Your manufacturing company just invested Rs 2 crore in a new CNC machine. Besides the regular 15% WDV depreciation, you can claim an additional 20% of the actual cost — that’s Rs 40 lakh — as a one-time extra deduction in the year of installation. This is additional depreciation under Section 32(1)(iia), and for capital-intensive businesses, it can significantly reduce the tax bill in the year of asset acquisition.
This guide explains who qualifies, what assets are eligible, how the 180-day rule works, why it’s not available under concessional tax regimes, and how to compute the deduction correctly with a worked example.
What Is Additional Depreciation and Why Does It Matter?
Additional depreciation under Section 32(1)(iia) of the Income Tax Act, 1961 is a one-time extra deduction equal to 20% of the actual cost of new plant and machinery (excluding ships, aircraft, and certain other assets) acquired and installed by an assessee engaged in the business of manufacture or production of any article or thing, or in the business of generation, transmission, or distribution of power.
This deduction is allowed over and above the normal depreciation under Section 32(1)(ii) computed at the rates prescribed in Appendix I. For a complete understanding of normal depreciation rates and block of assets, refer to our depreciation rates and block of assets guide.
The provision was introduced by the Finance Act, 2005 to incentivise capital investment in manufacturing and has been expanded over the years to cover power generation (Finance Act 2012) and power transmission (Finance Act 2016). However, it is NOT available to businesses that opt for concessional tax rates under Sections 115BAA, 115BAB, or 115BAC — a critical consideration for tax planning.
Key Terms You Should Know
- Additional Depreciation: A one-time extra deduction of 20% of the actual cost of eligible new plant and machinery, allowed in the year the asset is first put to use. Claimed over and above normal WDV depreciation. Reduced from the actual cost to compute WDV going forward.
- Actual Cost (Section 43(1)): The price paid to acquire the asset, including installation, transport, duties, and professional fees — minus any portion met by subsidy, grant, or reimbursement. Does not include GST input tax credit claimed.
- 180-Day Rule: If the new plant/machinery is put to use for less than 180 days in the year of acquisition, only 50% of additional depreciation (i.e., 10%) is allowed in that year. The remaining 10% is allowed in the immediately succeeding year.
- Manufacture or Production: The transformation of raw material into a new and distinct article/thing with a different name, character, and use. CBDT Circular 15/2016 confirmed that printing and publishing qualifies as manufacturing. Software development, food processing, and assembly operations have been subject to judicial interpretation.
- Concessional Tax Regimes: Sections 115BAA (22% for all domestic companies), 115BAB (15% for new manufacturing companies), and 115BAC (new regime for individuals/HUFs). Companies opting for these regimes CANNOT claim additional depreciation — only normal depreciation under Appendix I is permitted.
- Backward Area Enhanced Rate (Expired): From 1 April 2015 to 31 March 2020, manufacturing units set up in notified backward areas of Andhra Pradesh, Bihar, Telangana, and West Bengal could claim additional depreciation at 35% instead of 20%. This enhanced rate has expired and is no longer available.
Who Can Claim Additional Depreciation Under Section 32(1)(iia)?
The eligibility for additional depreciation is restricted to specific categories of businesses. The following must ALL be satisfied simultaneously:
- The assessee must be engaged in the business of manufacture or production of any article or thing — this includes printing, publishing, food processing, pharmaceutical manufacturing, textile production, and chemical manufacturing (confirmed by CBDT Circular 15/2016 and multiple ITAT/HC rulings)
- OR the assessee must be engaged in the business of generation, transmission, or distribution of power (from AY 2013–14 for generation/distribution; from AY 2017–18 for transmission)
- The asset must be NEW plant and machinery — second-hand, reconditioned, or refurbished assets do not qualify, whether Indian or imported
- The asset must be acquired and installed after 31 March 2005
- The asset must NOT be ships, aircraft, office appliances, road transport vehicles, or plant/machinery installed in office premises, residential accommodation, or guest houses
- The asset must NOT be one whose entire actual cost is allowed as a deduction under any other provision (e.g., Section 35, Section 35AD) in the same year
Businesses requiring statutory audit services should ensure their tax auditor verifies additional depreciation eligibility as part of the Form 3CD preparation.
