Quick Summary
Tax Amortization is the deduction allowed for intangible assets like patents, copyrights, trademarks, and know-how. It allows the cost of these assets to be written off over their useful life.
Amortization is the accounting and tax process of allocating the cost of intangible assets over their estimated useful life. While depreciation applies to tangible assets, amortization applies to intangible assets that have a finite useful life.
Intangible Assets Eligible for Amortization
- Patents: Exclusive rights to inventions
- Copyrights: Rights to literary, artistic works
- Trademarks: Brand names, logos, symbols
- Goodwill: Business reputation value
- Know-how: Technical knowledge, processes
- Franchises: License to operate under a brand
- Licenses: Government or private permits
- Software: Computer programs (under specific conditions)
Tax Treatment of Amortization in India
| Asset Type | Section | Amortization Rate |
|---|---|---|
| Know-how, Patents, Copyrights, Trademarks, Licenses, Franchises | 32(1)(ii) | 25% (SLM on actual cost) |
| Spectrum fees for telecom services | 35ABB | Over license period |
| Cost of obtaining license to operate telecom services | 35ABB | Over license period |
| Preliminary expenses | 35D | 1/5th each year for 5 years |
| Amalgamation/Demerger expenses | 35DD/35DDD | 1/5th each year for 5 years |
| VRS expenditure | 35DDA | 1/5th each year for 5 years |
Amortization vs Depreciation
| Aspect | Amortization | Depreciation |
|---|---|---|
| Applies to | Intangible assets | Tangible assets |
| Method (Tax) | Straight Line Method (SLM) | WDV Method (mostly) |
| Residual Value | Usually zero | May have scrap value |
Goodwill - Special Considerations
- Self-generated goodwill: No amortization allowed
- Purchased goodwill: Can be amortized in certain cases
- Goodwill on amalgamation: Treated as per specific provisions
Key Points
- Applies to intangible assets
- Rate: 25% for patents, copyrights, trademarks
- Uses Straight Line Method (SLM)
- Preliminary expenses amortized over 5 years
- Different from depreciation for tangible assets
- No salvage value usually considered