Depreciation is one of the most significant non-cash deductions available to businesses and professionals in India. It reduces taxable profit, improves cash flow, and encourages capital investment. With the Income Tax Act, 2025 coming into force from 1 April 2026, the depreciation framework moves from Section 32 of the old Act to Section 33 of the new Act, accompanied by Rule 25 of the Draft Income Tax Rules, 2026 and reorganised Appendix I and Appendix II rate tables.
While the core rates remain largely unchanged, there are important structural shifts: a 40% cap on depreciation for taxpayers under concessional tax regimes, a clearer distinction between Appendix I (WDV method) and Appendix II (actual cost method for power generation), new granular rates for batteries and portable equipment, and a formal framework for technology-based depreciation at 40% for DSIR-certified plant and machinery.
This guide explains every aspect — from the concept of block of assets to rate tables, the 180-day rule, additional depreciation, the old-to-new section mapping, and a worked example showing WDV computation across multiple years.
What Is Depreciation Under Income Tax?
Depreciation is a mandatory deduction under the Income Tax Act that allows businesses to write off the cost of tangible and intangible assets used for business or profession over their useful life, computed on the Written Down Value (WDV) of blocks of assets at rates prescribed in Appendix I of the Income Tax Rules.
Unlike the Companies Act (Schedule II), where depreciation is based on useful life and the Straight-Line Method (SLM), the Income Tax Act mandates the WDV method for all taxpayers except power generation undertakings. This means the deduction is higher in earlier years and reduces progressively — a pattern that provides front-loaded tax benefits. Depreciation impacts both regular computation and reporting under Form 3CD.
Key Terms You Should Know
- Block of Assets: A group of assets of the same class (tangible or intangible) with the same depreciation rate. Individual assets lose identity once grouped into a block.
- Written Down Value (WDV): Opening WDV = Cost of assets in the block – depreciation already claimed + additions during the year – sale proceeds of assets sold during the year.
- Actual Cost: The cost incurred to acquire the asset, including installation, transport, and duties — but excluding any portion met by subsidy or reimbursement.
- Appendix I: The table prescribing WDV depreciation rates by block of assets. Default for all taxpayers.
- Appendix II: The table prescribing SLM (actual cost) depreciation rates for assets used in power generation/distribution undertakings.
- 180-Day Rule: If an asset is put to use for less than 180 days in the year of acquisition, only 50% of the prescribed depreciation rate is allowed for that year.
- Additional Depreciation: An extra 20% of actual cost allowed on new plant and machinery (not second-hand) acquired by manufacturing or power generation businesses.
- Section 33 (IT Act 2025): The new section governing depreciation from FY 2026-27, replacing Section 32 of the old Act.
- Rule 25 (Draft IT Rules 2026): The rule prescribing the detailed computation methodology for depreciation under Section 33.
Conditions for Claiming Depreciation
Before any depreciation can be claimed, five conditions must be satisfied:
- Ownership: The asset must be owned (wholly or partly) by the taxpayer. Co-owners can claim proportionate depreciation.
- Business/Professional Use: The asset must be used for the purposes of business or profession. Personal-use assets are not eligible, though mixed-use assets get proportionate depreciation under Section 38.
- Asset Must Be Put to Use: The asset must have actually been used during the tax year. An asset merely purchased but not put to use cannot claim depreciation.
- Asset Must Be Depreciable: Land and goodwill are not depreciable. Goodwill was explicitly excluded from the definition of depreciable assets from AY 2021-22 onwards.
- Mandatory Claim: From AY 2002-03, depreciation is deemed to have been allowed even if the taxpayer does not claim it. The WDV is reduced regardless.
Depreciation Rates Under Appendix I (WDV Method) — FY 2026-27
Appendix I of the Income Tax Rules prescribes the WDV depreciation rates for all blocks of assets. This is the default and mandatory method for all taxpayers (except power generation undertakings that opt for Appendix II).
