Depreciation Calculator

Straight Line Method (SLM): Depreciates equal amount every year. Formula: (Asset Cost - Salvage Value) / Useful Life. Example: ₹10L asset, ₹1L salvage, 9-year life → (₹10L - ₹1L) / 9 = ₹1L annual depreciation (constant). Book value decreases linearly: Year 1 ₹9L, Year 2 ₹8L, Year 3 ₹7L...

Written Down Value (WDV): Depreciates percentage of opening book value each year. Formula: Opening Book Value × Depreciation Rate. Example: ₹10L asset @ 15% → Year 1: ₹10L × 15% = ₹1.5L, Book value ₹8.5L. Year 2: ₹8.5L × 15% = ₹1.28L, Book value ₹7.22L. Year 3: ₹7.22L × 15% = ₹1.08L... Depreciation decreases exponentially!

Key Differences:

Which Method to Use?

• Use SLM For:
  • Financial Statements—Companies Act 2013 prefers SLM (Ind AS/IFRS compliant)
  • Steady Usage Assets—Buildings, furniture, equipment used uniformly over life
  • Investor Communication—Shows consistent expense, smoother profit trends (no earnings volatility from depreciation)
  • Management Reporting—Easier budgeting/forecasting with predictable ₹X annual depreciation
  • Simplicity—Non-finance managers understand "₹1L depreciation every year" intuitively
• Use WDV For:
  • Income Tax Returns—Income Tax Act Section 32 mandates WDV for most assets (no choice!)
  • Rapid Obsolescence Assets—Computers (40% rate), vehicles (15-30%), machinery (15%)—lose more value early
  • Tax Optimization—Higher early-year deductions = greater tax savings when needed most (Year 1 cash flow critical for startups/capex-heavy projects)
  • Economic Reality—Matches actual value decline (car worth ₹7L after 1 year from ₹10L, not ₹9L!)
• Dual Accounting (Most Indian Companies): Use SLM for financial statements (Companies Act) + WDV for tax returns (Income Tax Act)—legally compliant + tax-optimized! Example: ₹50L machinery → Books show ₹3L SLM annual depreciation (clean P&L), Tax return claims ₹7.5L WDV Year 1 deduction (saves ₹1.89L tax!). Creates Deferred Tax Asset/Liability—requires Ind AS 12 reconciliation in financials.

Strategic Considerations:

• Time Value of Money: WDV's front-loaded tax savings worth more—₹1.89L saved Year 1 invested @ 10% grows to ₹7.89L by Year 15. SLM's ₹75k annual savings = ₹6.46L future value. WDV wins on NPV basis!
• Profit Smoothing: SLM shows stable profit (₹3L depreciation every year). WDV shows volatile profit (₹7.5L Year 1 → ₹3L Year 5 → ₹1L Year 10—profit fluctuates inversely). Public companies prefer SLM to avoid earnings surprises spooking investors!
• Asset Sale Impact: WDV book value drops faster (₹17.4L after 15 years @ 15% from ₹50L) vs. SLM (₹5L salvage). If sold for ₹20L: WDV shows ₹2.6L gain (₹20L sale - ₹17.4L book), SLM shows ₹15L gain (₹20L sale - ₹5L book). Higher WDV book value = lower taxable gain on sale!

Bottom Line: Use SLM for accounting/reporting (investor-facing, regulatory compliance), WDV for tax (legally mandated + cash flow optimization). Calculator lets you toggle between both—compare tax impact, choose strategically!

Income Tax Act Section 32 prescribes WDV (Written Down Value) depreciation rates in Appendix I for various asset blocks. Assets grouped into blocks (all plant & machinery in one block @ same rate), not depreciated individually.

Key Depreciation Rates (Income Tax Act Appendix I):

Buildings & Structures:

• Buildings (General): 10% WDV—RCC/permanent structures
• Temporary Structures: 40% WDV—tin sheds, wooden buildings (< 3-year life)
• Residential Buildings (Let-Out): 5% WDV—rental properties (if owner-occupied, not depreciable!)

Furniture, Fixtures & Fittings:

• Furniture & Fittings: 10% WDV—office furniture, cabinets, partitions
• Electrical Fittings: 10% WDV—fans, lights, AC (if < ₹5,000, expense directly!)

