Direct Tax Laws & International Taxation · Profits and Gains of Business or Profession

Depreciation and Capital Expenditure Deductions (CA Final DT)

Updated 5 October 2026 · Fact-checked

Depreciation is a statutory deduction on business assets, worked out on the written down value of a block of assets at the prescribed rate. Add additions, subtract sale proceeds, apply the rate, halve it for assets used under 180 days, then add any additional depreciation and specified capital deductions.

Understand Depreciation and Capital Expenditure Deductions

Accounting depreciation is ignored for tax. The Income-tax Act, 2025 gives its own depreciation, worked out by rule. You add back the book depreciation and claim the tax depreciation instead.

Tax depreciation is allowed on a block of assets, not on each asset. A block is a group of assets of the same class with the same rate, such as all plant and machinery at 15%. The block has one written down value (WDV). You do not track the sale of a single asset. You reduce the block by the sale proceeds.

There are conditions. The assessee must own the asset, wholly or partly. The asset must be used for the business or profession during the tax year. Land is never depreciable. Depreciation is compulsory. It is treated as allowed whether or not you claim it, so the WDV falls either way.

Additional depreciation is an extra deduction for new plant or machinery in a manufacturing or power business. It rewards investment. Its conditions are strict, and the exam tests them.

Some capital expenditure is not depreciated but deducted separately. Capital expenditure (other than on land) on scientific research related to the business is deducted in full in the year incurred. Capital expenditure on specified businesses is generally deducted at 100% of the expenditure in the year incurred, subject to the Act's conditions. A higher 150% rate applied to some specified businesses only in earlier years. Use the percentage given in the question. Land and goodwill do not qualify for the specified business deduction. Some other items, such as preliminary expenses, are not deducted in one year. They are spread in equal instalments over the number of years the Act fixes. Use the number of years given in the question.

Intangible assets such as patents, copyrights, trademarks, licences and franchises form their own block with a separate rate. Under the Income-tax Act, 2025, goodwill is not a depreciable asset for the block, so exclude it from the depreciable base.

Key rules to remember

WDV of block before depreciation: Opening WDV + Additions in the year − Sale proceeds (money/value received) of assets sold; Sale proceeds reduce the whole block. They are not tied to the asset sold.
Normal depreciation: Block WDV × Rate; additions used for less than 180 days × 50% of Rate; The law reduces the whole block by the sale proceeds. For working, set the proceeds against opening WDV and full-rate additions first. This is a working convention, not a rule of the Act. Use the rate given in the question.
180-day rule: Put to use for less than 180 days in the tax year → 50% of the normal rate on that addition; It applies to additions only. Opening WDV always gets the full rate.
Additional depreciation: 20% of actual cost of new plant or machinery; if used for less than 180 days, 10% in the year of acquisition and the balance 10% in the next year; For a manufacturing or production business, or power generation, transmission or distribution. It is not allowed on ships, aircraft, second-hand plant or machinery (including plant used outside India before import), office appliances (including computers), vehicles, or assets whose whole cost is deducted in one year. Look up the full list in the Act.
Negative block value: Sale proceeds > Opening WDV + All additions (block still has assets) → excess is deemed short-term capital gain; depreciation is nil and the block WDV becomes nil; The test uses the whole block: opening WDV plus all additions in the year, whatever their days of use, less the proceeds. If proceeds exceed that total, the excess is deemed short-term capital gain, even if assets remain in the block. The block WDV then becomes nil and no depreciation is allowed on it.
Block ceases to exist: All assets sold → positive WDV after proceeds = short-term capital loss; negative = short-term capital gain; The balance is a capital loss or gain, not business income. A negative balance is the same excess of proceeds over the whole block described in the Negative block value row.
Closing WDV: WDV before depreciation − Normal depreciation − Additional depreciation; Closing WDV becomes next year's opening WDV. Additional depreciation reduces it too.
Specified capital expenditure: Scientific research capital expenditure (not land) is deducted in full in the year incurred. Capital expenditure on specified businesses is generally deducted at 100% in the year incurred. Some items are spread in equal instalments over the years the Act fixes. All are subject to the Act's conditions.; If you claim a full deduction on an asset, you cannot claim depreciation on it. Use the percentage and the number of instalments given in the question.

How to solve Depreciation and Capital Expenditure Deductions questions

Use this order for any depreciation question. Do it block by block. Keep the sequence fixed so you do not miss marks.

1Check eligibility: the asset must be owned by the assessee and used for the business in the year. Exclude land and any asset on which a full capital deduction is claimed.
2Group the assets into blocks by rate. Note the rate for each block (from the question).
3For each block, list the opening WDV, additions with the date put to use, and sale proceeds.
4Split additions into those used for 180 days or more and those used for less than 180 days.
5Test the block first. If the sale proceeds exceed the opening WDV plus all additions but assets remain, the excess is deemed short-term capital gain, depreciation is nil and the WDV becomes nil. If the block has emptied, compute the short-term capital gain or loss and stop. Otherwise the law reduces the whole block by the proceeds. For working, set them against opening WDV plus full-rate additions first and state this convention.
6Apply the full rate to that adjusted figure and half the rate to the under-180-day additions. Add the two for normal depreciation.
7Test additional depreciation. Check the nature of business, new plant or machinery, exclusions, and the 180-day split. Compute 20%, or 10% now and 10% next year.
8Reduce the block WDV by both depreciations to get the closing WDV. State the amount and any capital gain separately.

