Depreciation Rates Under the Companies Act & Income Tax Act

As we already know, depreciation is also calculated for intangible assets and immovable assets. Let us take an example of a building which is an immovable asset and understand the depreciation of this asset using all the knowledge we have gained so far. A company, business or an individual can own a building for different purposes. As per the data provided under Schedule II, the useful life of a building is 60 years. We also have to take into consideration the land on which the building exists. For calculating the depreciation of this building, we take two factors into consideration – the useful life of the building and the number of years after it is constructed.

Sum of years’ digit depreciation method

• This helps the company compensate for the value lost on the depreciable asset.
• (ii) the useful lives of the assets for computing depreciation, if they are different from the life specified in the Schedule.
• Yes, different industries might apply different useful life estimates for assets, which impacts the depreciation calculation.
• These include technical feasibility, intent to complete, and the ability to use or sell the asset.
• Section 198, sub-section 4 talks about all such deductions that are needed to be done in order to obtain the profit or loss accounts.
• In accounting terms, it is referred to the technique which is used to decrease the book value of a loan or an intangible asset (or class of assets) over a period of time.

These assets can be long term or short term, tangible assets or intangible assets, etc. Short term assets are those which the company acquires for a limited period of time, for instance, a machinery for a specific assignment or project. Contrarily, long terms assets are held by the company for indefinite period of time, until their value depreciates or needs replacement.

Method of Depreciation under Companies

For accuracy in numbers of net income, it is important to deduct variable as well as fixed expenses and depreciation from the gross revenue in each financial year. The Companies Act, 2013 provides a systematic regulatory framework to govern and calculate depreciation. Different provisions of the Act help in the calculation of depreciation using the useful life of assets as mentioned under Schedule II of the Act.

Why is it charged?

Any company or individualcan use the depreciation formula & the useful life given in Schedule II ofCompanies Act, 2013 to calculate the Depreciation rate under the companies act,2013. If you are looking for a depreciation calculator as per companies act and income tax act, please have a look at the tool below. The Accumulated Depreciation account appears on the balance sheet as a deduction from the original purchase price of an asset. All Tangible Assets which have a useful life greater than one year and whose value is expected to reduce in the coming years are eligible for depreciation. Land is the only Tangible asset that cannot be depreciated as the value of land appreciates with time.

• Amortisation, helps in determining the accurate profit or loss statement of a company by deducting the amortised value of assets.
• A bit off the context, but this is also why traditionalists believe that real estate is one of the best forms of investment as even with market factors and fluctuations, the investment gives rewarding profits after a period of time.
• In taxation, depreciation refers to the reduction in net taxable income to reduce the amount of tax payable by the company.
• The prescribed rate as per Income Tax Act is useful for calculation of taxable income and tax payable on the income thereon.
• If the annual expenditure deducted from the total revenue earned gives a positive remainder, the company has earned profits.
• Therefore, the double declining balance method of calculating depreciation is suitable for assets whose value essentially decreases in the first year of use as compared to the following years, like vehicles, heavy machinery, factory equipment, etc.

Therefore, net revenue is the total revenue generated by the company before deducting business expenses like depreciation, amortisation, taxes, interests and other expenses. Depreciation and amortisation are deducted from this value to obtain the EBIT of the company. Hereafter, taxes and interests are paid, any pending loans or EMIs are paid, and all other expenses are paid off. The amount which is obtained after the payment of all these expenses is the net profits or loss of the company.

What is not covered in Schedule II of the Companies Act, 2013

Thus, depreciation is calculated to determine the actual value of assets and also serves other accounting necessities. Section 198 of the Companies Act, 2013 talks about calculating the profits of a company in a given financial year. As we have discussed earlier, calculating the revenue statement is necessary for any company and business in order to understand their profits or loss statement made during the particular year. As per Section 198 of the Act, the profit or loss statement can be calculated and obtained by making certain inclusion and deducting expenses wherever required. Depreciation as per new companies act is allowed on the basis of useful life of assets and residual value.

Companies Act 2013 – Depreciation Rates and Useful Lives

The net income varies for each year in each method of calculating depreciation. In the sum of years’ digits method, the net income remains lower in the initial years as the depreciation is accelerated. But as the years pass by, the depreciation stabilises and lowers, and thus, the net income value increases.

between Depreciation under Companies Act,2013 and Depreciation under the Income

Clear and comprehensive disclosure allows intangible assets depreciation as per companies act investors, analysts, and regulators to assess how intangible assets contribute to a company’s value and performance. To claim depreciation under the Income Tax Act, you need to determine the type of asset you own and group it into a “block of assets” (like machinery, buildings, etc.). Depreciation is calculated based on the written down value (WDV) of the asset at the beginning of the financial year, using specific rates provided in the Income Tax Rules.