Plant & Machinery (Most Common):

• General Plant & Machinery: 15% WDV—manufacturing equipment, production line, tools
• Energy-Efficient Equipment: 40% WDV—renewable energy systems (solar panels, wind turbines)
• Pollution Control Equipment: 100% WDV—full depreciation Year 1! Effluent treatment, air purifiers, waste management systems
• Computers & Software: 40% WDV—laptops, desktops, servers, monitors, UPS, routers, ERP software (very aggressive!)

Vehicles & Transport:

• Motor Cars (Personal Use): 15% WDV—company cars for employee/director personal use
• Motor Cars (Business Use / Hire): 30% WDV—double rate! Taxis, cabs, ride-sharing vehicles
• Lorries/Trucks/Buses: 30% WDV—commercial goods/passenger transport
• Motorcycles/Scooters: 15% WDV—two-wheelers for business (delivery, sales)
• Aircraft/Ships: 20% WDV—aviation, shipping assets

Intangible Assets:

• Patents, Copyrights, Trademarks: 25% WDV—intellectual property (if acquired, not self-developed!)
• Know-How, Licenses: 25% WDV—technical collaboration, franchise rights

Special Cases & Conditions:

• Multiple Shift Allowance: If plant & machinery used in double shift (16+ hours/day), add 50% extra depreciation (15% becomes 22.5%). If triple shift (24 hours/day), add 100% extra (15% becomes 30%)—recognizes accelerated wear-and-tear from intensive usage!
• Additional Depreciation (Section 32(1)(iia)): Manufacturing/production enterprises get additional 20% depreciation on new plant & machinery purchased in same year (total 35% Year 1: 15% regular + 20% additional!). If purchased after September, only 10% additional (total 25%). Huge benefit: ₹1Cr new machinery = ₹35L Year 1 depreciation saves ₹8.81L tax!
• Assets Acquired Before April 1, 1990: Lower rates apply (legacy provisions)—consult specific block schedule.
• Assets Used < 180 Days: If asset purchased/put to use < 180 days in financial year (e.g., purchased October 1 = 182 days left), depreciation rate halved (15% becomes 7.5% Year 1, full 15% from Year 2). Strategic: Purchase before September 30 to claim full-year depreciation!

Practical Examples with Tax Savings:

Important Notes:

• Block System: Assets grouped in blocks—all computers form one block @ 40%, all vehicles one block @ 15-30%. When new asset purchased, added to relevant block's opening WDV, then depreciation rate applied to entire block. When asset sold, sale proceeds reduce block WDV (no profit/loss unless sale > original cost of all assets in block!).
• Rate Changes: Income Tax rates revised periodically (typically Budget announcements)—2019 saw computer rate increase from 15% to 40% (incentivize digitalization). Always verify latest Appendix I before claiming depreciation.
• Unabsorbed Depreciation: If current year loss (insufficient profit to absorb depreciation deduction), unabsorbed depreciation carried forward indefinitely (unlike business losses limited to 8 years!)—set off against future profits. No time limit = valuable for startups with initial losses + heavy capex.
• Small Assets: Items < ₹5,000 typically expensed directly as "consumables" or "repairs/maintenance" (not capitalized/depreciated). Company policy determines threshold—some use ₹10,000 or ₹25,000 cutoff.

Tax Planning Strategies Using Depreciation Rates:

• High-Rate Asset Focus: If high-profit year, invest in 40% rate assets (computers, software)—₹50L IT infrastructure generates ₹20L deduction saves ₹5.03L tax vs. 15% machinery (saves ₹1.89L only—₹3.14L difference!). Accelerates tax shields to high-value years.
• Pollution Control Priority: 100% depreciation = instant tax write-off. ₹1Cr effluent treatment plant saves ₹25.17L tax Year 1—government effectively subsidizing 25.17% of environmental compliance cost!
• Year-End Purchases: Buy assets before September 30 to claim full-year depreciation (no 50% haircut). ₹1Cr machinery purchased Sept 30 = ₹15L depreciation; purchased Oct 1 = ₹7.5L only—₹7.5L lost = ₹1.89L extra tax paid! Time purchases strategically.
• Commercial Vehicle Classification: Use vehicles for "hire or business" to claim 30% rate vs. 15% personal use. Fleet of 10 cars ₹20L each (₹2Cr total): Business use = ₹60L Year 1 depreciation saves ₹15.10L tax, Personal use = ₹30L saves ₹7.55L—₹7.55L difference! Ensure proper documentation (trip logs, billing records) to substantiate business use.

Depreciation is non-cash tax deduction—reduces taxable income (lowering taxes) WITHOUT actual cash payment (cash spent at asset purchase, not during depreciation years). This creates powerful "tax shield" benefiting cash flow significantly.

