What is Depreciation?

Last updated: 27 June 2026

Depreciation is the systematic reduction in the book value of a tangible fixed asset (such as machinery, vehicles, computers, or buildings) over its useful life, recognised as a non-cash expense in the Profit & Loss Account that reduces taxable profit and reflects the asset's wear and consumption.

For Indian businesses, two separate depreciation frameworks apply: one for income tax purposes (Section 32 of the Income Tax Act, Written Down Value method) and one for accounting/company law purposes (Companies Act, Schedule II, Straight Line or WDV). They often produce different figures, creating a deferred tax adjustment.

Income tax depreciation — key rates (Section 32)

These are the commonly applied rates under Appendix I of the Income Tax Rules. Some asset sub-classes carry different rates, and rates can change with a Finance Act, so confirm the exact rate for your specific asset against the current Appendix I before computing.

Fact box. Under the Written Down Value (WDV) method used for income-tax, depreciation is calculated on the reducing balance each year — so the same 15% rate on a ₹10 lakh machine gives ₹1.5 lakh in year 1, ₹1.28 lakh in year 2, and so on. The asset never fully depreciates to zero; a residual WDV remains on the block.

Block of assets concept (income tax)

The Income Tax Act groups assets of similar nature into a "block." All assets in a block are pooled — additions increase the block, disposals reduce it. Depreciation is calculated on the net block value at year-end, not per individual asset. When an entire block is disposed of and the sale proceeds exceed the WDV, the surplus is a short-term capital gain.

Additional depreciation (Section 32(1)(iia))

Manufacturing or power-generation businesses may claim additional depreciation of 20% in the year of acquisition of new plant and machinery (not previously used). This is over and above the standard rate. Note that this benefit is not available to taxpayers who opt for the concessional corporate or individual tax regimes (such as Sections 115BAA or 115BAC), so it is mainly relevant to those still under the normal regime.

Frequently asked questions

Is depreciation a cash expense? No. Depreciation is a non-cash expense — no cash leaves the business when depreciation is recorded. It is an accounting entry that spreads the original cash outflow (the asset purchase price) over multiple years.

Can a business claim full depreciation if an asset is bought near year-end? For income-tax purposes, assets put to use for less than 180 days in a year attract only half the normal depreciation rate in that year.

Sources: Income Tax Act, Section 32; Income Tax Rules, Appendix I; Companies Act, 2013 Schedule II

General information, not professional advice. Verify on the official portal for your case. Reviewed by a Chartered Accountant; last updated 27 June 2026.

Related: Balance Sheet · Trial Balance · Advance Tax