The term depreciation denotes a decline in the value of an asset due to use / wear and tear / obsolescence. There are two methods generally used for calculation of depreciation of asset in financial accounting:

  1. Straight Line Method
  2. Diminishing Value Method

Since, the system of calculation of depreciation differs in Income Tax Act from Financial accounting, as under:

1)     Depreciation is allowed on the following assets:

  1. Tangible Assets: such as Plant & Machindery, Building, Funiture & Fixture
  2. Intangible Assets: such as Copyrights, Tradmarks, Franchises Patents, Knowhow, Licence.

Note: The term Plant & Machinery includes ships, vehicles, Computers (including software) etc. and the term building does not include Land (since, land never depreciate)

2)     Depreciation is allowed to the owner of the asset. The owner must be a person. If the assessee has taken an asset on lease, then the assessee (lessee) cannot avail depreciation, since he is not owner of the asset, on the other hand the lesser can avail depreciation.

3)     Depreciation is allowed only when the asset is used.

4)     Depreciation is allowed on the system of Block of asset. Except in case of Electricity companies. Since electricity companies have different method of calculating depreciation.

Block of Asset : As per section 2(11) of the Income Tax Act, means group of assets falling within the same class and same percentage of depreciation.
View Depreciation Rates as per Income Tax for Assessment Year 2012-13