Direct Tax Impact (Income Tax Reduction):

• Formula: Tax Savings = Depreciation Amount × Tax Rate. Example: ₹10L depreciation × 25.17% corporate tax rate = ₹2,51,700 tax saved (actual cash retained by company, not paid to government!).
• Example Scenario: ABC Manufacturing Ltd. reports ₹1Cr profit before depreciation (EBITDA). Claims ₹30L WDV depreciation on plant & machinery.
  • Without Depreciation: Taxable income ₹1Cr → Tax @ 25.17% = ₹25.17L cash paid to government.
  • With Depreciation: Taxable income ₹70L (₹1Cr - ₹30L depreciation) → Tax @ 25.17% = ₹17.62L cash paid.
  • Tax Savings: ₹25.17L - ₹17.62L = ₹7.55L cash retained! (= ₹30L × 25.17%)
• Higher Depreciation = Lower Taxes: WDV method (accelerated) saves more tax in early years vs. SLM. Same ₹50L asset: WDV @ 15% = ₹7.5L Year 1 depreciation saves ₹1.89L tax, SLM = ₹3L depreciation saves ₹75k tax—₹1.14L extra cash from WDV!

Cash Flow Impact (Operating Cash Flow Boost):

Depreciation's non-cash nature creates disconnect between accounting profit and cash flow—reconciled in Cash Flow Statement:

• Step 1: Start with Net Profit After Tax (includes depreciation expense reducing profit)
• Step 2: Add Back Depreciation (non-cash expense—no money actually left company)
• Step 3: Arrive at Operating Cash Flow (higher than profit due to depreciation add-back!)

Cash Flow Example:

Key Insights:

• Accounting Profit vs. Cash Flow Gap: Net profit ₹16.46L BUT operating cash flow ₹31.46L—₹15L higher due to depreciation being non-cash! Company has ₹31.46L actual cash to reinvest, pay dividends, repay loans (not just ₹16.46L profit suggests).
• Depreciation Tax Shield Value: ₹15L depreciation × 25.17% = ₹3.78L tax saved. If no depreciation, tax would be ₹9.32L (on ₹37L profit) instead of ₹5.54L—depreciation saved ₹3.78L cash!
• Free Cash Flow Calculation: Operating Cash Flow ₹31.46L - Capex (say ₹10L new equipment) - Working Capital increase (₹5L) = ₹16.46L Free Cash Flow. Despite same ₹16.46L net profit, company's cash generation capacity much higher when considering depreciation's non-cash nature!

Time Value Impact (WDV vs. SLM):

WDV front-loads depreciation → higher early-year tax savings → better NPV due to time value of money:

• Scenario: ₹50L asset, 15-year life, 15% WDV vs. SLM comparison @ 10% discount rate:
• SLM: ₹3L annual depreciation saves ₹75,510 tax every year × 15 years. Present Value = ₹75,510 × 7.606 (PV annuity factor) = ₹5.74L NPV.
• WDV: Year 1 saves ₹1.89L (high), Year 10 saves ₹51,599 (low)—higher early savings. Present Value calculation: Year 1 ₹1.89L / 1.1 + Year 2 ₹1.60L / 1.1² + ... = ₹6.21L NPV.
• WDV Advantage: ₹6.21L - ₹5.74L = ₹47,000 higher NPV from WDV despite similar absolute tax savings! Early rupees worth more than later rupees—WDV optimally structures tax shield.

Strategic Cash Flow Management:

• Capex Financing: High depreciation assets (computers @ 40%, vehicles @ 30%) generate strong tax shields—₹1Cr IT infrastructure saves ₹10L+ tax annually, improves debt serviceability (banks assess DSCR using cash flow, not profit!). Lenders prefer capex-heavy borrowers (depreciation tax shield ensures cash flow > profit).
• Working Capital Optimization: Operating cash flow (profit + depreciation) funds working capital needs without external borrowing. Company with ₹50L profit + ₹30L depreciation = ₹80L OCF can sustain ₹60L inventory/receivables increase internally (vs. ₹50L profit insufficient—would need ₹10L working capital loan!).
• Dividend Policy: Companies declare dividends based on profit (₹16.46L) but have higher cash (₹31.46L OCF). Boards often distribute 30-40% of profit (₹5-7L dividend) while retaining ₹25L cash for capex/debt repayment—depreciation enables cash conservation despite dividend payouts.
• Loss-Making Periods: If company reports loss but has depreciation, operating cash flow may still be positive! Loss ₹10L + Depreciation ₹25L = ₹15L positive OCF—company survives despite accounting losses. Depreciation's non-cash nature buffers against short-term profitability challenges (critical for startups/turnarounds with heavy capex but initial losses).

