Depreciation on Business Assets: Rates, WDV Method & Calculation Guide (FY 2026-27)

If your business owns any physical or intangible assets, from office computers and furniture to factory machinery and commercial vehicles, depreciation is one of the most significant tax deductions available to you every year. Yet many small business owners either skip it (losing legitimate deductions) or calculate it incorrectly (inviting scrutiny).

This guide explains the depreciation framework under the Income Tax Act 2025, the rate chart, the block-of-assets concept, and the step-by-step WDV calculation with a worked example that any business owner or CA can apply directly.

What Depreciation Means Under Income Tax

Depreciation is the tax deduction that accounts for the reduction in value of a business asset due to wear and tear, usage, or obsolescence over time.

When a business buys a computer for Rs 80,000, it cannot deduct the entire Rs 80,000 from profits in the year of purchase. Instead, it claims a portion each year as depreciation until the asset's tax value reaches zero (or near zero).

This deduction is available against business or professional income. It reduces your taxable profit, which directly reduces your tax liability.

Who can claim depreciation:

• Any person (individual, HUF, firm, LLP, company) earning income from business or profession
• The asset must be owned by the assessee (or held under a finance lease)
• The asset must be used for business purposes during the relevant financial year

Who cannot claim depreciation:

• Individuals using assets purely for personal purposes
• Businesses opting for presumptive taxation under Section 44AD or 44ADA (depreciation is deemed already allowed within the presumptive income)

Section 33: The Legal Framework

Under the new Income Tax Act 2025 (effective from FY 2026-27), depreciation provisions are governed by Section 33 (formerly Section 32 of the Income Tax Act 1961).

The substantive rules remain unchanged from the earlier regime:

• Depreciation is computed using the Written Down Value (WDV) method
• Assets are grouped into blocks, each with a prescribed rate
• Rates are specified in Appendix I to the Income Tax Rules (now Rule 25 of the Draft IT Rules 2026)
• The 180-day rule, additional depreciation, and block cessation rules continue as before

If you are filing returns for FY 2025-26 (AY 2026-27) under the old act, Section 32 applies. For FY 2026-27 onwards (AY 2027-28), Section 33 of the new act applies. The rates and methodology are the same.

Block of Assets: How It Works

Under income tax, you do not depreciate individual assets separately. Instead, all assets that fall under the same class and carry the same depreciation rate are grouped into one block of assets.

For example, if your business owns three computers bought in different years, all three form part of a single block (Computers at 40%). Their individual identities merge. You compute depreciation on the block's collective WDV, not on each machine.

Why this matters:

• When you sell one asset from a block, you reduce the block's WDV by the sale proceeds (not the original cost of that specific asset)
• When you add a new asset to the block, its cost gets added to the block's WDV
• You never need to track individual asset depreciation schedules for tax purposes (though you should maintain an asset register for audit trail)

When a block ceases to exist:

If all assets in a block are sold or transferred during the year:

• If sale proceeds exceed the block's opening WDV plus additions: the excess is a Short Term Capital Gain (regardless of holding period)
• If sale proceeds are less than the block's WDV: the shortfall is a Short Term Capital Loss

Depreciation Rate Chart (FY 2026-27)

The following rates apply under Appendix I of the Income Tax Rules:

Part A: Tangible Assets

Part B: Intangible Assets

Special Note on Concessional Tax Regime

From FY 2026-27, businesses opting for the concessional tax regime (lower corporate tax rates under Section 115BAA/115BAB equivalent in new act) face a 40% cap on depreciation rates under Draft IT Rules 2026. This means assets that normally qualify for rates above 40% will be capped at 40%.

WDV Calculation: Step-by-Step Formula

The Written Down Value method works as follows:

Step 1: Determine Opening WDV of the Block

This is the closing WDV from the previous year (or the actual cost if the asset is new and this is the first year).

Step 2: Add Acquisitions

Add the actual cost of any new assets acquired and put to use during the year.

Step 3: Subtract Disposals

Subtract the money received (or receivable) for any assets in the block that were sold, discarded, or demolished during the year.

Step 4: Compute Depreciation

Apply the prescribed rate to the adjusted WDV.

Formula:

Adjusted WDV = Opening WDV + Additions - Deletions (sale proceeds)
Depreciation = Adjusted WDV × Prescribed Rate
Closing WDV = Adjusted WDV - Depreciation

Important: For assets put to use for less than 180 days during the year of acquisition, only 50% of the normal rate applies to those specific additions.

