What is Section 32 of the Income Tax Act? A Detailed Guide on Depreciation
- Farheen Mukadam
- Jul 30
- 7 min read
Updated: Aug 19
Investors and business owners can make wise financial decisions by being aware of important tax rules. Section 32 of the Income Tax Act is a key clause in Indian tax law. Depreciation and how companies might deduct assets from their taxable income are covered in this section. To put it simply, it enables companies to take into consideration the deterioration of their assets over time, which eventually reduces their tax liability. Understanding section 32 can assist investors and company owners maximise tax savings while maintaining legal compliance.
Table of Contents
What is Section 32 of the Income Tax Act?
Section 32 lays down the key guidelines and rates for computing depreciation on various assets used for business or profession. A deduction known as depreciation is permitted for the gradual deterioration of both tangible and intangible assets. When you file your income taxes, this enables you to lower your taxable income. Machinery, manufacturing plant, and building are the assets eligible for a depreciation deduction. There is also a deduction for the depreciation of intangible assets, such as a franchise, copyright, license, patent, trademark, and other commercial/ business rights. When you file your income tax, you can lower your taxable income in this part. Businesses must adhere to Section 32 in order to calculate their tax liability and appropriately reflect the true economic cost of using assets.
Types of Depreciation under Section 32
Buildings, machines, and automobiles are examples of assets that corporations purchase, but as they age and are used, their value decreases. Businesses can spread out the cost of an asset over a number of years rather than deducting the entire amount in the year of acquisition. This procedure, known as depreciation, aids in the steady reduction of taxable revenue. Depreciation is classified as follows under Section 32 of the Income Tax Act:
Normal Depreciation
Section 32(1)(ii) allows any business to claim depreciation on its assets. The Income Tax Act specifies the rates of depreciation, which change depending on the kind of asset. The anticipated lifespan of an asset and the rate at which its value depreciates are used to calculate the depreciation rates. For instance:
Buildings: 10% to 40%
Plant and machinery: 15%
Vehicles: 15%
Computers: 40%
Businesses can lower their taxable revenue by using these depreciation rates to account for asset utilisation.
Additional Depreciation
Section 32(1)(iia) permits firms to claim additional depreciation in specific circumstances. This is relevant in the following situations:
With the exception of specific prohibited commodities and used equipment, a business purchases new machinery or plant.
The asset is employed in a production or manufacturing company.
The asset was set up after March 31, 2005.
The additional depreciation rate is set at 20% of the new asset's cost. This promotes investment in new technology and helps businesses further lower their taxable income.
Eligibility to Claim Depreciation under Section 32
Businesses and professionals who employ assets for revenue-generating activities might benefit greatly from depreciation under Section 32 of the Income Tax Act. It lowers their taxable income by enabling them to deduct the steady decline in asset value over time. The types of taxpayers who are eligible to claim depreciation under this clause are listed below:
Businesses: Section 32 allows businesses of any legal structure to claim depreciation as long as the assets are utilised for business activities. This comprises:
Sole Proprietorships: Individual business owners are eligible to claim depreciation on assets such as office equipment, automobiles, or machinery used for commercial purposes.
Partnership Firms: Partnerships engaged in manufacturing, trade, or commerce are eligible to deduct the cost of assets employed in their operations.
Limited Liability Partnerships (LLPs) are able to claim depreciation on assets used for business purposes since they combine the characteristics of a firm and a partnership.
Private and Public Limited Companies: Registered businesses of all sizes, including startups, are eligible to deduct the cost of tangible and intangible assets employed in their activities.
For instance, if a manufacturing company spends Rs. 10 lakh on new machinery, it can claim depreciation, which will gradually lower its taxable income.
Professionals using Depreciable Assets: Section 32 allows freelancers and self-employed professionals who own and use assets for their business to claim depreciation. This comprises:
Healthcare professionals like physicians who possess surgical instruments, diagnostic equipment, or other medical gadgets utilised at their clinic or hospital.
Professionals like chartered accountants (CAs) and company secretaries (CSs), employ computers, office supplies, and other business assets in their consulting firms
Lawyers and solicitors are legal practitioners who possess the technology tools, law books and office space required for their line of work.
Architects and engineers are eligible for depreciation deductions since they invest in design software, expensive computers, and specialised equipment.
For instance, a dentist can claim depreciation on dental chairs and X-ray machines they buy for their clinic, which lowers their taxable income. It's crucial to remember that section 32 does not allow depreciation claims for people who buy assets for their own use. The asset needs to be put to work making money.
