Depreciation benefits

Today, a growing number of individuals are taking on the path of entrepreneurship and are utilizing their professional expertise advising others charging a fees or using their business acumen to start their own enterprise. Also, with access to higher education, an equally large number of people are opting to become practicing professionals, such as doctors, lawyers, architects and the like. Professionals belonging to either category can legally avail ‘Depreciation’ benefits under section 32 of the Income-tax Act 1961.

If the earning is from business or profession one can claim depreciation on a number of high value business or profession related items, right from car to computer.

Depreciation defined as any tangible asset, such as a piece of furniture, a building, a car, etc. undergoes wear and tear over a period of time. The value of depreciation takes into account the general wear and tear of such assets. Since depreciation is allowed as business expenditure, it can be claimed as expenditure while computing total taxable income.

Depreciation can be claimed only when the basic conditions that need to be fulfilled for claiming the benefits of depreciation are:

* The asset should be owned, wholly or partly, by the assessed, i.e. by the person who is claiming such benefits.

* The asset should be used for the purpose of the business or profession. For instance, a computer used at the office premises of a businessman is eligible to benefit from depreciation provisions.
According to the Act, depreciation allowance is mandatory while computing business or professional income. Therefore, the income tax authority allows depreciation to an assessed even if he does not claim it.

The Income-tax Act clearly specifies the list of tangible assets, as well as the rate of depreciation, that is applicable to them.

While depreciation deduction can be claimed in respect of every asset at the rate specified, there is an exception which states that – “If the asset was acquired during the year and if the same was put to use for a period of less than 182 days in that year, the deduction will be allowed at only half of the prescribed rates of depreciation for that financial year.�

If expenses are incurred on office premises that is not owned by the professional or businessman but is taken on lease, and if such expenditure provides an enduring (long-term) benefit, then the same will be treated as capital expenditure and will be eligible for depreciation at the prescribed rate. In other words, if a capital expenditure (e.g. extensive repairs or renovations which are meant to provide long-term benefits) is incurred for a lease-hold premise, depreciation is allowable on the same; though the asset is not owned.

One can claim depreciation on car even if it is acquired by way of a loan. Under such an arrangement, depreciation is deducted on the total value of the asset and not on loan amount or down payment amount.

Purchase of computer software is also considered as capital expenditure and is eligible for depreciation. However, if the benefit of the software is for a short period and needs to be upgraded on a regular basis, then the expenditure can be claimed as revenue expenditure and no depreciation will be allowed on it.
When a second-hand asset is purchased depreciation is allowed at the prescribed rates on the value at which the asset is purchased.

When business is conducted or a profession is carried out from residence, there is usually a personal element involved in the usage of the asset and hence, the rate at which one can claim depreciation on it becomes a contentious issue. In such cases, the assessed need to substantiate the depreciation amount claimed.

A working partner of a firm using personal car can claim depreciation on his vehicle at the rate of 15 per cent. However, the depreciation benefit is restricted to only that proportion which is used for official purposes and is calculated on the written down value of the car. So, for instance if the car is used equally for official and personal purposes and the written down value of the car is Rs 5 lakh, then depreciation of 15 per cent per annum on Rs 2.5 lakh can be claimed.

In a particular year if business faces a loss, depreciation on assets can be carried forward. The depreciation for that year can be set-off against income from business/profession and also against various other heads of income, of subsequent years. This is because unabsorbed depreciation can be carried forward for an infinite number of years.

Depreciation reduces tax outgo it will help in achieving a greater post-tax income. In other words, make use of ‘depreciation’ in order to ‘appreciate’ your money.