Income-tax depreciation: block of assets and WDV

Your financial statements depreciate each asset over its useful life under Schedule II of the Companies Act, 2013 (see our guide on Schedule II depreciation). The Income-tax Act takes a different route. Section 32 of the Income-tax Act, 1961 allows depreciation at prescribed percentages on the written down value (WDV) of a block of assets, and the rates sit in Appendix I to the Income-tax Rules, 1962.

Because the two calculations follow different rules, most companies keep a second, memorandum book for tax. It is never posted to the general ledger. It feeds the tax computation, the tax audit report and the deferred-tax working, and the difference between the two books has to be explained every year (see book vs tax depreciation reconciliation).

Three features set the tax book apart:

• depreciation is computed per block, not per asset;
• there is no residual value and no day-based pro-rata: the full rate applies, or half the rate under the 180-day rule;
• depreciation is allowed only on assets owned by the assessee and used for the business during the year.

Section 2(11) defines a block of assets as a group of assets falling within a class of assets (buildings, machinery, plant, furniture, know-how, patents and so on) for which the same percentage of depreciation is prescribed. Blocks are kept per assessee, that is, per PAN, not per branch or factory.

Two points follow. First, two classes that happen to carry the same rate are still separate blocks: buildings at 10% and furniture at 10% are not merged. Second, once an asset joins a block it loses its individual identity for tax purposes. You no longer track its tax WDV; you track the block's.

Actual cost under section 43(1)

Additions enter the block at actual cost: the cost of acquisition less any part met directly or indirectly by another person or authority. Two adjustments matter in daily work:

• GST for which input tax credit is claimed is excluded from cost; GST that is blocked (for example under section 17(5) of the CGST Act) is included. See GST ITC on capital goods.
• A payment above ₹10,000 to a person in a day made otherwise than through the prescribed banking or electronic modes is excluded from actual cost.

The section 43(6) roll-forward

For each block, each year:

1. Start with the opening WDV.
2. Add the actual cost of assets that joined the block during the year.
3. Deduct the moneys payable on assets sold, discarded, demolished or destroyed during the year, together with any scrap value.
4. Apply the rate (or half rate) to the result to get depreciation.
5. The closing WDV is the result of step 3 less the depreciation allowed.

The deduction in step 3 is the sale consideration, not the tax WDV of the asset sold, because there is no asset-wise tax WDV. It cannot take the block below zero; that case is handled by section 50, below.

FixedAsset Pro adds an asset that is bought but not yet put to use to the block in the year it is first used. Some practitioners add it in the year of acquisition, so agree the approach with your CA.

The second proviso to section 32(1) restricts depreciation to 50% of the rate where an asset is acquired during the year and put to use for less than 180 days in that year. The common practice is to count days inclusively, from the put-to-use date to 31 March.

The half rate applies only in the year the asset is acquired and put to use. From the next year the asset is simply part of the block's WDV and carries the full rate. Because the boundary dates (3 to 5 October) depend on the day-count convention, confirm them with your CA when an addition falls near the line.

Note the order used here: the sale proceeds are deducted from the full-rate part first, which leaves the half-rate addition intact. When proceeds are larger than the opening WDV plus full-rate additions, the excess is taken against the half-rate additions. This ordering is common in tax audit practice but is not spelt out in the Act, so treat it as a point to confirm.

An assessee engaged in the manufacture or production of any article or thing, or in the generation, transmission or distribution of power, can claim additional depreciation of 20% of the actual cost of new plant and machinery acquired and installed. The base is the asset's cost, not the block's WDV, but the amount is still depreciation actually allowed and so it reduces the block's WDV.

Where the new asset is used for less than 180 days in the year of acquisition, 10% is allowed that year and the balance 10% in the immediately following year (the third proviso to section 32(1), from AY 2016-17).

Assets that do not qualify

• ships and aircraft;
• machinery or plant used by any other person, in or outside India, before installation by the assessee (second-hand machinery);
• machinery or plant installed in office premises or residential accommodation, including a guest house;
• office appliances and road transport vehicles;
• machinery or plant whose whole actual cost is allowed as a deduction in any one year.

A higher rate of 35% applied to certain new plant and machinery installed in notified backward areas of some states between 1-4-2015 and 31-3-2020; check whether any such assets remain relevant to you.

A domestic company that opts for the 22% rate under section 115BAA computes its income without certain deductions, and additional depreciation under section 32(1)(iia) is one of them. The same restriction applies under section 115BAB and the other concessional regimes. Normal depreciation is unaffected. The option, once exercised, cannot be withdrawn.

In the example above, a company under section 115BAA would claim ₹75,000 in FY 2025-26 (closing WDV ₹9,25,000) and ₹1,38,750 in FY 2026-27, with no additional depreciation in either year.

Rule 5 was amended so that, for a company opting for section 115BAA, unabsorbed additional depreciation that could not be set off was added back to the WDV of the block, and Form 3CD carries a column for this adjustment. The detailed mechanics should be confirmed with your CA before you record an opening adjustment.

Depreciable assets are taxed on sale through the block, and section 50 deems any resulting gain to be a short-term capital gain, irrespective of how long the assets were held.

The third row is often missed: a loss is recognised only when the block ceases. While even one asset remains, the unrecovered value continues to be depreciated.

Where a tax audit is required, clause 18 of Form 3CD reports depreciation block by block. Your register should be able to produce every column without manual work.

The new Act

The Income-tax Act, 2025 replaces the 1961 Act from tax year 2026-27, which began on 1 April 2026. The block concept and WDV method are expected to continue, but the provisions discussed here (sections 2(11), 32, 43(1), 43(6), 50 and 115BAA) have new numbers, the terms 'previous year' and 'assessment year' give way to 'tax year', and the tax audit reporting format may change. This guide keeps the 1961 Act references because closing balances for FY 2025-26 and earlier were computed under them. Before filing for tax year 2026-27, map each provision to the new Act and re-confirm rates with your CA.