| Block | Asset Class | WDV Rate | Examples |
|---|---|---|---|
| I | Buildings — Residential (not hotels/boarding) | 5% | Staff quarters, residential accommodation |
| II | Buildings — Non-residential / Hotels (after 2002) | 10% | Office, factory, warehouse, hotel buildings |
| III | Buildings — Temporary erections (wooden) | 40% | Temporary structures, wooden partitions |
| IV | Furniture and Fittings | 10% | Desks, chairs, shelving, electrical fittings |
| V | Plant and Machinery — General | 15% | Factory machinery, generators, compressors |
| VI | Plant and Machinery — Motor vehicles (non-commercial) | 15% | Cars, SUVs, bikes used for business |
| VII | Plant and Machinery — Motor vehicles (commercial) | 30% | Taxis, buses for hire, goods carriers |
| VIII | Plant and Machinery — Ships/vessels | 20% | Cargo vessels, tugboats, barges |
| IX | Plant and Machinery — Computers & software | 40% | Desktops, laptops, servers, software licenses |
| X | Plant and Machinery — Pollution control equipment | 40% | ETP, air/water pollution control devices |
| XI | Plant and Machinery — Renewable energy devices | 40% | Solar panels, windmills, biogas plants |
| XII | Plant and Machinery — Books (annual publications) | 40% | Law reports, professional journals |
| XIII | Plant and Machinery — Books (other than annual) | 40% | Reference libraries, periodicals |
| XIV | Intangible Assets | 25% | Patents, copyrights, trademarks, licenses, know-how, franchises |
Note: This is a summarised table covering the most common blocks. Appendix I contains granular sub-classifications within each block. For specific assets, check our for individual asset rates.
Appendix II — Straight-Line Method (Actual Cost) for Power Generation
Appendix II prescribes depreciation rates on the actual cost basis (SLM) for undertakings engaged in generation or generation and distribution of power. This is an alternative to Appendix I and applies only to power sector entities.
Key Differences: Appendix I vs Appendix II
| Feature | Appendix I (WDV) | Appendix II (SLM / Actual Cost) |
|---|---|---|
| Method | Written Down Value | Actual Cost (Straight-Line) |
| Who can use? | All taxpayers (default) | Only power generation/distribution undertakings |
| Depreciation pattern | Higher in early years, declining | Equal each year |
| Total depreciation | Approaches (but never reaches) 100% of cost | Total cannot exceed actual cost of asset |
| Block of assets concept? | Yes — assets pooled into blocks | No — individual asset tracking |
| Option to switch | N/A (default) | Power units can opt for Appendix I instead of II (irrevocable once exercised, before ITR due date) |
Draft IT Rules 2026 Update: Appendix II in the Draft Rules proposes specific SLM rates for power sector assets. New rates include batteries at 33.40%, static air-conditioning plants at 12.77%, and portable AC units at 33.40% — reflecting more scientific asset-life-based calculations for capital-intensive energy infrastructure.
What Is a Block of Assets? — Explained with Example
Under the Income Tax Act, depreciation is not computed on individual assets. Instead, all assets of the same nature and depreciation rate are grouped into a single “block.” The block has a combined WDV, and depreciation is computed on the block as a whole.
How assets are grouped: Same class (tangible or intangible) + Same depreciation rate = One block.
Example: A business owns three machines — a CNC lathe (Rs 20 lakh), a compressor (Rs 5 lakh), and a drilling machine (Rs 10 lakh). All three fall under “Plant and Machinery — General” at 15% WDV rate. They form a single block with a combined actual cost of Rs 35 lakh. If one machine is sold for Rs 8 lakh, the WDV of the block is reduced by Rs 8 lakh. The individual machine does not have a separate WDV.
What Happens When a Block Becomes Empty?
If all assets in a block are sold, discarded, or destroyed during the year, the block ceases to exist. If the sale proceeds exceed the opening WDV + additions, the excess is a short-term capital gain. If the proceeds are less, the deficit is a short-term capital loss. No depreciation is claimed for that year on an empty block.
How to Calculate Depreciation — WDV Method Step by Step
The WDV method is the standard computation prescribed under Appendix I:
- Start with the opening WDV of the block at the beginning of the tax year.
- Add the actual cost of any new assets acquired and put to use during the year.
- Subtract the sale proceeds (or insurance/scrap value) of any asset sold, discarded, demolished, or destroyed during the year.
- The result is the adjusted WDV.
- Apply the prescribed Appendix I depreciation rate to the adjusted WDV.
- If any asset was put to use for less than 180 days, restrict depreciation on the cost of that asset to 50%.
