Depreciation refers to the gradual reduction in the value of a tangible asset over time due to wear and tear, usage, or obsolescence. In the Indian financial and taxation system, depreciation is an important concept for businesses as it allows them to allocate the cost of assets—such as machinery, furniture, and vehicles—over their useful life, rather than deducting the entire cost in the year of purchase.
Under the Income Tax Act, depreciation is allowed as a deduction from the taxable income of a business. This helps in lowering the overall tax liability while accurately reflecting the real value of business assets over time. The Income Tax Department prescribes specific depreciation rates for different categories of assets, and businesses are required to follow these rules while computing their depreciation claims.
From a compliance perspective, claiming depreciation correctly is crucial during income tax filings, audits, and assessments. It is also an essential element in financial reporting and helps stakeholders evaluate the actual performance and asset health of a business. For new and small business owners in India, understanding depreciation is vital for planning capital investments and managing tax obligations efficiently.
Depreciation is usually calculated using methods like the Written Down Value (WDV) method, which is widely accepted for tax purposes in India. Proper documentation of asset purchase dates, costs, and usage is necessary to ensure accurate depreciation accounting.
To simplify depreciation calculations and tax planning, professional solutions like FinTax24’s income tax services can assist individuals and businesses in maintaining compliance with Indian tax laws.
In summary, depreciation not only helps businesses recover the cost of assets but also plays a strategic role in tax savings and financial management within the Indian regulatory framework.