Amortisation refers to the gradual reduction of an intangible asset’s value over its useful life. In the Indian business and taxation context, this usually applies to non-physical assets such as goodwill, trademarks, patents, or copyrights. Unlike physical assets (which are depreciated), intangible assets are amortised in the books of accounts to reflect their declining value over time.
For small business owners and startups in India, understanding amortisation is important for proper financial reporting and tax compliance. When you purchase an intangible asset for your business, you can't deduct the entire cost in the year of purchase. Instead, you spread the expense over several years, which helps to align the cost with the income the asset generates.
Under the Income Tax Act, the concept of amortisation becomes particularly relevant while filing returns, calculating profits, or during audits. For instance, certain preliminary expenses incurred before starting a business—such as legal fees, registration charges, or feasibility studies—can be amortised over a period of five years under Section 35D. This ensures businesses can recover those initial costs in a tax-efficient manner.
Amortisation also plays a role in maintaining accurate books under the Companies Act and is crucial during statutory filings, loan applications, or while evaluating the financial health of a business.
To ensure your business stays compliant and takes full advantage of allowable deductions, it’s essential to maintain proper records of intangible assets and apply amortisation correctly. For detailed support on income tax filing and financial compliance, you can visit FinTax24’s income tax solutions.
In summary, amortisation helps businesses manage their intangible asset costs efficiently and ensures smoother tax planning and regulatory compliance.