Depreciation is a significant aspect of the Income Tax Act, of 1961. It is an allowance that is granted to taxpayers who use assets for business or profession. Section 32 of the Income Tax Act deals with the concept of depreciation and provides the rules and regulations for calculating the same. This section allows the taxpayer to claim a deduction for the wear and tear of the assets used for business purposes. In this article, we will discuss the provisions of Section 32 of the Income Tax Act in detail.
Meaning of Depreciation:
Depreciation is the decrease in the value of an asset over time due to wear and tear, obsolescence, or any other reason. When an asset is used for business purposes, it wears out over time, and its value decreases. Depreciation is the method used to account for this decrease in value. The Income Tax Act allows taxpayers to claim a deduction for the depreciation of assets used for business or profession.
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Provisions of Section 32:
Section 32 of the Income Tax Act provides the rules for calculating the amount of depreciation that can be claimed by the taxpayer. The following are the key provisions of this section:
- Eligible Assets: The assets that can be depreciated under Section 32 are tangible assets, such as buildings, machinery, plant, furniture, and vehicles, and intangible assets, such as patents, trademarks, copyrights, and know-how. However, land and goodwill are not eligible for depreciation.
- Method of Depreciation: There are two methods of calculating depreciation under Section 32 – the straight-line method and the written-down value method. The straight-line method is used for buildings and furniture, while the written-down value method is used for plants, machinery, and vehicles.
- Rates of Depreciation: The rates of depreciation are specified by the Income Tax Act and vary depending on the type of asset. The rates of depreciation for different assets are given in Appendix I of the Income Tax Act. The rates are based on the useful life of the asset, which the Income Tax Act determines.
- Additional Depreciation: Section 32 also provides for further depreciation in certain cases. Additional depreciation can be claimed by a taxpayer who uses new machinery or plant, provided that it is acquired and installed after March 31, 2005, and before April 1, 2023. The rate of additional depreciation is 20% of the actual cost of the asset.
- Depreciation on Block of Assets: The Income Tax Act allows taxpayers to claim depreciation on a block of assets instead of individual assets. A block of assets is a group of assets that fall under the same category and have the same rate of depreciation. This simplifies the calculation of depreciation and reduces the compliance burden on taxpayers.
- Depreciation on Revalued Assets: If an asset is revalued, the depreciation is calculated based on the revalued amount instead of the original cost. However, if the revalued amount is less than the original cost, the depreciation will be calculated based on the original cost.
Conclusion:
Depreciation is a crucial aspect of the Income Tax Act as it allows taxpayers to claim a deduction for the wear and tear of assets used for business or profession. Section 32 of the Income Tax Act provides the rules and regulations for calculating depreciation. Taxpayers must understand the provisions of this section to ensure that they claim the correct amount of depreciation and comply with the Income Tax Act. It is recommended that taxpayers consult a tax professional for assistance with calculating depreciation and complying with the provisions of Section 32 of the Income Tax Act.
Frequently Asked Questions:Â
Q: What is depreciation of assets as per Section 32 of the Income Tax Act?
A: Depreciation refers to the reduction in the value of an asset over time due to wear and tear technological advancement, and other factors. Section 32 of the Income Tax Act provides for the allowance of depreciation on assets used for business or professional purposes.
Q: What are the types of assets on which depreciation can be claimed under Section 32?
A: Depreciation can be claimed on tangible assets such as buildings, machinery, plant, furniture, and vehicles, as well as intangible assets such as patents, copyrights, and goodwill.
Q: Can depreciation be claimed on all assets used for business purposes?
A: Depreciation can only be claimed on assets that are used for business or professional purposes. Assets used for personal purposes are not eligible for depreciation.
Q: What is the rate of depreciation that can be claimed as per Section 32?
A: The rate of depreciation varies depending on the type of asset, its useful life, and the method of depreciation used. The rates are provided in the Income Tax Rules.
Q: Can depreciation be claimed in the year of purchase of the asset?
A: Depreciation can only be claimed from the year in which the asset is put to use for business or professional purposes.
Q: Can depreciation be claimed on assets that are sold or disposed of during the year?
A: Depreciation can only be claimed for the period during which the asset was used for business or professional purposes. If the asset is sold or disposed of during the year, the depreciation can only be claimed for the period until the date of sale or disposal.
Q: Can the depreciation claim be more than the cost of the asset?
A: No, the depreciation claimed cannot exceed the cost of the asset.
Q: Can a taxpayer change the method of depreciation used for an asset?
A: Yes, a taxpayer can change the method of depreciation used for an asset with the permission of the Assessing Officer.
Q: What is the impact of claiming depreciation on the sale of an asset?
A: When an asset on which depreciation has been claimed is sold, the sale proceeds are reduced by the amount of depreciation claimed. This is known as the ‘written down value’ of the asset. The profit or loss on the sale is calculated based on the written-down value.
Q: Is it mandatory to claim depreciation on assets used for business or professional purposes?
A: It is not mandatory to claim depreciation on assets used for business or professional purposes, but it is recommended as it reduces the tax liability of the taxpayer.
