Business Income & Depreciation Rules Under the New Income Tax Act

Business Income & Depreciation Rules Under the New Act

For any business or professional maintaining regular books (not opting for presumptive taxation), understanding depreciation is central to accurately computing taxable profit — and it’s one of the most misunderstood areas of tax computation.

How Business Income Is Computed

Starting from your profit as per books of account (or profit & loss statement), tax law requires several adjustments:

•             Add back expenses not allowed for tax purposes (e.g., disallowed MSME dues under Section 43B(h), personal expenses claimed as business expenses, penalties, disallowed cash payments above ₹10,000).

•             Add back book depreciation (calculated as per the Companies Act, if applicable).

•             Deduct tax depreciation (calculated separately under income tax rules, usually different from book depreciation).

•             Deduct other allowable business deductions not already reflected in the books.

The “Block of Assets” Concept

Unlike simple accounting depreciation on individual assets, income tax depreciation works on a block of assets basis — all assets of the same category and depreciation rate are grouped into one block, and depreciation is calculated on the block’s aggregate written-down value (WDV), not asset-by-asset.

Common Depreciation Rates

The Half-Year Rule

If an asset is put to use for less than 180 days in the year of purchase, only half the normal depreciation rate can be claimed for that year — the remaining half is effectively deferred to future years through the block’s WDV mechanism.

Example

A company buys machinery worth ₹10,00,000 in December (used for less than 180 days before year-end). Instead of the full 15% (₹1,50,000), only 7.5% (₹75,000) can be claimed in that year.

Additional Depreciation for Manufacturing

Businesses engaged in manufacturing or production get an additional 20% depreciation on new plant and machinery (over and above normal depreciation), in the year of installation — a significant incentive for capital-intensive manufacturing investment. If the asset is used for less than 180 days, only 10% additional depreciation is available in that year, with the remaining 10% carried forward to the next year.

What Happens When You Sell an Asset From a Block

•             If the block still has assets remaining after the sale, the sale proceeds simply reduce the block’s WDV — no immediate capital gain/loss arises.

•             If the entire block is sold and the block ceases to exist, or if sale proceeds exceed the WDV, the excess is treated as a short-term capital gain.

Frequently Asked Questions

Q1. Can I claim depreciation on an asset used partly for personal purposes? Yes, but only the business-use proportion of depreciation is allowed as a deduction — the assessing officer can restrict the claim based on actual business usage, especially for vehicles.

Q2. Is depreciation mandatory, or can I choose not to claim it? Under most circumstances, depreciation must be claimed as computed by the tax rules (it’s not optional for reducing taxable income in a given year), though there are limited exceptions for specific situations.

Q3. Do presumptive taxpayers (Section 44AD/44ADA) also need to track depreciation? No — under presumptive taxation, the declared percentage of turnover/receipts is treated as covering all expenses including depreciation; you don’t separately compute or claim it, but you also can’t claim it as an additional deduction.

Reflects the general depreciation framework applicable for Tax Year 2026-27 under the Income Tax Act, 2025.