Reconciling book and tax depreciation

Every Indian company keeps two depreciation computations for the same assets. The Companies Act book follows section 123 and Schedule II, and it is the figure posted to the ledger and shown in the financial statements. The income-tax computation follows section 32 of the Income-tax Act, 1961 and the rates in Appendix I to the Income-tax Rules; it is a memorandum working that feeds the return and the tax audit report. The rules behind them differ at almost every step.

Because each line pulls in its own direction, a difference between the two charges is not an error. An unexplained difference is. The aim of the reconciliation is to show that every rupee of the gap comes from one of the recognised causes below.

Before any rate is applied, the two books can start from different numbers. The book cost is the capitalised cost under AS 10 or Ind AS 16. The tax figure is actual cost under section 43(1), and the following items commonly create a gap:

• GST. Where input tax credit is claimed, GST is left out of cost in both books. Where credit is blocked under section 17(5) of the CGST Act, GST is capitalised in both. Section 16(3) of the CGST Act denies credit on the tax component if depreciation is claimed on it, so the same invoice line should never carry both. If the two books treat the same invoice differently, that is a correction to make, not a reconciling item to carry.
• Cash payments. Payments otherwise than through banking channels above ₹10,000 to a person in a day are excluded from actual cost under section 43(1).
• Subsidies and grants that relate to the asset may reduce actual cost for tax, while the books follow the accounting standard on government grants.
• Foreign-currency loans. Exchange differences may be added to or deducted from actual cost under section 43A when paid, while the books follow AS 11 or Ind AS 21.
• Revaluation. An upward revaluation in the books has no effect on the tax block.
• Land. Land sits in the net block but is not depreciable and does not belong to any block.

Keep each of these as a named, documented line in the reconciliation. A line called "others" that grows every year is the first thing an auditor will question.

In the books, an asset is depreciated up to the day before disposal, and the difference between the net sale proceeds (excluding GST) and the NBV is a gain or loss in the statement of profit and loss. For tax, the asset does not exist on its own: the moneys payable on the sale, together with any scrap value, are simply deducted from the block. No separate gain or loss arises unless the deduction makes the block negative (short-term capital gain u/s 50(1)) or the block ceases because every asset in it has been transferred (short-term capital gain or loss u/s 50(2)).

Note that the tax deduction is the sale proceeds, not the NBV. That is why the clause 18 "deductions" column will rarely match the disposals column of the Schedule III note.

A reconciliation that survives review answers two questions: why the charge for the year differs, and why the closing carrying amount differs. The second check is the stronger one, because it catches errors that cancel out within a single year.

Part A: charge for the year

Part B: closing carrying amount

Check the arithmetic both ways: the difference for FY 2026-27 is ₹1,38,750 − ₹63,333.33 = ₹75,416.67, and ₹54,004.57 + ₹75,416.67 = ₹1,29,421.24, which equals ₹9,15,671.24 − ₹7,86,250. Both routes must give the same answer. You can reproduce each book with the Schedule II calculator and the income-tax depreciation calculator.

Because tax depreciation runs ahead in the early years and behind in the later years, the difference reverses over the asset's life. That is the textbook timing difference.

• AS 22 (companies not on Ind AS) looks at timing differences between accounting income and taxable income. Deferred tax is recognised on them at the tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets need reasonable certainty of future taxable income, and virtual certainty with convincing evidence where there are unabsorbed depreciation or carried-forward losses.
• Ind AS 12 takes a balance-sheet approach: the temporary difference is the carrying amount of the asset less its tax base. Here the tax base is the WDV attributable to the asset, which in practice means working with block WDVs alongside the register.

In the example, the difference at 31 March 2026 is ₹54,004.57, and the asset's carrying amount is higher than its tax WDV, so it gives rise to a deferred tax liability. Purely to illustrate the arithmetic, take a rate of 25.168% (22% under section 115BAA plus a 10% surcharge and 4% cess). The liability is ₹54,004.57 × 25.168% = ₹13,591.87 at 31 March 2026 and ₹1,29,421.24 × 25.168% = ₹32,572.74 at 31 March 2027, so the deferred tax charge for FY 2026-27 is ₹18,980.87. The rate that applies to your company is a matter for your CA.

Permanent items, such as the land line, do not create deferred tax. A revaluation surplus is generally dealt with through the revaluation reserve rather than profit and loss. Keep the reconciliation in Part B at the level of detail your deferred tax working needs.

Clause 18 of the tax audit report shows, for each block: the rate, opening WDV, the section 115BAA adjustment, additions (with the date put to use and adjustments for GST credit, subsidy and exchange differences), deductions, depreciation allowable and closing WDV. Before the report is signed, tick each column against its source.

1. Opening WDV equals last year's closing WDV in clause 18 and in the return as filed.
2. Additions tie to the register's additions for the year, after removing land, items still in CWIP and items capitalised in the books but not yet put to use. Each addition carries its put-to-use date, which decides the 180-day split.
3. Deductions tie to sale proceeds and scrap value in the disposal register, not to NBV.
4. Depreciation allowable equals the figure in the computation of income, and agrees with line D (and E) of Part A.
5. Closing WDV agrees with line 6 of Part B and becomes next year's opening.

The section numbers in this guide are those of the Income-tax Act, 1961, which governs FY 2025-26 and earlier years. The Income-tax Act, 2025 applies from tax year 2026-27, and the tax audit form and its clause numbering may change with it. Check the corresponding references with your CA before relying on them for later years.