When you buy any property or asset on or after April 1, 2014, you are subject to depreciation under the Companies Act of 2013. It specifies the usable life of various assets and makes no depreciation amounts recommendations. To determine the amortisation rate according to the Corporations Act, 2013, you could use depreciation calculation and the usable life stated in schedule II of the Companies Act, 2013.
Did you know?
An adjusted cost basis is the asset’s original cost basis used to compute depreciation deductions adjusted by allowable increases or decreases.
What Is Depreciation?
Depreciation is the measurement of an amortisation asset’s decline in value due to usage, the passing of time, or expiration due to technical or industry developments. During the investment’s projected expected lifetime, they charge depreciation in a reasonable percentage of the realisable value in each financial period. We can regard depreciation as such expenditure since it benefits the corporation that holds the depreciable resources since everything declines worth over time. The degradation of depreciating assets one can realise as the part of income and loss account as an expenditure.
Depreciation, which is recorded as an item in the income and loss account, enables the corporation to adjust for the money lost on depreciating assets. Depreciable properties are assets that one can deduct and use for commercial purposes. The company treats investment value as a firm’s expense above the life of the assets. Most concrete assets, including buildings, machines, automobiles, fixtures and fittings, technology and hardware, and intangibles, such as trademarks, licenses, and software applications, depreciate.
Why Is It Charged?
Depreciation is a tough accounting concept because it will not depict actual cash inflow. The intent of depreciation is really a bill to profit & loss account for a part of a property that relates to the income generated by that property. Most of us know it as the matching principle. Income and expenses show up in the company’s financial account in the same accounting periods, giving the best perspective of how well a business is conducted in that accounting period.
The problem with such a matching approach is there’s only a tenuous link between income generation and a particular property. There is no mechanism to correlate a particular fixed asset to specific revenue because one must view all of a firm’s property as a unified profit-generating system. Whenever the following conditions are met, the business organisation will halt depreciating the company’s property:
- If the commercial asset has attained the decline stage
- The business concerned disposes of it.
In case they didn’t charge any depreciation, they have to wipe off entire company assets as a cost as quickly as they purchase them. It’d lead to huge losses whenever the transactions occur, followed by extremely high profits when they recognise an equivalent amount of income, with no balancing expenditure. Consequently, a corporation that doesn’t even depreciate its assets would have very volatile financial performance.
Also Read: Section 186 of the Companies Act, 2013
Types of Depreciation
Depreciation is determined yearly according to the statute’s procedures. Depreciation is calculated in two ways under the Corporations Act:
- Written down value method (WDVM)
- Straight-line method (SLM)
According to the Income Tax Act of 1961, they estimate degradation using the WDV Methodology using the blocks of property criterion. The Indian Companies Act, 2013 stipulates the usable life of different types of investments in schedule II to determine depreciation rates using the SLM, WDV, or unit of production methods. The way of depreciation chosen has an impact on the profits as well as the carrying worth of a firm’s properties.
How to Use the Depreciation Calculator?
We will understand with the help of an example.
For instance, XYZ Private Limited spent ₹ 60,000 on a desktop on April 1, 2021. He seeks to investigate the depreciation rate for the fiscal year 2021-22 on March 31, 2022.
The percentage of resale value is set at 5%. The desktop has a three-year life cycle, according to the depreciation schedule.
Step 1: Adjust the investment’s buying to 1-4-2021.
Step 2: Input ₹ 60,000 as the asset’s price.
Step 3: Insert 5 in the Salvage/Residual space
Step 4: Limit the asset’s life span to 3.
Step 5: Choose WDV or SLM as your depreciation method from the menu list.
Step 6: Select Calculate from the drop-down menu.
Now you see the depreciation graph
Important Notes While Using the Calculator
- You have to enter the dates in this format only dd/mm/yyyy. Certain other data patterns usually the calculators do not support.
- When you have obtained an input tax credit upon that property, input the price of the asset minus the GST part.