Important Caveats:

• Depreciation ≠ Replacement Fund: ₹15L annual depreciation doesn't mean ₹15L cash set aside for asset replacement! It's accounting allocation, not cash reserve. Company must separately plan capex budget for replacements (depreciation calculator's year-by-year schedule helps forecast replacement timing/amounts).
• Unabsorbed Depreciation: If company has loss (negative taxable income), depreciation tax benefit not realized immediately—carried forward to future profitable years. Startup with ₹1Cr loss + ₹30L depreciation = ₹1.3Cr total loss carried forward (no current tax savings, but future benefit when profitable!).
• Minimum Alternate Tax (MAT): Companies paying MAT (18.5% on book profit) don't get full depreciation benefit—MAT calculated on profit per financial statements (SLM depreciation), not tax profit (WDV). Limits tax planning effectiveness for low-profit/high-capex companies (loss of WDV advantage under MAT regime).

Short Answer: Generally NO for tax purposes (Income Tax Act prohibits arbitrary method changes), but YES for financial statements (Companies Act/Ind AS allow with proper justification + disclosure). Understanding the rules critical to avoid tax disallowance + audit issues.

Income Tax Act (Tax Returns) - WDV Mandatory:

• Section 32 Requirement: Income Tax Act prescribes WDV method for depreciation (with specified rates in Appendix I). Companies MUST use WDV for tax purposes—no choice to use SLM! Exception: Buildings where SLM permitted @ 10% (but most companies still use WDV @ 10% for consistency).
• No Method Change Allowed: Once asset depreciated using WDV (as mandated), cannot switch to SLM for tax returns. Income Tax Officer will disallow depreciation claim if method changed arbitrarily—company must pay tax on disallowed depreciation + interest u/s 234B + potential penalty for incorrect return!
• Example: Company claims ₹10L WDV depreciation Year 1 on machinery, then switches to ₹6L SLM depreciation Year 2 (preferring lower deduction to match profit?). Tax auditor identifies discrepancy—disallows entire ₹6L SLM depreciation, requires WDV calculation (say ₹8.5L). If company can't substantiate reason, faces tax on ₹8.5L - ₹6L = ₹2.5L disallowed depreciation = ₹62,925 additional tax + 12% p.a. interest!
• Rate Changes: Income Tax rates themselves may change (Budget amendments)—in 2019, computer depreciation increased from 15% to 40%. Companies automatically apply new rate going forward (not a "method change," just rate update per law). This is permitted and mandatory.

Companies Act/Ind AS (Financial Statements) - Change Allowed with Conditions:

• Schedule II Flexibility: Companies Act 2013 Schedule II prescribes useful lives (buildings 60 years, machinery 15 years, etc.) and permits SLM as standard method. However, companies can choose WDV if justified + consistently applied.
• Change in Accounting Policy (Ind AS 8 / AS 8): Depreciation method change = change in accounting policy (requires specific conditions):
  • Requirement 1: Justification—Must provide reliable, more relevant information. Example: "Changed SLM to WDV to better reflect technological obsolescence of IT equipment" (justifiable). "Changed to reduce profit volatility" (NOT justifiable—profit manipulation motive!).
  • Requirement 2: Retrospective Application—Must restate prior year financials using new method (recalculate Year 1 depreciation with new method, adjust opening retained earnings). Complex—affects all historical balance sheets!
  • Requirement 3: Disclosure—Must disclose in financial statement notes: (a) Nature of change, (b) Reason for change, (c) Impact on current/prior year profit, (d) Impact on assets/liabilities. Transparency for investors/auditors essential.
• Change in Accounting Estimate (Easier): Changing useful life or salvage value (not method itself) = change in accounting estimate—applied prospectively (no prior year restatement needed!). Example: Reassess machinery life from 15 to 20 years—simply depreciate remaining book value over revised remaining life (no historical recalculation). Much simpler than method change!

