- Section 33 separates accounting and tax depreciation starting from the twenty twenty-six tax year.
- Tax rules use prescribed blocks of assets rather than individual useful life estimates.
- Assets used for fewer than one hundred eighty days receive only half the normal rate.
From tax year 2026-27, Section 33 of the Income-tax Act, 2025 can let a business claim a different depreciation amount from the charge recorded in its financial statements. A ₹1,00,000 computer may produce ₹20,000 of accounting depreciation but ₹40,000 of tax depreciation when it qualifies for the full 40% rate.
The two calculations serve different purposes. Accounting spreads an asset’s depreciable cost across its expected useful life, while tax rules generally apply prescribed percentages to blocks of assets.
The distinction applies to businesses, professionals, freelancers, non-resident Indians operating Indian businesses and foreign companies with taxable Indian business operations. Each may need separate book and tax depreciation schedules.
Free toolSubstantial Presence Test CalculatorThe difference can affect reported profit, taxable income, deferred-tax accounting and the tax result when an asset is sold.
Accounting spreads cost across an asset’s useful life
Schedule II of the Companies Act, 2013 defines depreciation as the systematic allocation of an asset’s depreciable amount over its useful life. The depreciable amount usually equals cost less residual value.
A company estimates how long the asset will remain available for use or how many production units it will deliver. Residual value ordinarily cannot exceed 5% of original cost unless the company discloses and technically supports another estimate.
Wear, the passage of time, technological obsolescence, production changes and expected replacement can all reduce an asset’s economic usefulness. Depreciation does not, however, establish the asset’s market price.
Under the straight-line method, the annual charge is calculated as follows:
Annual depreciation = (Cost − residual value) ÷ useful life
A computer costing ₹1,00,000, with nil residual value and a five-year useful life, therefore generates ₹20,000 each year when available throughout the year. After year one, its accumulated depreciation is ₹20,000 and its accounting carrying amount is ₹80,000.
That ₹80,000 is a book figure, not necessarily the computer’s resale value. A machine with a ₹4 lakh carrying amount could have a market value of ₹6 lakh or ₹2 lakh.
The accounting entry debits depreciation expense by ₹20,000 and credits accumulated depreciation by ₹20,000. The entry reduces accounting profit but does not create a new cash payment, because the cash generally left the business when the computer was purchased.
Tax rules use blocks instead of the book schedule
The tax calculation normally groups assets carrying the same prescribed rate into a block. The deduction is then based on the block’s written-down value rather than the remaining cost of each individual asset.
Section 41 determines that value by taking account of the previous written-down value, earlier depreciation, additions, sale proceeds from assets removed from the block and specified adjustments, including those arising from slump sales.
The tax identity of an individual asset becomes less important after it enters the block. Businesses must instead track the block’s opening value, additions, disposals and closing balance.
| Asset block | Prescribed rate |
|---|---|
| Residential buildings, excluding hotels and boarding houses | 5% |
| Other ordinary buildings | 10% |
| Furniture and electrical fittings | 10% |
| General machinery and plant | 15% |
| Ordinary motor cars not used in the business of running them on hire | 15% |
| Computers, including qualifying computer software | 40% |
| Specified intangible assets | 25% |
Appendix I to Rule 25 sets the rates as percentages of written-down value. Other classifications can carry rates of 20%, 30% or 40%, so a business must check the relevant entry rather than automatically applying 15% to every machine.
Ownership and business use determine eligibility
The provision covers specified assets owned wholly or partly by the taxpayer and used wholly and exclusively for business or professional work. Eligible tangible assets include buildings, machinery, plant and furniture.
Eligible intangible assets include know-how, patents, copyrights, trademarks, licences, franchises and similar commercial rights acquired on or after April 1, 1998. Goodwill of a business or profession remains excluded.
Personal ownership alone is not enough. A laptop used only privately does not qualify, while a freelancer using a computer for both work and personal activities may claim only the fair business-use portion.