- If you haven’t claimed the input tax credit upon that property, input the property’s price, along with the GST part.
- The typical residual value percentage is 5%—only input 5 in the calculator. Whenever your firm’s residual value is unusual, insert only the quantity without the percentage (%) symbol.
- You have to refer to the depreciation table for whatever asset you purchase. You can find the table in this article below.
- SLM- When you choose the straight-line method, it computes depreciation expense using the SLM equation, and this calculation creates the chart.
- WDV- When you choose the written down value method, then it computes depreciation expense using the WDV equation, and this calculation creates the chart.
Other Factors for Depreciation as per Companies Act, 2013
Whenever the time provided in the plans differs from the time the company uses to compute depreciation, the methodology of depreciation that the business employs, one has to include this report in the financial accounts, as will the usable lives of properties companies use to compute depreciation. Godowns, workspaces, and worker housing are not included in industrial plants. Depreciation for such holdings depends on a pro-rata grounds immediately preceding the date of acquiring or, in the occasion of a selling, decommissioning, destruction, or breakdown, the date might well be, till the date of expulsion, sale ruination, or dismantling in any financial year whenever there is an alteration toward any property, disposal dismantling, selling, or ruination of any assets.
Furthermore, the useful life mentioned in portion C of the schedule pertains to every property and in circumstances where the prices of a specific section of a property are significant to the property’s overall value, and its usable life differs from the real application of those other assets. The functional lifetime of each component that is important to the company has to be calculated separately and appropriately.
Why Is There a Difference Between Depreciation Charged Under the Income Tax Act and the Companies Act?
The corporation claims depreciation for 2 reasons: Tax and accounting
Depreciation in accounting falls into two categories: a drop in the asset’s worth and the assignment of the asset’s price to the asset’s functional time. Depreciation is determined based on the usable existence of assets rather than the value of depreciation under the Companies Act of 2013.
Depreciation is a taxation term to describe the decrease in total tax liability that a corporation makes to lower the sum of taxes it owes. The government allows the depreciation of resources as a cost to the firm. While coming at revenue underneath the top of profits from business and occupation underneath the Income Tax Act 1961. Beginning with the year when they start using the asset for the 1st time and depending on the frame of investments, one calculates depreciation based on the specification of the rate inside the Income Tax Act.
Depreciation Rate Chart as per Schedule II of the Companies Act 2013
|
Nature of Assets |
Useful Life |
Rate [SLM] |
Rate [WDV] |
|
(I) Buildings [NESD] |
|
|
|
|
(a) Building (other than factory buildings) RCC Frame Structure |
60 |
1.58% |
4.87% |
|
(b) Building (other than factory buildings) other than RCC Frame Structure |
30 |
3.17% |
9.50% |
|
(c) Factory buildings |
30 |
3.17% |
9.50% |
|
(d) Fences, wells, tube wells |
5 |
19.00% |
45.07% |
|
(e) Other (including temporary structure, etc.) |
