Depreciation Rules and Block explained: this guide covers what Depreciation Rules and Block 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.
Depreciation is a critical deduction for businesses computing taxable income under the Income Tax Act 2025. Unlike accounting depreciation, which may use straight-line method, ITA 2025 mandates the Written Down Value (WDV) method on the block of assets concept. Understanding these rules is essential for accurate tax computation from Tax Year 2026-27.
Block of Assets: The Core Concept
Under ITA 2025, assets are not depreciated individually. Instead, all assets of the same class sharing the same depreciation rate are grouped into a block. The WDV of the block at the beginning of the year, plus additions during the year, minus sales/transfers during the year, gives the net WDV on which depreciation is calculated.
Standard Depreciation Rates
| Asset Class | Rate |
|---|---|
| Residential buildings | 5% |
| Non-residential buildings (non-temporary) | 10% |
| Temporary wooden structures | 40% |
| Furniture and fittings | 10% |
| Plant and machinery (general) | 15% |
| Pollution control equipment | 40% |
| Computers and peripherals/software | 40% |
| Intangible assets (patents, trademarks, know-how) | 25% |
| Vehicles (other than heavy) | 15% |
| Ships | 20% |
| Goodwill | Nil (abolished) |
50% Restriction in Year of Acquisition
If any asset is put to use for less than 180 days in the year of acquisition, only 50% of the normal depreciation is allowed on that asset in the first year. The remaining depreciation is available from the next Tax Year onwards.
Additional Depreciation for Manufacturing Units
New plant and machinery acquired by manufacturing companies (not second-hand) is eligible for additional depreciation of 20% in the first year (over and above normal depreciation). This additional depreciation is also subject to the 50% restriction if the asset is used for less than 180 days.
WDV Computation Example
Example: A company has a P&M block (15% rate).
- Opening WDV: Rs. 10,00,000
- Add: New machinery purchased July 2026 for Rs. 4,00,000 (used <180 days)
- Less: Machinery sold for Rs. 2,00,000
- Net WDV for depreciation: Rs. 12,00,000
- Normal depreciation (15%): Rs. 1,80,000
- 50% of normal on new asset (15% × Rs. 4L × 50%): Rs. 30,000 already included
- Additional depreciation on new asset (20% × Rs. 4L × 50%): Rs. 40,000
- Total depreciation: Rs. 1,80,000 + Rs. 40,000 = Rs. 2,20,000
Terminal Depreciation and Capital Gains on Block Dissolution
When all assets in a block are sold and the sale proceeds exceed the WDV, no depreciation is available and a short-term capital gain (charged as business income) arises. If sale proceeds are less than WDV after all assets in the block are sold, a terminal depreciation (business loss) is allowed in that year.
Unabsorbed Depreciation
Depreciation not fully absorbed against business income in a Tax Year becomes "unabsorbed depreciation." Unlike other business losses (8-year cap), unabsorbed depreciation can be carried forward indefinitely and set off against any head of income in subsequent years.
Assets Not Eligible for Depreciation
- Land (not depreciable)
- Goodwill (abolished under ITA 2025)
- Assets used exclusively for non-business/personal purposes
- Assets not "put to use" during the Tax Year
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