Why one asset needs two depreciation schedules
Companies depreciate property, plant and equipment in the books under the applicable accounting standard (AS 10 or Ind AS 16) and Schedule II to the Companies Act, 2013. For calculation of profits for dividend purposes, section 123(2) refers to Schedule II. Income tax separately allows a statutory deduction. The examples below use FY 2023–24 and therefore sections 32, 43(6) and 50 of the Income-tax Act, 1961, with rule 5 and New Appendix I of the Income-tax Rules, 1962. For tax years starting from 1 April 2026, use the Income-tax Act, 2025, including section 33, and the Income-tax Rules, 2026. Earlier years remain subject to the repeal and savings rules in section 536.
| Question | Company books | Legacy income-tax computation |
|---|---|---|
| What is depreciated? | Each asset or separately depreciable significant component. | Generally a block of assets in the same statutory class with the same prescribed rate. Special rules apply to eligible power undertakings and certain other cases. |
| How is the charge set? | Allocate depreciable amount over useful life using a method that reflects consumption. Straight line, diminishing balance and units of production may be appropriate, depending on the facts. | Normally apply the prescribed percentage to block written-down value (WDV). Classification and eligibility affect the rate. |
| When does it start? | When the asset is available for its intended use. Apply Schedule II's pro-rata requirement on additions and disposals. | Subject to ownership, business use and applicable rules. For an asset acquired in the previous year and put to use for less than 180 days in that year, the normal deduction attributable to it is restricted to half. |
| Are extra shifts recognised? | Under Schedule II Part C note 6, subject to the no-extra-shift designation and the basis used to estimate useful life. | Extra shifts do not increase the prescribed block rate. Additional depreciation is a separate statutory incentive. |
| What happens on disposal? | Derecognise the asset; the difference between net proceeds and carrying amount is generally recognised in profit or loss. | Apply the block rules to disposals. A section 50 gain or loss is computed separately where the statutory conditions are met. |
Component accounting and useful life
Identify significant parts that need separate depreciation. Schedule II Part C note 4 looks at the cost of the part relative to the whole and whether its useful life differs from the rest. Ind AS 16 paragraphs 43–47 set out component depreciation, including when components can be grouped. There is no universal 10% or 15% significance threshold. Document the assessment with relevant technical evidence, such as maintenance cycles, engineering specifications and actual usage. A press's drives and base, a furnace shell and its refractory lining, or a building and major cooling equipment may need separate treatment.
Schedule II Part A normally uses the Part C lives and a residual value not exceeding 5% of original cost. If a permitted difference is adopted, disclose the difference and justification backed by technical advice. Part B separately addresses assets whose useful life or residual value is notified for accounting by a regulator or the Central Government. Schedule II does not universally require an independent chartered engineer. Under the applicable standard, review useful lives, residual values and methods as required. On replacement, capitalise the new component if the recognition criteria are met and derecognise the old component's carrying amount.
How to compute the tax block
- Start with the opening WDV under section 43(6). Add actual cost under the tax rules for eligible assets acquired and brought into use; track the dates and half-rate additions separately.
- Deduct moneys payable and scrap value for disposals as provided in section 43(6)(c), subject to the statutory limit on the reduction. Use the applicable allocation, actual-cost and special rules. Reconcile receipts and consideration payable; they are not necessarily the same.
- If the block remains and has positive eligible WDV, apply the applicable rates. If the value is exhausted, there is no block depreciation for that year. If all assets in the block are transferred, apply section 50 and check gain or loss rather than carrying forward depreciation on a block with no remaining assets.
The less-than-180-day test applies to eligible current-year acquisitions; it is not a fixed calendar cut-off across all years. Determine the actual period of use from records. For qualifying new machinery or plant, section 32(1)(iia) generally allows 20% additional depreciation to eligible manufacturing/production or power businesses, subject to exclusions such as previously used machinery, specified office or residential installations, office appliances and road transport vehicles. When the half-year restriction applies, the remaining half of the qualifying additional deduction is allowed in the next previous year under the applicable proviso. A company under section 115BAA cannot claim this additional depreciation; restrictions also apply to attributable loss or depreciation carried forward.
Section 50 generally compares the applicable full value of consideration with transfer expenditure, opening WDV and qualifying additions. Excess consideration can produce short-term capital gain even when assets remain in the block. If the block ceases to exist because all its assets are transferred, the statutory computation can produce a gain or loss. Do not assume that demolition or scrapping automatically meets the all-assets-transferred condition. Distinguish the tax outcome from the book gain or loss and check any special valuation rules.
Three worked FY 2023–24 examples
1. One press, two component lives and a new CNC unit
Assume a ₹5 crore press was acquired and available and put to use on 1 April 2021. Its hydraulic arms and drives cost ₹2 crore, with a five-year life and ₹10 lakh residual value. The base and flywheel cost ₹3 crore, with a 15-year life and ₹15 lakh residual value. Straight-line charges are ₹38 lakh and ₹19 lakh a year. A ₹50 lakh CNC unit, acquired, available and put to use on 18 October 2023, has an assumed ten-year life and ₹2.50 lakh residual value. Using an inclusive day count, it is in use for 166 of the 366 days to 31 March 2024. Its book charge is ₹4,75,000 × 166 ÷ 366 = ₹2,15,437, rounded to the nearest rupee.
