Amortization refers to the gradual reduction of an intangible asset’s value over its useful life or the scheduled repayment of a loan over time through regular payments. In the Indian accounting and tax context, it is commonly used in two areas: accounting for intangible assets (like patents, trademarks, or goodwill) and managing financial liabilities such as term loans.
When businesses acquire intangible assets, the cost is not expensed all at once. Instead, they spread it over the asset’s useful life, as per the applicable accounting standards like the Companies Act, 2013 and Indian Accounting Standards (Ind AS). This process is called amortization. It helps businesses reflect a more accurate financial position by gradually accounting for the cost of the asset in their Profit and Loss statement.
Amortization is also relevant in loan management. Many small businesses in India take business loans, and their repayment is structured in Equated Monthly Installments (EMIs). Each EMI includes a portion of the principal and interest. Over time, the principal component increases while the interest component decreases. This structured loan reduction is also termed as amortization.
For compliance and tax filing purposes, proper amortization ensures accurate reporting of expenses and assets. It affects taxable income calculations and is essential for audits, loan applications, and regulatory filings. Businesses should maintain amortization schedules to support claims during assessments or inspections.
Understanding amortization is crucial for making informed financial decisions, managing long-term investments, and ensuring compliance with Indian financial reporting norms.