Worked Example: WDV Depreciation Over 3 Years
Scenario: ABC Pvt Ltd, a manufacturing company, has the following plant and machinery (Block V, 15% WDV):
| Particulars | FY 2026-27 | FY 2027-28 | FY 2028-29 |
|---|---|---|---|
| Opening WDV | Rs 30,00,000 | Rs 28,05,000 | Rs 27,84,250 |
| Add: New machinery purchased (>180 days use) | Rs 5,00,000 | Rs 3,00,000 | — |
| Add: New machinery purchased (<180 days use) | Rs 2,00,000 | — | Rs 4,00,000 |
| Less: Asset sold during year | (Rs 4,00,000) | — | (Rs 6,00,000) |
| Adjusted WDV (before depreciation) | Rs 33,00,000 | Rs 31,05,000 | Rs 25,84,250 |
| Depreciation @ 15% on full-year assets | Rs 4,65,000 | Rs 4,65,750 | Rs 3,27,638 |
| Depreciation @ 7.5% (50%) on <180-day asset | Rs 15,000 | — | Rs 30,000 |
| Total Depreciation Claimed | Rs 4,80,000 | Rs 4,65,750 | Rs 3,57,638 |
| Closing WDV (carried forward) | Rs 28,05,000 | Rs 27,84,250 | Rs 22,26,612 |
Note: The <180-day asset’s cost is added to the block and gets full depreciation from the following year. The 7.5% (half of 15%) is applied only on the cost of the specific asset put to use for less than 180 days, not on the entire block. This distinction is critical during verification.
The 40% Depreciation Cap — Concessional Tax Regime Taxpayers
One of the most significant changes in Rule 25 of the Draft Income Tax Rules, 2026 is the introduction of a 40% cap on depreciation for taxpayers opting for concessional tax regimes.
Who is affected?
- Domestic companies opting for concessional tax under Sections 199(3), 200(5), or 202(2) of IT Act 2025
- Individuals, HUFs, AOPs, BOIs, and artificial juridical persons taxable under Section 202(1)
- Resident cooperative societies opting under Sections 203(5) or 204(2)
Impact: For these taxpayers, depreciation on any block of assets cannot exceed 40% of the WDV, regardless of the rate prescribed in Appendix I. This means that while the Appendix I rate for computers is 40%, the effective cap is also 40%, so there is no impact on computers. However, for assets with additional depreciation (15% + 20% = 35%), the 40% cap is still above the effective rate. The cap is primarily a safeguard ensuring no taxpayer in the concessional regime claims disproportionate depreciation.
Additional Depreciation — 20% Extra on New Plant and Machinery
In addition to the normal Appendix I depreciation, manufacturing businesses and power generation/distribution/transmission undertakings can claim additional depreciation of 20% of the actual cost of new plant and machinery.
Conditions for Additional Depreciation:
- The asset must be new (not second-hand or previously used by anyone in India or outside India).
- It must be plant or machinery — not furniture, buildings, office appliances, road transport vehicles, or assets whose entire cost is deductible in one year.
- The business must be engaged in manufacturing, production, or power generation/distribution/transmission.
- If the asset is used for less than 180 days, only 50% of the additional depreciation (i.e., 10% instead of 20%) is allowed. The balance 10% can be claimed in the following year.
Example: A factory buys new machinery for Rs 10,00,000 on 1 June 2026 (used for full year). Normal depreciation: 15% of WDV = Rs 1,50,000. Additional depreciation: 20% of actual cost = Rs 2,00,000. Total first-year depreciation: Rs 3,50,000 (35% effective rate). This significantly reduces taxable profit in the acquisition year.
The 180-Day Rule — Half-Year Depreciation
If any new asset is put to use for less than 180 days during the tax year of acquisition, depreciation on that asset is restricted to 50% of the normal rate for that year. The full rate applies from the second year onwards.
How it works: An asset purchased on 15 November 2026 and used until 31 March 2027 has been used for only ~137 days. Since this is less than 180 days, only half the depreciation rate is allowed.
Practical tip: If a business is planning a significant capital expenditure, acquiring and putting the asset to use before 2 October of the financial year ensures the 180-day threshold is crossed, unlocking full-year depreciation.
Additional depreciation interaction: The 180-day restriction also applies to additional depreciation. If only 10% additional depreciation is claimed in year one, the balance 10% is claimable in year two.