| Reconciliation | Amount | Basis |
|---|---|---|
| Total book depreciation | ₹59,15,437 | ₹38,00,000 + ₹19,00,000 + ₹2,15,437 |
| Tax opening WDV | ₹3,61,25,000 | ₹5,00,00,000 less ₹75,00,000 in year one and ₹63,75,000 in year two |
| Current tax depreciation | ₹57,93,750 | ₹54,18,750 at 15% on opening WDV + ₹3,75,000 at 7.5% on the new unit; no disposals or additional depreciation |
| Net addition to book profit in tax computation | ₹1,21,687 | Add back book depreciation and deduct tax depreciation; other adjustments excluded |
| Closing book carrying amount and tax WDV | ₹3,76,84,563 and ₹3,53,31,250 | The closing book amount exceeds tax WDV by ₹23,53,313 |
Assume a valid section 115BAA election, an expected reversal rate of 25.168% (22% plus 10% surcharge and 4% cess), and no other tax-basis differences. Under the Ind AS 12 balance-sheet approach, closing deferred tax liability is about ₹5,92,282. On the same assumptions, the year's difference reduces the opening liability by about ₹30,626; it does not establish a new asset. If AS 22 applies, assess cumulative timing differences and the applicable recognition criteria under that framework.
2. Proceeds exceed the entire vehicle block
A block of four lorries used in the business of running them on hire has opening WDV of ₹18 lakh. In September 2023, two are sold for ₹24 lakh. Assume no transfer expenses, special consideration adjustments or new additions. The ₹6 lakh excess is deemed short-term capital gain under section 50(1), and there is no remaining WDV to depreciate even though two trucks are still held. The 30% rate for eligible vehicles run on hire is not a general rate for every commercial vehicle. If the same consideration instead arose on transfer of all assets, the all-assets-transferred rule would also require review. If all were sold for ₹15 lakh with no expenses or additions, the short-term capital loss would be ₹3 lakh and there would be no further depreciation on the block.
3. Extra depreciation for a triple-shift period
A rolling mill costs ₹6 crore and has a ₹30 lakh residual value and 15-year useful life, estimated on a single-shift basis. The full-year straight-line charge is ₹38 lakh. Assume it is available all 366 days, is not marked no-extra-shift depreciation, and the company measures a sporadic triple-shift period of 240 days against the calendar days of the year. Under that stated basis, 100% additional charge for the period is ₹38,00,000 × 240 ÷ 366 = ₹24,91,803, rounded; total book depreciation is ₹62,91,803. Schedule II does not prescribe a blanket 240-day denominator. If sustained extra shifts are reflected in the estimated useful life, do not double count the effect. Tax uses the applicable block rate; a deferred tax amount cannot be inferred without the actual tax WDV and other facts.
Fixed asset review checklist
- Reconcile the physical register, general ledger and tax block schedule. Track acquisition, date available for use, date put to use and disposal separately. Apply CARO 2020 clause 3(i) where the Order applies.
- Document material component costs, useful lives, residual values, replacement disposals and shift records. Check available-for-use evidence and any departures from Schedule II.
- Reconcile the tax opening WDV, additions and eligible disposals. Confirm classification, actual cost, the half-rate rule, any additional depreciation and the tax regime.
- For a legacy tax audit, prepare Form 3CD clause 18 where applicable. For a tax year under the 2025 Act, use the prescribed Form 26 and its relevant depreciation disclosure for the applicable audit. Use the correct year and format.
- Assess deferred tax separately from current tax. Review book amounts, tax bases or timing differences as required by the reporting framework and consider recognition criteria.
Frequently asked questions
What if equipment is invoiced in March but installed in May?
If it is neither available for use in March nor put to qualifying business use, book depreciation and the tax claim ordinarily do not start in March on these facts. Assets under installation may be carried as capital work in progress. A genuine dispute about passive use or readiness requires review of the facts and applicable law.
Does the half-rate test automatically apply to an asset acquired in an earlier year?
No. The restriction in section 32 expressly refers to an asset acquired during the relevant previous year and put to use for less than 180 days in that year. For an earlier acquisition first used late in the current year, verify when it was acquired, eligibility, and the block computation before claiming the ordinary deduction. For example 25–31 March is seven calendar days inclusive; the date alone does not decide the claim.
Is every software licence depreciated as computer software?
No. In the books, a separately identifiable controlled licence may be an intangible asset; software integral to hardware or a service subscription can be treated differently. Under the legacy tax schedule, qualifying computers including computer software generally attract 40%, and qualifying business or commercial rights can attract 25%. Classify the actual asset and rights before applying either rate.
Does sale above original cost automatically produce a tax gain?
No. For section 50, compare the statutory consideration with the relevant block amounts and eligible expenses. The sale price of one asset relative to its original cost does not settle the block computation. If section 50 deems a gain short term, the original holding period does not undo that treatment.
Sources
- India Code: Companies Act, 2013, Schedule II
- MCA: Ind AS 16, Property, Plant and Equipment
- MCA: Ind AS 12, Income Taxes
- Income Tax Department: transition to Form 26
- ICAI: Guidance Note on Accounting for Depreciation in Companies
- Income Tax Department: Income-tax Act, 1961, sections 2(11), 32, 43(6), 50 and 115BAA
- Income Tax Department: Income-tax Rules, 1962, New Appendix I
- Income Tax Department: Income-tax Act, 2025, including sections 33 and 536
- Gazette: Income-tax Rules, 2026, including depreciation rules and Form 26