3 |
31.67% |
63.16% |
|
(II) Bridges, culverts, bunkers, etc. [NESD] |
30 |
3.17% |
9.50% |
|
(III) Roads [NESD] |
|
|
|
|
(a) Carpeted Roads |
|
|
|
|
(i) Carpeted Roads – RCC |
10 |
9.50% |
25.89% |
|
(ii) Carpeted Roads – other than RCC |
5 |
19.00% |
45.07% |
|
(b) Non-carpeted roads |
3 |
31.67% |
63.16% |
|
(IV) Plant and Machinery |
|
|
|
|
(a) General rate applicable to Plant and Machinery not covered under Special Plant and Machinery |
|
|
|
|
(i) Plant and Machinery other than continuous process plant not covered under specific |
15 |
6.33% |
18.10% |
|
(ii) Continuous process plant for which no special rate has been prescribed under (ii) below |
8 |
11.88% |
31.23% |
|
(b) Special Plant and Machinery |
|
|
|
|
(i) Plant and Machinery related to production and exhibition of Motion Picture Films |
|
|
|
|
1 Cinematograph films – Machinery used in the production and exhibition of cinematograph films, recording and reproducing equipments, developing machines, printing machines, editing machines, synchronizers and studio lights |
13 |
7.31% |
20.58% |
|
2 Projecting equipment for exhibition of films |
13 |
7.31% |
20.58% |
|
(ii) Plant and Machinery used in glass |
|
|
|
|
1 Plant and Machinery except direct fire glass melting furnaces – Recuperative and regenerative glass melting furnaces |
13 |
7.31% |
20.58% |
|
2 Plant and Machinery except direct fire glass melting furnaces – Moulds [NESD] |
8 |
11.88% |
31.23% |
|
3 Float Glass Melting Furnaces [NESD] |
10 |
9.50% |
25.89% |
|
(iii) Plant and Machinery used in mines and quarries Portable underground machinery and earth moving machinery used in open cast mining |
8 |
11.88% |
31.23% |
|
(iv) Plant and Machinery used in Telecommunications [NESD] |
|
|
|
|
1 Towers |
18 |
5.28% |
15.33% |
|
2 Telecom transceivers, switching centres, transmission and other network equipment |
13 |
7.31% |
20.58% |
|
3 Telecom – Ducts, Cables and optical fibre |
18 |
5.28% |
15.33% |
|
4 Satellites |
18 |
5.28% |
15.33% |
|
(v) Plant and Machinery used in exploration, production and refining oil and gas [NESD] |
|
|
|
|
1 Refineries |
25 |
3.80% |
11.29% |
|
2 Oil and gas assets (including wells), processing plant and facilities |
25 |
3.80% |
11.29% |
|
3 Petrochemical Plant |
25 |
3.80% |
11.29% |
|
4 Storage tanks and related equipment |
25 |
3.80% |
11.29% |
|
5 Pipelines |
30 |
3.17% |
9.50% |
|
6 Drilling Rig |
30 |
3.17% |
9.50% |
|
7 Field operations (above ground) Portable boilers, drilling tools, well-head tanks, etc. |
8 |
11.88% |
31.23% |
|
8 Loggers |
8 |
11.88% |
31.23% |
|
(vi) Plant and Machinery used in generation, transmission and distribution of power [NESD] |
|
|
|
|
1 Thermal / Gas / Combined Cycle Power Generation Plant |
40 |
2.38% |
7.22% |
|
2 Hydro Power Generation Plant |
40 |
2.38% |
7.22% |
|
3 Nuclear Power Generation Plant |
40 |
2.38% |
7.22% |
|
4 Transmission lines, cables and other network assets |
40 |
2.38% |
7.22% |
|
5 Wind Power Generation Plant |
22 |
4.32% |
12.73% |
|
6 Electric Distribution Plant |
35 |
2.71% |
8.20% |
|
7 Gas Storage and Distribution Plant |
30 |
3.17% |
9.50% |
|
8 Water Distribution Plant including pipelines |
30 |
3.17% |
9.50% |
|
(vii) Plant and Machinery used in manufacture of |
|
|
|
|
1 Sinter Plant |
20 |
4.75% |
13.91% |
|
2 Blast Furnace |
20 |
4.75% |
13.91% |
|
3 Coke Ovens |
20 |
4.75% |
13.91% |
|
4 Rolling mill in steel plant |
20 |
4.75% |
13.91% |
|
5 Basic Oxygen Furnace Converter |
25 |
3.80% |