Legal Framework: Section 32(1)(iia) and Related Provisions
| Provision | What It Provides | FY 2026–27 Status |
|---|---|---|
| Section 32(1)(iia) | Additional depreciation @ 20% of actual cost of new P&M for manufacturers and power companies | Active — available to taxpayers NOT under concessional regimes |
| First Proviso to 32(1)(iia) | 35% enhanced rate for backward areas (AP, Bihar, Telangana, WB) for assets installed 1 Apr 2015 to 31 Mar 2020 | Expired — no longer available |
| Second Proviso to 32(1)(iia) | Exclusions: second-hand P&M, office/residential installations, office appliances, ships, aircraft, transport vehicles, 100%-deductible assets | Active |
| Section 32(1)(ii) | Normal depreciation on WDV at Appendix I rates | Active — available under all regimes |
| Section 115BAA | 22% concessional tax for domestic companies — additional depreciation NOT claimable | Active |
| Section 115BAB | 15% concessional tax for new manufacturing companies — additional depreciation NOT claimable | Active |
| CBDT Circular 15/2016 | Confirms printing and publishing constitutes “manufacturing” for additional depreciation eligibility | Active |
How to Compute Additional Depreciation: Step-by-Step Process
- Step 1: Confirm the assessee is engaged in manufacturing, production, or power business. Verify the business activity qualifies. If there’s ambiguity (e.g., software development, job work, assembly), check CBDT circulars and relevant ITAT/HC precedents. CBDT Circular 15/2016 is the key reference for printing/publishing.
- Step 2: Confirm the asset is eligible new plant and machinery. Check: (a) it is NEW (not second-hand), (b) it is plant/machinery (not ships, aircraft, office appliances, vehicles, or residential installations), (c) its entire cost is not deductible under Section 35/35AD in the same year.
- Step 3: Verify the assessee has NOT opted for concessional tax regime. If the company has filed Form 10-IC (Section 115BAA), Form 10-ID (Section 115BAB), or opted for Section 115BAC, additional depreciation is not available. Only normal depreciation under Appendix I applies. This is a critical check — many companies miss this.
- Step 4: Determine actual cost of the asset. Actual cost = purchase price + installation + transport + duties – subsidies/reimbursements – GST ITC claimed. This is the base for computing 20% additional depreciation.
- Step 5: Apply the 180-day rule. If the asset is put to use for 180+ days: Additional Depreciation = 20% of actual cost. If <180 days: 10% in Year 1 + 10% in Year 2. Engage ITR filing for business for correct bifurcation across assessment years.
- Step 6: Compute total first-year depreciation. Total depreciation = Normal depreciation (Appendix I rate on WDV) + Additional depreciation (20% or 10% of actual cost). The additional depreciation is then deducted from the actual cost to arrive at the WDV for subsequent years.
- Step 7: Report in ITR and tax audit. Disclose additional depreciation separately in the depreciation schedule. The tax auditor verifies in Form 3CD. Engage income tax return filing for compliant filing.
Documents and Records Needed to Claim Additional Depreciation
- Purchase invoice for the new plant/machinery showing supplier name, date, amount, and GST details
- Proof of installation — installation certificate, commissioning report, or site engineer’s certificate with date
- Fixed asset register showing date of acquisition, date put to use, and actual cost after adjustments
- WDV computation schedule showing normal depreciation + additional depreciation separately
- Board resolution or management approval for capital expenditure (for companies)
- GST ITC claim records — to ensure actual cost excludes ITC already claimed
- Manufacturer’s certificate or import documents confirming the asset is brand new (not second-hand)
- Tax audit report (Form 3CD) with depreciation schedule verified by CA
- ITR with depreciation schedule showing additional depreciation as a separate line item
- Production records or factory license confirming manufacturing/production activity
- CBDT Circular 15/2016 reference (if claiming for printing/publishing industry)
- Form 10-IC / 10-ID non-filing confirmation (to prove concessional regime was NOT opted)
Additional Depreciation Rates: Current and Historical
| Category | Rate | Applicable Period | FY 2026–27 Status |
|---|---|---|---|
| General — all eligible manufacturers and power companies | 20% of actual cost | From AY 2006–07 onwards | Active (if not under 115BAA/BAB/BAC) |
| 180-day rule (asset used <180 days in acquisition year) | 10% in Year 1 + 10% in Year 2 | From AY 2006–07 onwards | Active |
| Backward area — AP, Bihar, Telangana, West Bengal | 35% of actual cost | Assets installed 1 Apr 2015 to 31 Mar 2020 | Expired — no longer available |
| Power generation/distribution | 20% of actual cost | From AY 2013–14 onwards | Active (if not under concessional regime) |
| Power transmission | 20% of actual cost | From AY 2017–18 onwards | Active (if not under concessional regime) |
Note: Additional depreciation is a one-time benefit — it is available only in the year the asset is first put to use (and the immediately succeeding year if the 180-day rule applies). It is NOT a recurring annual deduction. The 20% is computed on the actual cost, not on the WDV. After claiming additional depreciation, the actual cost is reduced by the additional depreciation amount to arrive at the WDV for subsequent normal depreciation calculations.
