Business Income — Depreciation (Sections 33 & 41)
Depreciation — Section 33
Complete guide to depreciation under the Income Tax Act 2025 — eligible assets, the block system, WDV computation, 50% restriction for short-use assets, additional depreciation for manufacturing, terminal allowance, carry-forward rules, and pro-rata on amalgamation/demerger.
🔄 Replaces: Section 32 and Section 43(6) of the Income Tax Act 1961
📅 Effective: 1st April 2026 (Tax Year 2026-27 onwards)
Section 33(1) — Eligible Assets
Depreciation is allowed on assets that are owned wholly or partly by the assessee and used wholly and exclusively for the purposes of the business or profession.
- Buildings — factory, office, warehouse
- Machinery — all manufacturing/production equipment
- Plant — industrial plant, fixtures
- Furniture — office furniture, fittings
Acquired on or after 1st April 1998 only. Excludes goodwill:
- Know-how
- Patents
- Copyrights
- Trademarks
- Licences
- Franchises
- Any other business/commercial right of similar nature
- Goodwill — whether self-generated or purchased (explicitly excluded from Section 33(12)(a)(ii))
- Land (not depreciable under any tax regime)
- Assets not put to use at all during the year (even if owned)
- Personal assets not used for business
Section 33(3) — The Block of Assets System
India's depreciation system works on the concept of a "block of assets" — all assets of the same class attracting the same rate of depreciation are grouped together. You don't track each individual asset separately; instead you compute depreciation on the entire block's WDV.
- Opening WDV of block (from previous year)
- Add: Actual cost of new assets added to the block during the year
- Less: Sale proceeds of assets sold from the block during the year (capped at WDV)
- = Net WDV on which depreciation is computed at the prescribed rate
- Closing WDV = Net WDV minus depreciation = carries forward to next year
- When assets are added mid-year, the 50% restriction (if used < 180 days) applies to those specific assets
- When assets are sold, sale proceeds reduce the block WDV — if WDV goes negative (sale exceeds WDV), it is treated as a Short-Term Capital Gain under Section 74
- If the block becomes zero, no further depreciation
- Depreciation is mandatory — Section 33(7) says it applies whether or not the assessee claimed it. WDV is reduced even if not claimed.
Section 41 — Written Down Value (WDV) Formula
Replaces Section 43(6) of the 1961 Act. The WDV of a block of assets is computed as:
where:
A = WDV of the block at the start of the immediately preceding tax year
B = Actual cost of assets added to the block during the current year
C = Sale proceeds (+ scrap value) of assets sold/transferred/demolished/destroyed from the block (C shall not exceed A − D + B)
D = Depreciation actually allowed in the immediately preceding year for this block
E = In case of slump sale: actual cost of assets in the block reduced by depreciation allowed up to 31 March 1986 + depreciation allowable from 1 April 1987 as if the asset was the only asset in that block
WDV for an asset acquired before the current year [Section 41(1)(b)]: Actual cost less depreciation actually allowed under this Act or the 1961 Act.
WDV on Corporate Restructuring [Section 41(2)–(6)]
| Transaction | WDV in Transferee's Hands |
|---|---|
| Holding-to-subsidiary or subsidiary-to-holding transfer [Sec 70(1)(c)/(d)] | WDV of the block in transferor's hands in the immediately preceding year, reduced by depreciation allowed that year [Section 41(2)] |
| Amalgamation (Indian company) | Same as transferor/amalgamating company's WDV (preceding year) reduced by depreciation allowed [Section 41(2)(c)] |
| Demerger — demerged company | Block WDV of demerged company is reduced by the WDV of transferred assets [Section 41(3)] |
| Demerger — resulting company | WDV of transferred assets as in demerged company immediately before demerger [Section 41(4)] |
| Company-to-LLP conversion [Sec 70(1)(ze)] | WDV as in the company on date of conversion [Section 41(5)] |
Section 33(4) — 50% Restriction: Assets Used Less Than 180 Days
If an asset is acquired AND put to use during the tax year but used for less than 180 days, the depreciation deduction for that year is restricted to 50% of the prescribed rate.
| Scenario | Depreciation Rate |
|---|---|
| Asset acquired and put to use, used for ≥ 180 days in the year | Full rate (e.g., 15% for plant) |
| Asset acquired and put to use, used for < 180 days (e.g., bought and installed on 1 February) | 50% of rate (e.g., 7.5% for plant) |
180 days = approximately 1 October for a standard April–March tax year. Assets put to use on or before 1 October get full rate; after 1 October get 50%. This restriction applies both to normal depreciation (Section 33(3)) and power sector straight-line depreciation (Section 33(2)).
Section 33(8)–(9) — Additional Depreciation @ 20%
Over and above normal depreciation, an additional 20% depreciation is allowed on new machinery/plant in the first year of use — a tax incentive for investment in new manufacturing capacity.
Who can claim? [Section 33(8)]
- Manufacture or production of any article or thing
- Generation, transmission, or distribution of power
- Ships or aircraft
- Previously used machinery (within or outside India)
- Installed in office premises or residential accommodation (including guest houses)
- Office appliances or road transport vehicles
- Assets whose full cost is allowed as deduction in any year
Rate of Additional Depreciation [Section 33(9)]
| Usage in Year of Acquisition | Additional Depreciation |
|---|---|
| Put to use for ≥ 180 days in the year of acquisition | 20% of actual cost — in the year of acquisition |
| Put to use for < 180 days in the year of acquisition | 10% in year of acquisition + remaining 10% in the immediately succeeding year |
Normal depreciation is on WDV (declining balance). Additional depreciation is on the actual cost of the new machinery — computed separately and added to the normal depreciation for that year. It is a one-time deduction — not allowed again in subsequent years for the same asset.