11.29% |
|
(viii) Plant and Machinery used in manufacture of non ferrous metals |
|
|
|
|
1 Metal pot line [NESD] |
40 |
2.38% |
7.22% |
|
2 Bauxite crushing and grinding section |
40 |
2.38% |
7.22% |
|
3 Digester Section [NESD] |
40 |
2.38% |
7.22% |
|
4 Turbine [NESD] |
40 |
2.38% |
7.22% |
|
5 Equipments for Calcinations [NESD] |
40 |
2.38% |
7.22% |
|
6 Copper Smelter [NESD] |
40 |
2.38% |
7.22% |
|
7 Roll Grinder |
40 |
2.38% |
7.22% |
|
8 Soaking Pit |
30 |
3.17% |
9.50% |
|
9 Annealing Furnace |
30 |
3.17% |
9.50% |
|
10 Rolling Mills |
30 |
3.17% |
9.50% |
|
11 Equipments for Scalping, Slitting, etc. [NSED] |
30 |
3.17% |
9.50% |
|
12 Surface Miner, Ripper Dozer, etc. used in mines |
25 |
3.80% |
11.29% |
|
13 Copper refining plant [NSED] |
25 |
3.80% |
11.29% |
|
(ix) Plant and Machinery used in medical and surgical operations [NESD] |
|
|
|
|
1 Electrical Machinery, X-ray and electrotherapeutic apparatus and accessories thereto, medical, diagnostic equipments, namely, Cat-scan, Ultrasound Machines, ECG Monitors, etc. |
13 |
7.31% |
20.58% |
|
2 Other Equipments |
15 |
6.33% |
18.10% |
|
(x) Plant and Machinery used in manufacture of pharmaceuticals and chemicals [NESD] |
|
|
|
|
1 Reactors |
20 |
4.75% |
13.91% |
|
2 Distillation Columns |
20 |
4.75% |
13.91% |
|
3 Drying equipments / Centrifuges and Decanters |
20 |
4.75% |
13.91% |
|
4 Vessel / Storage tanks |
20 |
4.75% |
13.91% |
|
(xi) Plant and Machinery used in civil construction |
|
|
|
|
1 Concreting, Crushing, Piling Equipments and Road Making Equipments |
12 |
7.92% |
22.09% |
|
2 Heavy Lift Equipments – |
|
|
|
|
– Cranes with capacity more than 100 tons |
20 |
4.75% |
13.91% |
|
– Cranes with capacity less than 100 tons |
15 |
6.33% |
18.10% |
|
3 Transmission line, TunnellingEquipments [NESD] |
10 |
9.50% |
25.89% |
|
4 Earth-moving equipments |
9 |
10.56% |
28.31% |
|
5 Others including Material Handling / Pipeline / Welding Equipments [NESD] |
12 |
7.92% |
22.09% |
|
(xii) Plant and Machinery used in salt works [NESD] |
15 |
6.33% |
18.10% |
|
(V) Furniture and fittings [NESD] |
|
|
|
|
(a) General furniture and fittings |
10 |
9.50% |
25.89% |
|
(b) Furniture and fittings used in hotels, restaurants and boarding houses, schools, colleges and other education institutions, libraries, welfare centres, meeting halls, cinema houses, theatres and circuses and furniture and fittings let out on hire for used on occasion of marriages and similar functions |
8 |
11.88% |
31.23% |
|
(VI) Motor Vehicles [NESD] |
|
|
|
|
(a) Motor cycles, scooters and other mopeds |
10 |
9.50% |
25.89% |
|
(b) Motor buses, motor lorries, motor cars and motor taxies used in a business of running them on hire |
6 |
15.83% |
39.30% |
|
(c) Motor buses, motor lorries, motor cars and motor taxies other than those used in a business of running them on |
8 |
11.88% |
31.23% |
|
(d) Motor tractors, harvesting combines and heavy vehicles |
8 |
11.88% |
31.23% |
|
(e) Electrically operated vehicles |
8 |
11.88% |
31.23% |
|
(VII) Ships [NESD] |
|
|
|
|
(a) Ocean-going ships |
|
|
|
|
(i) Bulk Carriers and liner vessels |
25 |
3.80% |
11.29% |
|
(ii) Crude tankers, product carriers and easy chemical carriers with or without conventional |
20 |
4.75% |
13.91% |
|
(iii) Chemicals and Acid Carriers |
|
|
|
|
1 With Stainless steel tanks |
25 |
3.80% |
11.29% |
|
2 With other tanks |
20 |
4.75% |
13.91% |
|
(iv) Liquefied gas carriers |
30 |
3.17% |
9.50% |
|
