Depreciation Rates for FY 2026-27 Under Income Tax Act

Depreciation is the gradual decrease in the value of a tangible asset over time because of wear and tear, usage, or ageing. Under the Income Tax Act, businesses must claim depreciation as an allowable deduction in the profit and loss account for assets used in business or professional activities.
 

What is Depreciation?

Depreciation is the decline in the value of a tangible asset over time due to usage, wear and tear, or ageing. As per the Income Tax Act, businesses must claim depreciation as a deduction in their profit and loss account for assets used in business or professional activities.

It can be calculated using two methods:

• Written Down Value (WDV) method: the most widely used approach across industries.
• Straight-Line Method (SLM): permitted for entities involved in power generation or its distribution.

Additionally, the Act permits additional depreciation in the year of purchase for certain new assets, especially for manufacturing and production businesses, subject to specific conditions.
 

Block of Assets

The Income Tax Act categorises assets into blocks based on their nature and usage, such as buildings, machinery, furniture, and vehicles. Depreciation is calculated collectively for each block rather than individually for every asset. This grouping simplifies calculations and ensures uniform treatment of similar assets. Businesses must accurately classify assets into blocks to comply with taxation rules and optimise depreciation claims.

To claim depreciation under the Income Tax Act, the following conditions must be met:

• The asset must be owned by the taxpayer.
• The asset should be used for business or professional purposes during the relevant financial year.
• Depreciation cannot be claimed on assets used for personal purposes.
  Compliance with these rules ensures businesses stay within the legal framework while optimising tax deductions.

Written Down Value (WDV) of Assets

Written Down Value (WDV) is the net book value of an asset after accounting for depreciation. It is calculated by subtracting accumulated depreciation from the asset’s original cost. The WDV method is commonly used under the Income Tax Act to determine the remaining value of an asset for tax purposes. Accurate WDV calculations are essential for claiming depreciation and maintaining compliance.

Amount of Depreciation Allowed

The amount of depreciation allowed is calculated using prescribed rates under the Income Tax Act. The formula involves applying the depreciation rate to the WDV of the asset block at the beginning of the financial year. For new assets, the depreciation amount is proportionate to the duration of use within the financial year. Businesses must adhere to these rules to ensure proper tax deductions.

The following table outlines depreciation rates applicable for FY 2026-27 for commonly used assets:

Depreciation Rates as per the Income Tax Act (Comprehensive Chart)

Below is a detailed chart of depreciation rates for various asset categories under the Income Tax Act for FY 2025-26:

How is depreciation calculated under Income Tax Act?

The Income Tax Act prescribes two methods for calculating depreciation:

1. Straight Line Method (SLM): Depreciation is calculated uniformly over the asset’s useful life.
2. Written Down Value Method (WDV): Depreciation is calculated as a percentage of the asset’s WDV.

For example, if an asset’s WDV is Rs. 1 lakh and the depreciation rate is 10%, the depreciation amount for the year would be Rs. 10,000.

Analysis of AS-22/IND AS 12 with Reference to Depreciation

AS-22 and IND AS 12 are accounting standards dealing with deferred tax assets and liabilities. While AS-22 focuses on timing differences, IND AS 12 adopts a balance sheet approach. Both frameworks emphasise accurate tax calculations related to depreciation, ensuring businesses adhere to financial reporting norms and minimise discrepancies.

Key Conditions to Claiming Depreciation Benefits

To claim depreciation benefits under the Income Tax Act, certain conditions must be met. The asset must be owned, wholly or partly, by the taxpayer and used for business or professional purposes during the financial year. Depreciation is allowed only on tangible and specified intangible assets such as machinery, buildings, patents, or trademarks. The asset should be recorded in the books of accounts, and proper documentation must be maintained. If an asset is used for less than 180 days in a year, only 50% of the eligible depreciation can be claimed. Additionally, depreciation must be claimed mandatorily as per prescribed rates, and the method of calculation (WDV or SLM) should be consistently followed.

What is the formula for depreciation under the Income Tax Act? 

Under the Straight-Line Method (SLM), depreciation is calculated by spreading the depreciable value of an asset evenly over its useful life. First, the depreciation rate is determined by subtracting the residual value from the original cost, dividing it by the useful life, and multiplying by 100. Annual depreciation is then calculated by applying this rate to the original cost of the asset.

Conclusion

Depreciation is a vital component of the Income Tax Act, helping businesses manage asset valuations and reduce taxable income. By understanding depreciation rates, methods, and compliance requirements, businesses can optimise their tax planning and ensure adherence to regulations.