An Assessing Officer can restrict the deduction where a building, machine, plant or furniture is not used wholly and exclusively for business or profession. Land ordinarily is not depreciable, although a building, improvement or other qualifying structure on the land may be.
Leasehold work can qualify in some circumstances. Construction, renovation, extension or improvement carried out by a business occupying premises under a lease or another occupancy right may be treated as a building owned by that taxpayer for depreciation purposes.
The computer example shows the two-year tax gap
The ₹1,00,000 computer receives a ₹20,000 annual book charge under five-year straight-line depreciation. Its qualifying tax block carries a 40% rate.
That produces this first-year comparison:
| Calculation | Accounting books | Tax computation |
|---|---|---|
| Original cost | ₹1,00,000 | ₹1,00,000 |
| First-year depreciation | ₹20,000 | ₹40,000 |
| Closing value | ₹80,000 | ₹60,000 |
In the next tax year, 40% of the ₹60,000 tax value would be ₹24,000, assuming the block continues and there are no additions or disposals. The accounting charge may remain ₹20,000.
Neither figure replaces the other. The book carrying amount and tax written-down value can diverge, creating deferred-tax implications for entities required to account for them.
The same five-year accounting method also answers a separate machine question: a ₹5,00,000 machine with a 10-year life and no residual value produces ₹50,000 of annual accounting depreciation.
Assets used for fewer than 180 days receive half the normal rate
A qualifying asset acquired during the tax year and put to business or professional use for fewer than 180 days receives only 50% of the normal prescribed rate. The purchase or payment date is not necessarily the operational-use date.
For the ₹1,00,000 computer, the full 40% amount is ₹40,000. The restricted first-year amount is ₹20,000.
Installation records, delivery documents, user-allocation records, commissioning certificates and other operational evidence can establish when the asset entered use. The timing should be supported rather than inferred from the invoice date.
Omitted depreciation does not preserve the tax cost
The rules apply whether or not the taxpayer claims depreciation while calculating income. A taxpayer generally cannot retain a higher written-down value simply by leaving the deduction out of the return.
That rule affects later years, asset sales and returns prepared without a proper fixed-asset schedule. The tax value must reflect depreciation treated as allowable under the law.
Where depreciation exceeds business or professional profit, the unabsorbed amount is added to depreciation eligible in the succeeding tax year under Section 33(11). A business should reconcile current depreciation, the amount absorbed, the balance carried forward and later set-offs year by year.
New machinery may receive an additional deduction
Taxpayers engaged in manufacturing or producing an article or thing, or in generating, transmitting or distributing power, may qualify for additional depreciation on eligible new machinery or plant. The general additional amount is 20% of actual cost.
If the asset enters use for fewer than 180 days, 10% may be allowed in the first tax year and the remaining 10% in the immediately succeeding tax year.
The incentive excludes used machinery, office appliances, road transport vehicles, machinery installed in office or residential premises and assets whose entire cost is otherwise deductible. A machine being new to the taxpayer is not enough.
Sales can trigger the block rules
Selling a depreciated business asset does not automatically create an ordinary long-term capital gain. Section 74 applies special rules when the asset belongs to a depreciable block.
In one example, a block begins with a ₹6,00,000 written-down value, receives ₹1,00,000 of additions and produces ₹8,00,000 in sale consideration, with no transfer expenses. The resulting deemed short-term capital gain is ₹1,00,000.
The calculation compares sale proceeds with transfer expenses, the opening block value and additions during the year. It can apply even when the particular asset sold had been held for more than two or three years. If every asset leaves the block, the special provisions determine the resulting gain or loss.
Businesses should retain purchase invoices, payment proof, ownership or lease documents, installation evidence, asset identification numbers, locations, business-use records and personal-use details. The file should also show the accounting useful life, residual-value estimate, tax block, rate, opening and closing written-down values, sale documentation and the reconciliation between book and tax figures.
The records should identify assets belonging to and used by the Indian taxable operation when a business holds property in several countries. A separate schedule for financial reporting and income-tax computation will be needed from tax year 2026-27.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.
