for personal purposes
• Assets acquired for personal use but occasionally used in business

And here's something many people miss—if you use an asset partly for business and partly for personal use, you can only depreciate the business portion. So if you use your car 60% for business and 40% for personal use, you depreciate only 60% of the cost.

Depreciation for Different Business Types

Different types of businesses have different depreciation needs. Let me break this down for you.

Manufacturing Businesses - These typically have the most assets. Plant and machinery, factory buildings, tools—all of these get depreciated. Manufacturing businesses often benefit the most from depreciation because they have high capital investments.

Trading Businesses - Retailers and wholesalers depreciate shop furniture, display equipment, and vehicles. But inventory doesn't get depreciated—it's treated as an expense.

Service Businesses - Consultants, CA firms, and other service providers depreciate computers, office furniture, and equipment. The rates are the same, but the asset base is usually smaller.

Real Estate Businesses - If you're in the business of constructing and selling properties, buildings get depreciated at 5%. But if you're just investing in property, depreciation depends on how the property is classified.

Agricultural Businesses - Agricultural machinery gets depreciated at 15%. Farm buildings get depreciated at 5%. But agricultural land doesn't depreciate.

Depreciation and Tax Filing: What You Need to Do

Now that you understand the rules, here's what you actually need to do when filing your tax return.

First, maintain a fixed asset register. This is your record of all assets, their cost, date of purchase, and depreciation. You don't need to attach it to your return, but you must keep it for tax department inspection. The tax authority can ask for it anytime.

Second, calculate depreciation correctly. Use the WDV method unless you have a specific reason to use another method. Keep your calculations clear and documented.

Third, disclose depreciation in your profit and loss statement. In your tax return, depreciation appears as an expense, reducing your taxable income. The amount you claim should match your fixed asset register.

Fourth, if you sell an asset, calculate the gain or loss. The difference between the sale price and the WDV at the time of sale is your gain or loss. This gets added or subtracted from your income.

And finally, keep supporting documents. Invoices, bills, payment receipts—all of these prove the cost of your assets. Without proper paperwork, the tax department won't accept your depreciation claim.

Common Mistakes People Make with Depreciation

I've seen businesses lose thousands in tax benefits because of simple mistakes. Let me help you avoid these.

Mistake 1: Forgetting to claim depreciation - Some people don't claim depreciation because they think it's complicated. But not claiming it doesn't help you. You lose the deduction forever.

Mistake 2: Using the wrong rate - Different assets have different rates. Using a 10% rate for machinery (which should be 15%) means you're claiming less depreciation than you're allowed.

Mistake 3: Not maintaining proper records - If you can't prove the cost and date of purchase, the tax department won't accept your depreciation claim. Keep all bills and invoices.

Mistake 4: Mixing personal and business use - If you use an asset for both personal and business purposes, you can only depreciate the business portion. Many people claim 100% depreciation on vehicles used partly for personal purposes.

Mistake 5: Claiming depreciation on stock - Your inventory isn't depreciated. It's treated as an expense. Claiming depreciation on stock will get you into trouble with the tax department.

Depreciation in 2026-27: What's Changed?

As we head into 2026-27, the depreciation rates remain the same. There haven't been major changes to the depreciation rules in recent years. But there are a few things you should be aware of.

The government has been encouraging businesses to invest in technology and green energy. There are additional depreciation benefits available for certain assets like solar panels and energy-efficient equipment. These can get depreciated faster than regular assets.

Also, if you're buying new machinery and equipment, check if you qualify for the accelerated depreciation scheme. Some manufacturing businesses can get depreciation at higher rates for new assets.

The digital economy is also changing how depreciation works. Software and digital assets are increasingly important. Make sure you're classifying these correctly for depreciation purposes.

Frequently Asked Questions About Depreciation

Q1: Can I claim depreciation on assets I already owned before starting my business?

A: Yes, you can. But you need to determine the fair market value of the asset on the date you started using it for business. That becomes your cost for depreciation purposes. So if you had a computer worth ₹50,000 when you started your business, that's your cost base.

Q2: What happens when the WDV of an asset becomes zero or very low?

A: Once the WDV drops to zero, you don't claim any more depreciation. But you can still use the asset. If you sell it for any amount, that becomes your income. So if a computer has zero WDV but you sell it for ₹5,000, that ₹5,000 is treated as income.

Q3: Can I change from WDV method to straight-line method?

A: This is complicated. Generally, once you start using WDV, you need to continue with it. Changing methods requires approval from the tax department, and it's rarely granted. Stick with WDV unless you have a really specific reason to change.

Q4: What if I buy an asset on the last day of the financial year?

A: You still get half-year depreciation. So if you buy machinery on 30 March 2027, you get depreciation for half a year in 2026-27. This is because of the half-year rule mentioned earlier.

Q5: Can I claim depreciation on a vehicle I use for personal and business purposes?

A: Yes, but only on the business portion. If you use the car 70% for business and 30% for personal use, you depreciate only 70% of the cost. You need to maintain records showing the business and personal usage.

Q6: Is there a minimum cost threshold for claiming depreciation?

A: No, there's no minimum. Even if you buy a small tool for ₹500, you can claim depreciation. But practically, for very small items, many businesses group them together and depreciate them as a single asset.

Practical Example: Depreciation for a Manufacturing Business

Let me give you a real-world example to bring everything together. Imagine you're starting a small manufacturing business in April 2026.

You invest in the following assets:

• Factory building: ₹20,00,000
• Machinery: ₹15,00,000
• Office furniture: ₹2,00,000
• Computers: ₹5,00,000

Here's how depreciation works:

So in the first year, you can claim ₹4,95,000 as depreciation. This reduces your taxable income by that amount. If your tax rate is 30%, this saves you about ₹1,48,500 in taxes!

In the second year (2027-28), you calculate depreciation on the reduced WDV of each asset. The building WDV becomes ₹19,50,000, machinery becomes ₹12,75,000, and so on. Your depreciation will be slightly less than the first year.

Compliance Tips for Depreciation

To stay compliant and avoid tax issues, follow these best practices.

• Maintain a detailed fixed asset register with asset name, cost, date of purchase, and depreciation
• Keep all original invoices and purchase documents for at least 6 years
• Update your register regularly, ideally as soon as you buy an asset
• Reconcile your register with your balance sheet every year
• Document any asset sales with the sale price and date
• Get professional help if you're unsure about depreciation classification

And here's something important—if the tax department audits your return, they'll ask for your fixed asset register. If you don't have it, they can disallow your depreciation claim. So maintain proper records from day one.

When to Seek Professional Help

Most straightforward depreciation calculations are simple enough to do yourself. But there are situations where you really should get professional help.

Get a CA's help if you have complex assets, significant capital investments, if you're unsure about asset classification, if you're dealing with asset sales and gains, or if you're being audited. A professional can also help you optimize your depreciation strategy to minimize taxes legally.

The cost of getting professional help is usually far less than the taxes you'll save through proper depreciation planning.

Final Thoughts on Depreciation

Depreciation is one of the most valuable tax benefits available to businesses. It's a non-cash deduction that can significantly reduce your tax liability. But it only works if you claim it correctly and maintain proper documentation.

The rules are straightforward—identify your assets, find the right depreciation rate, calculate using the WDV method, and claim the deduction in your tax return. Keep your fixed asset register updated and maintain all supporting documents.

In 2026-27, the depreciation rates remain unchanged. But technology and green energy assets might offer additional benefits. Stay updated with tax changes and adjust your strategy accordingly.

And remember—not claiming depreciation is a mistake. It's a legitimate deduction that you've earned through your business investments. Make sure you're getting the full benefit of it.