Common Mistakes to Avoid When Claiming Additional Depreciation
Mistake 1: Claiming additional depreciation under Section 115BAA/115BAB. Companies that have opted for the concessional 22% (115BAA) or 15% (115BAB) corporate tax rate CANNOT claim additional depreciation. The option is irrevocable — once you file Form 10-IC or 10-ID, additional depreciation is permanently forfeited. Many companies discover this only during assessment, leading to additions and interest. New manufacturing companies considering private limited company registration should evaluate this trade-off before opting for 115BAB.
Mistake 2: Claiming additional depreciation on second-hand or refurbished machinery. The provision explicitly requires the asset to be brand NEW. Reconditioned, refurbished, or imported second-hand machinery does not qualify — even if it has never been used in India before. Courts have consistently upheld this exclusion (multiple ITAT rulings). The test is whether the machinery was used by any person, anywhere, before installation by the assessee.
Mistake 3: Not bifurcating the 180-day claim correctly. If a machine is installed in January (less than 180 days remaining in the FY), only 10% of actual cost is allowed as additional depreciation in that year. The remaining 10% must be claimed in the immediately succeeding year — not any later year. Missing the Year 2 claim means the balance is permanently lost. The Karnataka High Court in CIT v. Rittal India Pvt Ltd confirmed this carry-forward to Year 2.
Mistake 4: Confusing additional depreciation with enhanced depreciation rates. Some assets in Appendix I have higher normal depreciation rates (e.g., 40% for computers, 30% for motor cars used in hire business). These are enhanced normal depreciation rates, NOT additional depreciation. Additional depreciation under Section 32(1)(iia) is a separate, distinct deduction computed on actual cost, not on WDV.
Mistake 5: Claiming additional depreciation on office equipment, furniture, or vehicles. The Second Proviso explicitly excludes office appliances, furniture, fittings, road transport vehicles, and any plant/machinery installed in office premises or residential accommodation. A manufacturing company cannot claim additional depreciation on a delivery truck, an office AC, or factory-office furniture — only on plant and machinery used directly in the manufacturing process.
Penalties for Incorrect Additional Depreciation Claims
Claiming additional depreciation incorrectly can trigger multiple adverse consequences.
Under Section 270A, underreporting of income due to incorrect additional depreciation claims (e.g., claiming on excluded assets, claiming under concessional regime, or computing on WDV instead of actual cost) attracts a penalty of 50% of the tax payable on the underreported amount. If classified as misreporting (furnishing inaccurate particulars of the asset), the penalty is 200%.
Under Section 271(1)(c) (applicable for assessments up to AY 2016–17), concealment of income or furnishing inaccurate particulars can attract penalty of 100% to 300% of the tax sought to be evaded.
Additionally, if the claim is disallowed during assessment, the WDV of the block of assets is recalculated without the additional depreciation. This increases the WDV (since less depreciation was actually allowable), which reduces subsequent year depreciation and increases taxable income going forward. Interest under Sections 234B/234C at 1% per month is levied on the resultant tax shortfall from the original due date.