Section 32 to Section 33 — IT Act 1961 vs IT Act 2025 Mapping
| Provision | Old Act (Section 32) | New Act (Section 33) |
|---|---|---|
| Depreciation on tangible assets | Section 32(1)(ii) | Section 33(1) / 33(3) |
| SLM for power generation | Section 32(1)(i) | Section 33(2) |
| WDV method rates | Appendix I (IT Rules 1962) | Appendix I (Draft IT Rules 2026) |
| SLM rates for power | Appendix I-A (IT Rules 1962) | Appendix II (Draft IT Rules 2026) |
| Additional depreciation | Section 32(1)(iia) | Corresponding provision under Section 33 |
| Block of assets definition | Section 2(11) | Corresponding definition in new Act |
| Depreciation computation rule | Rule 5 (IT Rules 1962) | Rule 25 (Draft IT Rules 2026) |
| 40% cap for concessional regime | Not explicitly codified in rules | Rule 25(2) of Draft IT Rules 2026 |
| DSIR technology depreciation | Rule 5(2) (IT Rules 1962) | Rule 25(6) of Draft IT Rules 2026 |
Income Tax Act vs Companies Act — Depreciation Differences
Businesses maintain two sets of depreciation calculations: one for tax purposes (Income Tax Act) and one for accounting/reporting (Companies Act, 2013). These differ significantly:
| Feature | Income Tax Act (Appendix I) | Companies Act (Schedule II) |
|---|---|---|
| Method | WDV (mandatory for most) | SLM or WDV (company’s choice) |
| Basis | Block of assets | Individual asset useful life |
| Rates | Prescribed rates (5%–40%) | Based on useful life (3–30 years) |
| Residual value | Not applicable (WDV reduces perpetually) | Maximum 5% of original cost |
| Purpose | Tax computation | Financial reporting |
| Creates deferred tax? | Yes — timing difference creates deferred tax asset/liability (AS-22 / Ind AS 12) | N/A (base for deferred tax calculation) |
The difference between the two depreciation amounts creates a “timing difference” that must be accounted for as a deferred tax asset or deferred tax liability in the financial statements. This is a standard disclosure requirement in every tax audit.
Common Depreciation Mistakes to Avoid
Mistake 1: Claiming depreciation on goodwill. Goodwill is explicitly excluded from depreciable assets from AY 2021-22. Any depreciation claimed on goodwill in prior years must be added back when computing WDV of the block.
Mistake 2: Forgetting the 180-day rule. Assets purchased in the second half of the year (after October) often fall below 180 days. Claiming full depreciation instead of 50% is a common error that triggers reassessment.
Mistake 3: Including land cost in the building block. Land is not depreciable. The cost of land must be separated from the building cost before adding to the building block.
Mistake 4: Using Companies Act rates for tax returns. The Income Tax Act has its own prescribed rates (Appendix I). Using Schedule II useful-life-based rates in the ITR is incorrect and will be disallowed.
Mistake 5: Claiming additional depreciation on second-hand assets. Additional depreciation is available only on new machinery. A used machine acquired from another business does not qualify.
Mistake 6: Not reducing WDV by sale proceeds. When an asset in the block is sold, the sale proceeds must be deducted from the block’s WDV. Failure to do so overstates the WDV and inflates the depreciation claim.
Key Takeaways
- Depreciation under the new IT Act 2025 (Section 33) follows the same WDV method using Appendix I rates — the framework is structurally unchanged.
- Rule 25 of Draft IT Rules 2026 introduces a 40% depreciation cap for concessional tax regime taxpayers.
- Appendix I (WDV method) is default for all taxpayers. Appendix II (SLM on actual cost) is available only for power generation/distribution undertakings.
- Key WDV rates: Buildings 5–10%, Furniture 10%, Plant & Machinery 15%, Vehicles 15–30%, Computers 40%, Intangibles 25%.
- The 180-day rule restricts first-year depreciation to 50% for assets put to use for less than 180 days.
- Additional depreciation of 20% on new plant and machinery is available for manufacturing and power sector businesses.
- Individual assets lose identity once grouped into a block. Depreciation is computed on the block’s WDV collectively.
- Depreciation is mandatory from AY 2002-03 — WDV is reduced even if depreciation is not claimed.
- Draft IT Rules 2026 propose granular rates for power sector assets (batteries 33.40%, portable AC 33.40%).
Need Help with Depreciation Computation?
Depreciation computation requires maintaining accurate block-wise records, tracking asset additions and disposals, applying the correct rates, and reconciling with financial statements. Our team at Patron Accounting handles fixed asset register maintenance, depreciation schedules, compliance, and for businesses across India.
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