Depreciation Adjustments explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Clause 18(d) requires three depreciation adjustments inside the additions and deductions column — CENVAT credits, the section 43A change in the rate of exchange, and any subsidy, grant or reimbursement under Explanation 10 to section 43(1).
From the ICAI Guidance Note on Tax Audit (Revised 2026), the concluding edition under the Income-tax Act, 1961. For tax years under the Income-tax Act, 2025 the depreciation machinery sits in rule 25 of the Income-tax Rules, 2026 and the particulars in Form No. 26 under rule 47.
The three named depreciation adjustments
Sub-clause 18(d) requires additions and deductions during the year with dates, and for an addition the date put to use, "including adjustments on account of" three specific depreciation adjustments:
- Central Value Added Tax credits claimed and allowed under the Central Excise Rules, 1944, in respect of assets acquired on or after 1 March 1994;
- change in the rate of exchange of currency; and
- subsidy or grant or reimbursement, by whatever name called.
These are not optional refinements — each has its own column in the e-filing utility, and the TAQRB found exchange fluctuation adjustments reported in the annexure but not in the corresponding column of the utility, resulting in inconsistencies in reporting.
Depreciation adjustment 1 — input tax credit on capital goods
The clause names the CENVAT regime, but the live equivalent is GST. Paragraph 30.16 states the current test directly: the tax auditor should verify that the amount of GST input credit deducted from the cost of capital goods tallies with the credit availed on this account.
The logic is the same in both regimes and follows from section 43(1): actual cost is the cost to the assessee reduced by that portion met directly or indirectly by any other person or authority. A credit availed on capital goods is such a portion, so it comes out of actual cost — and out of the depreciable base. Of the three depreciation adjustments, this is the one most easily traced, because the credit register gives the figure directly.
Where input tax credit is blocked or not available under section 17 of the CGST Act, 2017, paragraph 26.13 requires it to be added to the cost of the capital goods. So the two directions coexist: credit availed reduces actual cost; credit blocked stays in it. Both need to be traced to the GST records rather than assumed from the invoice.
Depreciation adjustment 2 — section 43A, change in the rate of exchange
Paragraph 30.17 sets out the conditions. Section 43A applies where:
- the assessee has acquired an asset in any previous year from a country outside India for the purposes of his business or profession;
- in consequence of a change in the rate of exchange during any previous year after the acquisition;
- there is an increase or reduction in the liability of the assessee as expressed in Indian currency, compared with the liability at the time of acquisition;
- at the time of making the payment towards the whole or part of the cost of the asset, or towards repayment of the whole or part of the monies borrowed directly or indirectly in any foreign currency specifically for acquiring the asset, along with interest;
- the increase or reduction during the previous year which is taken into account at the time of making the payment;
- irrespective of the method of accounting followed,
is to be added to, or deducted from, the cost of the asset as defined in section 43(1).
Paragraph 30.18 draws the operative limit: "the extent of addition or reduction will be limited to the exchange difference actually paid during the previous year." The auditor must verify that the adjustments in the fixed asset schedule prepared for the income-tax depreciation computation are in accordance with section 43A, and that the information is provided under sub-clause (ii) of clause 18(d). He may prepare a reconciliation statement for his own records where the accounting treatment under the Accounting Standards differs, and should also refer to the Explanations to section 43A.
Under AS 11 or Ind AS 21 the exchange difference on a monetary liability is recognised as it arises. Section 43A adjusts the asset's cost only to the extent actually paid in the year, and irrespective of the method of accounting. The two figures will therefore differ almost every year an imported asset carries a foreign currency liability — which is exactly why the Guidance Note recommends a standing reconciliation, and why leaving the utility column blank shows up in review.
Depreciation adjustment 3 — subsidy, grant or reimbursement
Paragraph 30.19: Explanation 10 to section 43(1) provides that where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government, a State Government, any authority established under any law, or any other person, in the form of a subsidy, grant or reimbursement (by whatever name called), so much of the cost as is relatable to it shall not be included in the actual cost.
Where it cannot be related to a specific asset
The proviso apportions: the amount which bears to the total subsidy, reimbursement or grant the same proportion as that asset bears to all the assets in respect of, or with reference to, which the subsidy, grant or reimbursement is received, shall not be included in the actual cost of that asset.
Where it arrives in a later year
A subsidy within Explanation 10 in respect of an asset acquired in an earlier year but received during the year has to be deducted from the written down value of that asset in the year of receipt. It is not a retrospective restatement of the earlier year's actual cost.
Goodwill — the related depreciation adjustment at 18(cb)
Paragraph 30.19 also records that intangible assets being goodwill of a business or profession do not qualify for depreciation from 1 April 2021, that is A.Y. 2021-22, by the Finance Act, 2021 — goodwill having been eligible up to A.Y. 2020-21. That exclusion is reported at sub-clause (cb).
And the arithmetic that ties the depreciation adjustments together: for working out depreciation, the WDV under sub-clause (c) as reduced by the amounts reported in sub-clauses (ca) and (cb) should be considered, and that amount is reported in sub-clause (cc). The three sub-clause (d) depreciation adjustments then work on the additions and deductions of the year, while (ca) and (cb) work on the opening balance.
Worked example
| Item | Effect on actual cost or WDV | Where reported |
|---|---|---|
| Imported machine, invoice USD 500,000; GST paid on import, ITC availed Rs 9,00,000 | Reduce actual cost by Rs 9,00,000 | 18(d)(i) column |
| Rupee weakened; instalment paid in the year created an additional liability of Rs 6,40,000 | Add Rs 6,40,000 to cost — limited to the amount actually paid | 18(d)(ii) column |
| Unpaid balance of the foreign liability restated in the accounts by Rs 11,00,000 | No section 43A adjustment — not yet paid | Reconciliation working paper |
| State capital subsidy of Rs 20,00,000 received against a Rs 2 crore project covering four assets | Apportion across the four assets under the proviso and exclude from each actual cost | 18(d)(iii) column |
| Subsidy of Rs 5,00,000 received this year for a machine bought two years ago | Deduct from the WDV in the year of receipt | 18(d)(iii) column |
| Goodwill of Rs 30,00,000 in the intangible block | Excluded from the depreciable base | 18(cb), flowing into 18(cc) |
Audit checklist
- Schedule the depreciation adjustments asset by asset before completing the clause 18 statement.
- Tie the input tax credit on capital goods deducted from cost to the credit actually availed in the GST records.
- Add blocked credit to cost where section 17 denies it.
- Restrict the section 43A adjustment to the exchange difference actually paid in the year.
- Keep a reconciliation between the accounting exchange treatment and the section 43A adjustment.
- Enter the exchange adjustment in the utility column, not only in an annexure.
- Test every subsidy, grant or reimbursement against Explanation 10, and apportion where it is not asset-specific.
- Deduct a late-received subsidy from the WDV in the year of receipt.
- Exclude goodwill at 18(cb) and compute depreciation on 18(cc).
Common mistakes
- Adjusting the full accounting exchange difference rather than the amount paid.
- Reporting the exchange adjustment only in an annexure, leaving the utility's depreciation adjustments column blank.
- Treating a general subsidy as outside Explanation 10 because it names no asset.
- Restating an earlier year for a subsidy received later.
- Leaving goodwill in the intangible block after A.Y. 2020-21.