The 180-Day Rule

If a business asset is acquired and put to use for less than 180 days in the financial year, only half the normal depreciation is allowed on that particular addition.

Example: You buy a machine on 15 November 2026 (FY 2026-27 runs April to March). From November 15 to March 31 is approximately 137 days, which is less than 180 days. So this machine gets depreciation at 7.5% (half of 15%) in its first year. From the second year onward, full 15% applies on the block WDV.

When does the clock start? The date the asset is put to use for business purposes, not the date of purchase or installation.

Assets purchased between October and March of a financial year will typically fall under this rule, since they get less than 180 days of use before March 31.

Additional Depreciation for Manufacturing Businesses

If your business is engaged in manufacture or production of any article or thing, and you acquire and install new plant and machinery (not second-hand), you are entitled to an additional depreciation of 20% of the actual cost in the first year.

Conditions:

• The assessee must be in the business of manufacturing or production (or power generation)
• The machinery must be new (not previously used by anyone)
• It must be plant or machinery (not buildings, furniture, or office equipment)
• Certain items are excluded: ships, aircraft, second-hand machinery, machinery installed in office premises

180-day interaction: If the new plant and machinery is used for less than 180 days in the year of acquisition, only 10% additional depreciation (half of 20%) is allowed that year. The remaining 10% is allowed in the immediately succeeding year.

Practical impact: A manufacturing SME buying new machinery worth Rs 10 lakh gets:

• Normal depreciation: 15% = Rs 1,50,000
• Additional depreciation: 20% = Rs 2,00,000
• Total first-year deduction: Rs 3,50,000 (35% of cost)

Worked Example: Computing Depreciation for an SME

Scenario: ABC Traders (a partnership firm) has the following assets:

Depreciation computation:

1. Office Building (10%)

• Adjusted WDV: Rs 25,00,000
• Depreciation: Rs 25,00,000 × 10% = Rs 2,50,000
• Closing WDV: Rs 22,50,000

2. Furniture (10%)

• Furniture added in June 2026 (will be used more than 180 days before March 31): full rate applies
• Adjusted WDV: Rs 3,00,000 + Rs 80,000 = Rs 3,80,000
• Depreciation: Rs 3,80,000 × 10% = Rs 38,000
• Closing WDV: Rs 3,42,000

3. Plant & Machinery (15%)

• Machine added in May 2026 (more than 180 days of use): full rate
• Adjusted WDV: Rs 12,00,000 + Rs 5,00,000 - Rs 2,00,000 = Rs 15,00,000
• Depreciation: Rs 15,00,000 × 15% = Rs 2,25,000
• Closing WDV: Rs 12,75,000

4. Computers (40%)

• Computer added in December 2026: only ~120 days before March 31, so 180-day rule applies (half rate = 20%)
• Depreciation on existing block: Rs 1,20,000 × 40% = Rs 48,000
• Depreciation on new addition: Rs 1,50,000 × 20% = Rs 30,000
• Total depreciation: Rs 78,000
• Closing WDV: Rs 1,20,000 + Rs 1,50,000 - Rs 78,000 = Rs 1,92,000

Total depreciation claimed: Rs 2,50,000 + Rs 38,000 + Rs 2,25,000 + Rs 78,000 = Rs 5,91,000

This Rs 5,91,000 is deducted from ABC Traders' business income, directly reducing taxable profit.

Depreciation Is Mandatory

A critical rule that many small business owners miss: depreciation is deemed to have been allowed whether you actually claim it in your return or not.

This means:

• If you forget to claim depreciation one year, you lose that deduction permanently
• The WDV of your assets still reduces by the eligible depreciation amount
• You cannot "accumulate" unclaimed depreciation and claim it in a future year

The only exception is unabsorbed depreciation. If your total income is nil or your depreciation exceeds your income, the unabsorbed portion can be carried forward indefinitely and set off against income of subsequent years.

Assets That Get 100% Deduction in One Year

Certain assets effectively get written off entirely in the year of purchase because of their very high rates or specific provisions:

• Scientific research assets (100% deduction under Section 35 equivalent)
• Assets costing Rs 5,000 or less may be fully written off in some cases (check your tax advisor)

Note: From AY 2018-19, many assets that previously had 100% depreciation (pollution control equipment, energy-saving devices, etc.) were reduced to 40%.