Section 33(10) — Terminal Allowance (Power Sector Only)
For assets depreciated under the straight-line method (Section 33(2) — power generation/distribution undertakings only), when any such asset is sold, discarded, demolished, or destroyed, and the moneys payable plus scrap value is less than the WDV — the shortfall (WDV minus net realisation) is allowed as a deduction in that year, provided the deficiency is actually written off in the books.
Section 33(11) — Carry-Forward of Unabsorbed Depreciation
Where profits in a tax year are insufficient to absorb the full depreciation:
| Situation | Treatment |
|---|---|
| Business profit (not a loss) < Depreciation allowable | Depreciation allowed only up to the available profit. Balance carried forward. |
| Business result is a loss | No depreciation allowed. Full amount carried forward. |
| Unabsorbed depreciation — carried forward | Added to the depreciation allowable in the next year and treated as part of that year's depreciation. Carried forward indefinitely — no time limit (unlike business losses which are limited to 8 years). |
Special Cases & Rules
Where the assessee does not own the building (holds it on lease or other occupancy right), but incurs capital expenditure on construction of any structure or renovation/extension/improvement for business purposes — such structure is treated as a building owned by the assessee for depreciation purposes.
Depreciation applies whether or not the assessee has claimed it. This means the WDV is reduced by the allowable depreciation regardless of whether it was deducted in the ITR. No "skipping" depreciation to increase future WDV.
Total depreciation allowable to predecessor + successor (or amalgamating + amalgamated, or demerged + resulting) cannot exceed the full year's depreciation at prescribed rates. Split on a pro-rata basis based on number of days each entity used the assets.
Where building/machinery is partly used for business — depreciation is restricted to the fair proportionate part as determined by the AO. For a building used 60% for business and 40% personally, only 60% of the depreciation qualifies.
Common Depreciation Rates (WDV Basis)
Actual rates are prescribed in the Rules (Schedule II to IT Rules, 1962 — carried forward into 2025 Act rules). These are the commonly used rates:
| Asset Type | Rate | Notes |
|---|---|---|
| BUILDINGS | ||
| Residential buildings (employee accommodation) | 5% | |
| Buildings used for business (other than residential) | 10% | Factory, office, warehouse |
| Temporary structure (purely temporary) | 100% | Full deduction in year of use |
| PLANT & MACHINERY | ||
| General plant and machinery | 15% | Most common rate |
| Motor cars (other than used in hire business) | 15% | |
| Buses, lorries, taxis (used in hire business) | 30% | |
| Aeroplanes, aero-engines | 40% | |
| Pollution control / energy-saving devices | 40% | |
| Computers and peripherals (including software) | 40% | |
| Ships | 20% | |
| FURNITURE & FITTINGS | ||
| Furniture and fittings (including electrical fittings) | 10% | |
| INTANGIBLE ASSETS | ||
| Know-how, patents, copyrights, trademarks, licences, franchises | 25% | Acquired on/after 1 Apr 1998; not goodwill |
Practical Q&A
| Question | Answer |
|---|---|
| Plant purchased on 1 Nov 2026 for ₹10L. Rate 15%. Additional depreciation applicable. Depreciation for FY 2026-27? | Used < 180 days (Nov–Mar = ~150 days). Normal: 15% × 50% × ₹10L = ₹75,000. Additional: 10% × ₹10L = ₹1,00,000 (remaining 10% in FY 2027-28). Total FY 2026-27 = ₹1,75,000. |
| Block of plant: Opening WDV ₹50L. Added ₹20L (put to use on 1 June). Sold one machine for ₹15L. Rate 15%. Depreciation? | Net WDV = ₹50L + ₹20L − ₹15L = ₹55L. New addition ≥180 days. Normal depreciation = 15% × ₹55L = ₹8.25L. Closing WDV = ₹55L − ₹8.25L = ₹46.75L. |
| Can a company choose not to claim depreciation in a loss year to protect the WDV? | No — Section 33(7) makes depreciation mandatory. Whether or not claimed in the ITR, the WDV is reduced by the allowable amount. Depreciation not claimed is lost — it cannot be added back to WDV. |
| Unabsorbed depreciation of ₹30L from FY 2018-19. Can it be set off against salary income in FY 2026-27? | Yes — unabsorbed depreciation has no time limit and can be set off against income under any head. It is carried forward indefinitely and can absorb any income including salary. |
| A tenant company spends ₹50L on renovating a leased office. Can it claim depreciation? | Yes — under Section 33(6), capital expenditure on renovation of a leased building used for business is treated as a building owned by the assessee. Depreciation @ 10% on ₹50L = ₹5L per year. |
| Goodwill purchased for ₹1 crore on acquisition of a business. Is depreciation allowed? | No — Section 33(12)(a)(ii)(G) explicitly excludes goodwill from intangible assets eligible for depreciation. This applies to both purchased and self-generated goodwill. |