Different Depreciation Rates under Companies Act vs Income Tax Act
Whether you're a startup or an established company, knowing how depreciation works under the Companies Act, 2013 and Income Tax Act, 1961 is key to accurate accounting and tax savings. These two laws differ in how depreciation is calculated and applied. This guide simplifies everything — from key concepts to real examples like computer depreciation rate, machinery depreciation rate, and more.
Benefits of Depreciation Rate
1. Tax Savings
Depreciation reduces taxable income, helping businesses lower their tax liability.
2. Accurate Asset Valuation
Reflects the real-time value of assets, supporting transparent financial reporting.
3. Better Financial Planning
Enables efficient budgeting and long-term capital expenditure planning.
4. Compliance Friendly
Ensures adherence to legal requirements under Companies Act and Income Tax Act.
Companies Act vs Income Tax Act: Key Differences
Depreciation under Companies Act, 2013 (Follow Schedule II Guidelines)
Choose Your Method
Select either:
1. Straight Line Method (SLM): Equal depreciation every year
2. Written Down Value (WDV): Higher depreciation in early years
Apply Correct Asset Life
Examples include:
Furniture – 10 years
Electrical fittings – 10 years
CCTV Camera (office equipment) – 5 years
Use a Depreciation Calculator
Make accurate calculations easier using a depreciation calculator as per Companies Act.
Choose Your Method
Select either:
1. Straight Line Method (SLM): Equal depreciation every year
2. Written Down Value (WDV): Higher depreciation in early years
Apply Correct Asset Life
Examples include:
Furniture – 10 years
Electrical fittings – 10 years
CCTV Camera (office equipment) – 5 years
Use a Depreciation Calculator
Make accurate calculations easier using a depreciation calculator as per Companies Act.
Purpose of Depreciation in Financial Reporting and Taxation
Depreciation Rate Comparison: Companies Act vs Income Tax Act
FAQs
Depreciation under Income Tax Act, 1961
The Income Tax Act uses:
WDV method only (SLM allowed only for power companies)
Block of assets concept: assets are grouped into categories
Examples:
Machinery depreciation rate – 15%
Depreciation on motor car as per income tax – 15% or 30% (if used for hire)
Software depreciation rate – 40%
Television depreciation rate – 15% to 40%
Office equipment depreciation rate – 15%
Which Depreciation Method Should You Use?
For accounting, follow the Companies Act.
1. For tax calculation, follow the Income Tax Act.
2. Maintain two separate schedules to avoid errors. This is especially important for startups and MSMEs.
What is Depreciation?
Depreciation is the decrease in the value of a fixed asset over time due to usage, wear and tear, or age. In accounting, it is shown as an expense, helping represent the actual value of business assets.
Why Depreciation Rates Matter
Choosing the right depreciation rate is important because:
1. It impacts your financial reporting
2. It affects your tax deductions
For example:
1. Computer depreciation rate is high due to rapid obsolescence.
2. Furniture depreciation rate is lower because it has a longer lifespan.
Conclusion
Understanding the depreciation rate as per Companies Act 2013 and comparing it with income tax depreciation rates helps keep your business compliant, transparent, and tax-efficient. Use the correct method, consult a CA when needed, and make use of online tools like a depreciation calculator to simplify your financial planning.