Common Mistakes SMEs Make With Depreciation

1. Claiming depreciation on personal assets: An asset used partly for personal purposes qualifies for depreciation only on the business-use proportion.

2. Missing the 180-day rule: Buying assets late in the year without realizing you only get half the depreciation.

3. Not maintaining an asset register: While the block concept merges individual assets, you still need records of purchase dates, costs, and disposal proceeds for audit purposes.

4. Ignoring additional depreciation: Manufacturing businesses that do not claim the 20% additional depreciation on eligible new machinery leave significant tax savings on the table.

5. Confusing Companies Act depreciation with Income Tax depreciation: The rates and methods differ. Your books of accounts may follow Companies Act (SLM method, different useful life), but your tax return uses income tax rates (WDV method, prescribed rates). These are two separate calculations.

6. Selling assets without reporting capital gains: When sale proceeds exceed the block WDV, the excess is a short-term capital gain that must be reported.

Depreciation and Presumptive Taxation

If your business is assessed under the presumptive taxation scheme:

• Section 44AD (business with turnover up to Rs 2 crore / Rs 3 crore for digital receipts): Your presumptive income (6% or 8% of turnover) is deemed to be after all deductions including depreciation. You cannot separately claim depreciation.

• Section 44ADA (professionals with gross receipts up to Rs 75 lakh): Same rule. The 50% presumptive profit is after all deductions.

If you opt out of presumptive taxation and maintain books of accounts, you must compute depreciation as explained in this guide and claim it in your ITR.

Tax Garden Can Help

Depreciation computation requires:

• Correct classification of assets into blocks
• Accurate WDV tracking year over year
• Proper application of the 180-day rule
• Identification of additional depreciation eligibility
• Reconciliation between books depreciation and tax depreciation

Tax Garden handles all of this as part of your annual compliance. We maintain your asset register, compute block-wise depreciation, and file your return with the depreciation schedule correctly populated.

For related guides, see:

• Tax Audit Under Section 44AB: Thresholds and Form 3CD
• Section 44AD Presumptive Taxation for Small Businesses
• ITR Filing Guide AY 2026-27
• Income Tax Act 2025: What Changed

Frequently Asked Questions

What is the depreciation rate on computers under income tax?

Computers and computer software are depreciated at 40% per annum under the WDV method. If the computer is purchased and used for less than 180 days in the year of acquisition, only 20% (half rate) is allowed in that year.

Can I claim depreciation on a car used for business?

Yes. Motor cars used for business purposes are depreciated at 15% under the WDV method. The car must be registered in the business name or used predominantly for business. If used partly for personal purposes, only the business-use proportion qualifies.

What is additional depreciation and who can claim it?

Additional depreciation is an extra 20% deduction on the actual cost of new plant and machinery available to manufacturing or power generation businesses. The machinery must be brand new (not second-hand) and must not be installed in office premises.

Is depreciation compulsory even if I do not claim it?

Yes. Under income tax law, depreciation is deemed to have been allowed whether or not you actually claim it in your return. Your asset WDV reduces by the eligible amount every year regardless.

What happens if I sell an asset for more than the block WDV?

If the sale proceeds from assets in a block exceed the block's opening WDV plus additions for the year, the excess is treated as a Short Term Capital Gain, regardless of how long you held the asset.

Can I claim depreciation under presumptive taxation (44AD)?

No. Under presumptive taxation schemes (Section 44AD or 44ADA), the deemed profit percentage already accounts for all expenses including depreciation. Separate depreciation claims are not allowed.

What is the 180-day rule in depreciation?

If a business asset is put to use for less than 180 days in the financial year of acquisition, only 50% of the normal depreciation rate is allowed on that asset for that year. Full rate applies from the next year onward.

Sources

This guide is based on Section 33 of the Income Tax Act 2025, Rule 25 and Appendix I of the Draft Income Tax Rules 2026, the official depreciation rate chart published by the Income Tax Department of India (incometaxindia.gov.in), and CBDT notifications governing depreciation rates. The substantive provisions (WDV method, block of assets, rates, 180-day rule, additional depreciation) remain unchanged from the earlier Section 32 framework. Rates and rules verified against ClearTax, BajajFinserv, and TaxGuru references as of May 2026. Always consult a qualified tax professional for asset-specific classification.