(v) Conventional large passenger vessels which are used for cruise purpose also |
30 |
3.17% |
9.50% |
|
(vi) Coastal service ships of all categories |
30 |
3.17% |
9.50% |
|
(vii) Offshore supply and support vessels |
20 |
4.75% |
13.91% |
|
(viii) Catamarans and other high speed passenger for ships or boats |
20 |
4.75% |
13.91% |
|
(ix) Drill ships |
25 |
3.80% |
11.29% |
|
(x) Hovercrafts |
15 |
6.33% |
18.10% |
|
(xi) Fishing vessels with wooden hull |
10 |
9.50% |
25.89% |
|
(xii) Dredgers, tugs, barges, survey launches and other similar ships used mainly for dredging |
14 |
6.79% |
19.26% |
|
(b) Vessels ordinarily operating on inland waters |
|
|
|
|
(i) Speed boats |
13 |
7.31% |
20.58% |
|
(ii) Other vessels |
28 |
3.39% |
10.15% |
|
(VIII) Aircrafts or Helicopters [NESD] |
20 |
4.75% |
13.91% |
|
(IX) Railway siding, locomotives, rolling stocks, tramways and railway used by concerns, excluding railway |
15 |
6.33% |
18.10% |
|
(X) Ropeway structures [NESD] |
15 |
6.33% |
18.10% |
|
(XI) Office equipments [NESD] |
5 |
19.00% |
45.07% |
|
(XII) Computers and data processing units [NESD] |
|
|
|
|
(a) Servers and networks |
6 |
15.83% |
39.30% |
|
(b) End user devices, such as, desktops, laptops, etc. |
3 |
31.67% |
63.16% |
|
(XIII) Laboratory equipment [NESD] |
|
|
|
|
(a) General laboratory equipment |
10 |
9.50% |
25.89% |
|
(b) Laboratory equipments used in education institutions |
5 |
19.00% |
45.07% |
|
(XIV) Electrical Installations and Equipment [NESD] |
10 |
9.50% |
25.89% |
|
(XV) Hydraulic woks, pipelines and sluices [NESD] |
15 |
6.33% |
18.10% |
Residual Value
The worth of an investment’s residual value is its worth at the time of disposal. The residual price should not exceed 5% of the investment’s initial price. A firm may employ a variable rate of depreciation, usable life, or resale value than that specified in schedule II of the act. In these circumstances, the corporation should clarify why the gap exists to the investors. They have to attach the justification to the report of financial position by the board members. The directors have to attach the technical report supporting the use of alternative depreciation levels or the residual cost. The experts have to write the technological report.
Also Read: What Is a Dormant Company? Definition and Eligibility
Useful Life – Based on Projection
The useful life is a forecast or prediction that one makes at the time of purchasing. The investment’s UL may or may not correspond to the number of production units it generates over its lifetime. The definition of the useful life of a property is the total number of years one can use for business purposes. The volume of output or same units estimated by the business to gain from the property refers to the UL. The UL and degradation levels should adhere to schedule II standards.
Mode of Expression – Percentage vs Years
One can express the depreciation rates as per cent; on the other hand, one can express usable life in years. One can state, for instance, that a manufacturing facility has to depreciate for more than thirty years, and one may also claim that those factory structures can depreciate at 9.5%.
Conclusion
The requirements of Schedule II of the Companies Act, 2013, significantly influence all Indian businesses. As a result, we all must grasp these rules, as they will affect company depreciation accounts. Also, throughout the audits, make sure you charge depreciation per Schedule II of the Act.
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