Practical Scenarios & Recommendations:

Scenario 1: Company Using SLM in Books, Wants to Switch to WDV

• Tax Impact: No issue—tax returns ALREADY must use WDV (Income Tax mandates). So tax calculation unaffected.
• Book Impact: Financial statements changing SLM → WDV = accounting policy change. Must justify (e.g., "Better reflects accelerated obsolescence of plant & machinery in our industry"), restate prior years, disclose impact. Auditors scrutinize heavily—ensure genuine business reason, not profit manipulation!
• Result: Permitted but cumbersome—requires retrospective restatement + extensive disclosures. Rare in practice unless significant business/operational change justifies it.

Scenario 2: Company Using WDV in Books, Wants to Switch to SLM

• Tax Impact: Tax returns continue WDV (no choice)—creates book-tax difference. Financial statements show SLM (higher profit initially), tax return shows WDV (higher depreciation, lower taxable income). Requires Deferred Tax accounting (Ind AS 12)—records Deferred Tax Liability for timing difference.
• Book Impact: Accounting policy change—must justify ("SLM provides more reliable measurement of asset usage in our steady-state operations"), restate prior years, disclose extensively.
• Result: Permitted but adds complexity—dual depreciation schedules (SLM books + WDV tax) with deferred tax reconciliation. Management must convince Board/auditors/investors that change serves genuine purpose (not earnings management!).

Scenario 3: Asset-Specific Change (Some Assets SLM, Others WDV)

• Allowability: Generally NOT permitted—inconsistency within company. Must apply chosen method uniformly to all similar assets. Exception: Different asset categories can have different methods IF justified (e.g., Buildings SLM @ 10% per 60-year life, Machinery WDV @ 15% reflecting rapid obsolescence—categorically different assets). But within same category (all machinery), must be consistent.
• Example: Cannot depreciate Machine A using SLM and Machine B using WDV if both are similar CNC machines in same plant. Auditors flag as arbitrary, inconsistent policy violating Ind AS 16 / AS 10 requirements.

Alternatives to Method Change (Easier & Compliant):

• 1. Revise Useful Life: Instead of changing method, revise useful life estimate. Machinery initially assessed 15 years, reassess to 10 years (faster obsolescence)—increases annual SLM depreciation ((Cost - Salvage) / 10 instead of / 15). Applied prospectively (no restatement!), disclosed as change in estimate, easier to justify to auditors.
• 2. Revise Salvage Value: Lower salvage value estimate → higher depreciable base → higher annual depreciation. ₹50L machine with ₹5L salvage (₹45L depreciable), revise salvage to ₹2L (₹48L depreciable) → Annual depreciation increases ₹3k (₹48L / 15 vs. ₹45L / 15). Simpler than method change!
• 3. Component Depreciation: Ind AS 16 allows depreciating significant components separately. Machinery ₹50L = Engine ₹20L (5-year life) + Body ₹30L (15-year life)—depreciate components at different rates within single asset. No "method change," just more granular application. Achieves similar accelerated depreciation effect as WDV without policy change hassles!
• 4. Dual Accounting (Status Quo): Most Indian companies already use SLM for books + WDV for tax—no need to change! Maintains regulatory compliance (Companies Act prefers SLM, Income Tax mandates WDV), optimizes both financial reporting (stable profit) and tax (accelerated deductions). Accept the book-tax difference, account for deferred taxes, move on!

Red Flags Triggering Auditor/Regulator Scrutiny:

• Frequent Changes: Switching methods every 2-3 years signals earnings manipulation—auditors reject as unreliable accounting.
• Method Change Right Before Profit Target: Company targeting ₹50Cr profit, Year-end forecast ₹48Cr, suddenly switches SLM to WDV to reduce depreciation ₹3Cr (boosts profit to ₹51Cr!)—obvious manipulation, auditors disallow.
• No Business Justification: "Changed method to align with peers" (weak reason—peer pressure isn't valid accounting principle!). "Changed to better reflect economic reality" (strong if substantiated with operational data—machine usage intensity increased, technological obsolescence accelerated, etc.).
• Inconsistent Application: Changed method for loss-making division (inflate profit) but not profitable divisions—cherry-picking violates consistency principle, auditors require uniform policy across company.

Bottom Line: Avoid method changes if possible—stick with chosen method unless genuine business/operational reason exists. For tax, you MUST use WDV (no choice). For books, if change unavoidable, ensure: (a) Strong business justification, (b) Board approval, (c) Audit committee concurrence, (d) Proper retrospective restatement, (e) Extensive note disclosures. Simpler alternatives: Revise useful lives/salvage values (change in estimate, prospective application only), or accept dual accounting (SLM books + WDV tax) as standard practice!