Conditions to Claim Depreciation under Section 32
Businesses must meet the requirements listed below in order to claim depreciation under section 32:
The firm must be the owner of the asset.
Throughout the fiscal year, the asset must be utilised for business objectives.
Unless the business chooses to use the straight-line technique in specific circumstances, depreciation is computed using the written-down value method.
Depreciation cannot be carried forward if it is missed in a fiscal year; it must be claimed annually.
Provision for Depreciation During the Year of Purchase
Under Section 32, the depreciation of assets during the year of purchase has some special provisions. Only if the asset is used within the year of purchase—even for testing—can you claim depreciation. Also, the 180-day rule is applicable, with depreciation being calculated as follows:
Complete depreciation: If utilised for 180 days or more, claim 100%.
Half depreciation: If utilised for fewer than 180 days, claim 50%.
If the asset is not used at all during the year, there will be no depreciation.
Depending on the asset type and location, you may receive additional depreciation.
Provision for Depreciation During Successive Years
The following are the provisions for asset depreciation in subsequent years:
Fixed percentage method: Every year, apply the specified rate to the Written-Down Value (WDV), which is determined by the kind of asset.
WDV recalculation: To get the WDV for the following year, remove the initial cost from the depreciation for each year.
Claim till scrap: Continue to depreciate until the WDV equals the scrap value, or the lowest amount. Upon reaching scrap value, one has to stop claiming depreciation.
Benefits of Section 32 of the Income Tax Act
Lowers tax liability: Businesses can reduce their tax payments by deducting depreciation from taxable income.
Encourages asset investment: Because of the extra depreciation benefits, businesses are incentivised to invest in new machinery and equipment.
Boosts economic growth: Higher production and the creation of jobs are the results of incentives for buying new assets.
Conforms to international tax standards: Depreciation is a widely used tax-saving strategy that keeps India's tax structure competitive.
Recent Updates
To encourage economic growth, a few amendments have been made to Section 32 in recent years. Among the most important updates are:
A decrease in the depreciation rates for specific assets
Temporary halt to further decline in certain areas
Benefit extensions for MSMEs to incentivise small enterprises to make asset investments
To learn about the most recent modifications that apply to your company, it is essential to review the most recent income tax regulations or speak with a tax professional.
Conclusion
Businesses' depreciation allowances are determined in large part by Section 32 of the Income Tax Act. It offers a methodical framework for figuring out asset depreciation. This makes taxation more equitable and consistent. Both individuals' and businesses' tax obligations are greatly impacted by the measures described in this section. To maximise your depreciation claims and adhere to tax laws, you must comprehend and follow the rules outlined in Section 32.
Frequently Asked Questions
What is Section 32 of the Income Tax Act?
Section 32 of the Income Tax Act states that its goal is to give a tax deduction for depreciation on assets used in the course of business or professional practice.
What is depreciation as per the Income Tax Act?
The Income Tax Act defines depreciation as the allowance for a decline in value brought on by the usage of tangible or intangible assets that are calculated annually.
How is depreciation under Section 32 calculated?
Depending on the asset, normalisation is calculated using the asset's cost and the applicable depreciation rate that can be claimed under the Income Tax Act, either using the WDV or SLM procedures.
What are the depreciation rates charged under the Income Tax Act?
Depreciation rates differ depending on the type of asset; the Income Tax Rules specify the necessary rates for buildings, machinery, furniture, and intangible assets, among other categories.
Who can claim depreciation under Section 32?
Section 32 of the Income Tax Act allows depreciation to be claimed by any taxpayer, including persons, businesses, and firms, who own and use assets for commercial or professional purposes.
Is a salaried individual allowed to claim depreciation under Section 32?
No, depreciation can only be claimed by professionals and businesses that use assets for revenue-generating purposes.
Can depreciation be claimed on all assets?
No, only tangible assets used for business purposes—such as buildings, machinery, and automobiles—as well as some intangible assets—such as patents and trademarks—are eligible for depreciation.
What happens if depreciation is not claimed in a year?
Depreciation must be reported annually. It cannot be carried over or modified for subsequent years if it is missed.
What is the difference between normal and additional depreciation?
All businesses are eligible for normal depreciation at the specified rates. Only newly purchased manufacturing equipment is eligible for additional depreciation, with a 20% reduction.
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