How Additional Depreciation Connects with Other Provisions
Additional depreciation under Section 32(1)(iia) operates within the broader depreciation framework of Section 32. Normal depreciation under Section 32(1)(ii) is computed on the WDV of the block of assets at Appendix I rates. Additional depreciation is a separate, one-time deduction on the actual cost of the specific new asset — it is not computed on the block WDV. After the additional depreciation is claimed, the actual cost of the asset (reduced by the additional depreciation) enters the block, and subsequent normal depreciation is computed on the combined block WDV. For businesses filing returns, refer to our income tax return filing services for integrated depreciation computation.
The interaction with concessional tax regimes is the most critical planning point. Section 115BAA(2)(b) and Section 115BAB(2)(b) explicitly provide that total income shall be computed without claiming additional depreciation under clause (iia) of sub-section (1) of Section 32. Normal depreciation under Section 32(1)(ii) remains available under all regimes. This means a manufacturing company must compare: (a) the benefit of 20% additional depreciation at the regular 25–30% tax rate, vs (b) the lower 22%/15% concessional rate without additional depreciation. For capital-intensive manufacturers, this comparison can swing either way depending on the year’s capital expenditure.
The Income Tax Act, 2025 (effective 1 April 2026) retains the additional depreciation framework with restructured section numbers. The substantive eligibility conditions, the 20% rate, the exclusion list, and the 180-day rule remain unchanged. Taxpayers filing returns for FY 2026–27 will need to reference the new section numbers.
Additional Depreciation vs Normal Depreciation: Key Differences
| Feature | Normal Depreciation — Section 32(1)(ii) | Additional Depreciation — Section 32(1)(iia) |
|---|---|---|
| Computed on | WDV of the block of assets | Actual cost of the specific new asset |
| Rate | As per Appendix I (5% to 40% depending on asset class) | Flat 20% of actual cost (one-time) |
| Recurring? | Yes — every year until block WDV reaches zero | No — one-time only (Year 1 and Year 2 if 180-day rule applies) |
| Eligible assets | All depreciable assets (buildings, furniture, P&M, intangibles, vehicles) | Only new P&M (excluding ships, aircraft, office appliances, vehicles, residential/office installations) |
| Eligible assessees | All businesses and professions | Only manufacturers, producers, and power generation/transmission/distribution companies |
| Available under 115BAA/BAB/BAC? | Yes — normal depreciation is always available | No — forfeited under concessional tax regimes |
| 180-day rule | 50% of normal rate if used <180 days | 50% of additional rate (10%) if used <180 days; balance 10% in Year 2 |
Key Takeaways
Additional depreciation under Section 32(1)(iia) allows manufacturers, producers, and power companies to claim a one-time extra deduction of 20% of the actual cost of new plant and machinery — over and above normal Appendix I depreciation.
The deduction is NOT available for second-hand machinery, ships, aircraft, office appliances, road transport vehicles, or any plant installed in office/residential premises. It applies only to new plant and machinery used directly in manufacturing or power operations.
Companies that opt for concessional tax rates under Sections 115BAA (22%), 115BAB (15%), or 115BAC must forgo additional depreciation entirely. The choice between a lower tax rate and higher depreciation deduction is a critical annual planning decision for capital-intensive businesses.
The 180-day rule requires careful timing: if an asset is installed in the second half of the financial year (after 30 September approximately), only 10% additional depreciation is allowed in Year 1, with the balance 10% claimable in Year 2. Missing the Year 2 claim results in permanent loss of the deduction.
The enhanced 35% additional depreciation rate for backward areas in Andhra Pradesh, Bihar, Telangana, and West Bengal expired on 31 March 2020. No equivalent enhanced rate exists for FY 2026–27. The standard 20% rate applies uniformly across all locations.
Need Help Claiming Additional Depreciation?
Claiming additional depreciation correctly requires verifying manufacturing eligibility, confirming the asset meets all conditions (new, non-excluded, correctly classified), computing the actual cost after GST ITC adjustments, applying the 180-day rule accurately, and ensuring the company has not opted for a concessional tax regime. A single error can result in disallowance, WDV recalculation, and cascading tax increases for subsequent years.
Explore our tax planning services for expert depreciation computation, regime selection analysis, and compliant ITR filing.
For queries, reach out at +91 945 945 6700 or WhatsApp us directly.
