Depreciation: Meaning, Methods and How to Calculate It (India)

TL;DR: Depreciation is the part of a fixed asset's cost that you charge as an expense each year of its useful life. Calculate it with straight-line ((cost - residual value) / useful life) or written down value (a fixed rate on the opening book value). In India you usually run two tracks: Schedule II of the Companies Act, 2013 for your books, and the Income-tax block rates (40% for computers, 15% for machinery, 10% for furniture) for tax.

Depreciation means the systematic allocation of the cost of a tangible fixed asset, such as a machine, laptop, vehicle or furniture, over the years the business uses it. It is an accounting expense, not a cash payment: you paid the cash on the day you bought the asset, and depreciation spreads that cost across the periods that benefit from it. Every depreciation calculation needs four inputs: the asset's cost, its residual (salvage) value, its useful life, and a method (Wikipedia: Depreciation).

What is the meaning of depreciation in accounting?

Depreciation in accounting is a method of allocation, not valuation. The number on your balance sheet after depreciation (the book value) is what remains of the cost, not what the asset would sell for today. A three-year-old laptop might have a book value of ₹4,500 and sell for ₹15,000; both numbers are correct for their purpose.

Depreciation does three jobs:

• Matches cost to income. A ₹5,00,000 machine that produces goods for 15 years should not wipe out the profit of the year you bought it.
• Shows a fair asset value. Fixed assets on the balance sheet appear at cost less accumulated depreciation.
• Reduces taxable profit. The tax depreciation allowance is a deduction from business income.

Related terms:

What assets can be depreciated?

Assets can be depreciated when the business owns them, uses them to earn income, and expects them to last more than one year. Typical small-business examples are computers, servers, furniture and fittings, office equipment, plant and machinery, vehicles and buildings.

Not depreciated:

• Land. It does not wear out, so it stays at cost (Wikipedia: Depreciation).
• Stock (inventory). It is expensed through cost of goods sold, not depreciated.
• Goodwill, for Indian income tax. Goodwill of a business stopped being a depreciable asset for tax from assessment year 2021-22 after the Finance Act, 2021.

How do you calculate depreciation?

You calculate depreciation by picking a method and applying it to cost, residual value and useful life. The two methods used in India are straight-line (SLM) and written down value (WDV).

Straight-line depreciation example

A machine costs ₹5,00,000, has a residual value of ₹25,000 and a useful life of 15 years (the Schedule II life for general plant and machinery).

Depreciation per year = (₹5,00,000 - ₹25,000) / 15 = ₹31,667 (rounded).

The rate is 31,667 / 5,00,000 = 6.33% of cost every year.

Written down value example

The same machine at the 15% income-tax rate for plant and machinery:

WDV charges more in early years and never reaches zero on its own. To find the WDV rate that brings an asset down to its residual value over its life, use: Rate = 1 - (Residual value / Cost)^(1 / Life). For the machine: 1 - (25,000 / 5,00,000)^(1/15) = 18.1%.

Double-declining balance example

Bench's worked example: an asset costing $10,000 with a 10-year life has a straight-line rate of 10%, so the double-declining rate is 20%. Year 1 is $2,000 and year 2 is 20% of $8,000 = $1,600 (Bench). Indian company books rarely use this method, but you will see it in US accounting software and textbooks.

Which useful lives and rates apply under Indian law?

Indian businesses calculate depreciation twice, under two different laws, and the two numbers rarely match.

Books: Schedule II of the Companies Act, 2013

Companies depreciate assets over the useful lives listed in Part C of Schedule II. The residual value is normally not more than 5% of the original cost. A company may use a different life or residual value only if it discloses the difference and justifies it with technical advice (Schedule II, Companies Act 2013).

Sole proprietors and partnership firms are not bound by Schedule II. Most still follow it, or simply use the income-tax figures in their books, to keep one set of numbers.

Tax: block of assets at WDV rates

For income tax, assets are grouped into blocks and depreciated on the written down value of the whole block, at rates set in Appendix I of the Income-tax Rules (ICAI: Rates of depreciation under the Income Tax Act).

Three rules change the number you claim:

• The 180-day rule. An asset put to use for less than 180 days in the year you acquire it gets only 50% of the normal rate for that year.
• Additional depreciation. Manufacturing and power businesses can claim an extra 20% on new (not second-hand) plant and machinery, also halved under 180 days (Patron Accounting).
• No asset-wise life. Tax depreciation is calculated on the block, so selling one laptop reduces the computer block's WDV rather than producing a separate gain or loss, unless the block is emptied.

What does one asset look like on both tracks?

A laptop bought for ₹90,000 and put to use on 10 November 2026 shows how the book and tax numbers differ in the year ending 31 March 2027.

Your profit and loss account shows ₹11,088 of depreciation; your income-tax computation adds that back and deducts ₹18,000 instead. Companies that report under AS 22 or Ind AS 12 record the timing difference as deferred tax.

How do you record it in the books?

The journal entry for depreciation debits Depreciation (an expense) and credits Accumulated Depreciation (a contra-asset). For the machine in year 1:

At year end, close Depreciation to the profit and loss account: debit Profit and Loss A/c, credit Depreciation A/c. Small businesses sometimes credit the asset account directly instead of using accumulated depreciation; it gives the same book value but hides the original cost, which you need for a fixed asset register.

When you sell or scrap an asset, remove both its cost and its accumulated depreciation, and book the difference against the sale proceeds. Suppose the machine is sold at the start of year 4 for ₹3,80,000, when its book value is ₹4,04,999 (cost ₹5,00,000 less ₹95,001 accumulated):

A sale above book value produces a Profit on Sale of Asset credit instead. Under the income-tax block method, the ₹3,80,000 sale price is instead deducted from the plant and machinery block's WDV; a short-term capital gain arises only if the sale proceeds exceed the whole block, or the block ceases to exist.

Depreciation reduces profit but not cash, so the indirect method of the cash flow statement adds it back to net profit to arrive at cash from operations.

How do you keep a depreciation schedule?

A depreciation schedule (fixed asset register) is a table with one row per asset that you update every year. Keep these columns:

• Asset description and location
• Date of purchase and date put to use
• Cost, including freight and installation
• Method, useful life or rate, and residual value
• Opening book value, depreciation for the year, closing book value
• For tax: the block it belongs to and whether the 180-day rule applied
• Sale date and sale value when you dispose of it

Recording assets when you post the purchase bill makes the year-end schedule a lookup rather than a hunt through old invoices. If you track your margins too, remember that depreciation sits below gross profit: the gross margin calculator ignores it, while net profit in your profit and loss account includes it.

This guide is general information, not tax advice. Check the current Appendix I rate for your specific asset and confirm the treatment with your chartered accountant.

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