Quickest way: Three-line block table

When to use it: Use it when a question has several additions and a sale. It keeps the working to a few lines.

Draw three lines: (A) opening WDV + additions used for 180 days or more − sale proceeds (a working convention; the law reduces the whole block); (B) additions used for under 180 days; (C) cost of eligible new plant for additional depreciation.
Normal depreciation = A × rate + B × rate × 50%. Additional depreciation = C × 20%, with C split by days used.
Closing WDV = A + B − normal depreciation − additional depreciation. First test the whole block: if sale proceeds exceed opening WDV + all additions, use the negative block rule instead. If the proceeds exceed only opening WDV + full-rate additions, set the excess against B. Check that closing WDV is positive.

Common mistakes in Depreciation and Capital Expenditure Deductions

Applying half rate to the whole block or to opening WDV.
Students see a mid-year purchase and halve everything.
Fix: The 180-day test applies only to additions. Opening WDV always takes the full rate.
Deducting sale proceeds only from the asset sold, or charging a profit or loss on sale as business income.
Accounting habits lead students to compute profit on each asset.
Fix: Reduce the block by the sale proceeds. If proceeds exceed the opening WDV plus all additions, the excess is deemed short-term capital gain even if assets remain, and the WDV becomes nil. If all assets are sold, a positive balance is a short-term capital loss and a negative balance is a short-term capital gain.
Deducting sale proceeds from the half-rate additions first.
Students are unsure where the sale reduction sits.
Fix: The law reduces the whole block. For working, take sale proceeds off the opening WDV plus full-rate additions first, as in the three-line table, and state this as your working convention. Run the negative-block test on the whole block.
Claiming additional depreciation on second-hand plant, vehicles or computers, or in a trading business.
Students remember 20% but not the conditions.
Fix: Test the business (manufacture, production or power), the asset (new, and not excluded), and the 180-day split before computing.
Forgetting the balance of additional depreciation in the next year and forgetting to reduce WDV by it.
Students treat additional depreciation as a one-year deduction outside the block.
Fix: If the asset was used for under 180 days, claim the other half of the additional depreciation next year. Reduce WDV by both depreciations every year.
Claiming depreciation on the book figure or on land or goodwill.
Students start from the accounts and do not separate tax depreciation.
Fix: Add back book depreciation and use only the tax figure. Exclude land and goodwill from the depreciable base.

Worked examples

Example 1

Mehta Traders owns a block of plant and machinery (rate 15%, as given in the question). Opening WDV on 1 April 2026 is ₹10,00,000. On 10 May 2026 it bought machine A for ₹4,00,000 and used it from 1 July 2026. On 15 November 2026 it bought machine B for ₹2,00,000 and used it the same day. In January 2027 it sold an old machine for ₹1,50,000. Compute the depreciation and closing WDV for tax year 2026-27. Ignore additional depreciation.

Show the solution

The rate of 15% is given in the question, so use it as stated.
Machine A was used from 1 July 2026 to 31 March 2027, which is 274 days. That is 180 days or more, so it takes the full rate.
Machine B was used from 15 November 2026, 137 days. That is under 180 days, so it takes half the rate, 7.5%.
Full-rate base = 10,00,000 + 4,00,000 − 1,50,000 = ₹12,50,000. The sale proceeds do not exceed the block, so the block is not negative.
Depreciation on the base = 12,50,000 × 15% = ₹1,87,500.
Depreciation on machine B = 2,00,000 × 7.5% = ₹15,000.
Total depreciation = 1,87,500 + 15,000 = ₹2,02,500.
WDV before depreciation = 10,00,000 + 6,00,000 − 1,50,000 = ₹14,50,000. Closing WDV = 14,50,000 − 2,02,500 = ₹12,47,500.

Answer: Depreciation is ₹2,02,500. Closing WDV is ₹12,47,500. There is no capital gain because the sale proceeds are less than the block.

Example 2

Sharma Fabrics Ltd. manufactures cloth. The block of plant and machinery (rate 15%) has an opening WDV of ₹30,00,000. On 1 August 2026 it installed and used new machine X costing ₹20,00,000. On 1 January 2027 it installed and used new machine Y costing ₹10,00,000. Nothing was sold. Compute the normal and additional depreciation for tax year 2026-27, the closing WDV, and the additional depreciation for 2027-28 on these machines.

Show the solution

Machine X was used for 243 days, so it takes the full rate. Machine Y was used for 90 days, so it takes half the rate.
Normal depreciation: (30,00,000 + 20,00,000) × 15% = ₹7,50,000.
Normal depreciation on Y: 10,00,000 × 7.5% = ₹75,000. Total normal depreciation = ₹8,25,000.
The company manufactures and both machines are new plant, so additional depreciation applies.
Additional depreciation on X = 20,00,000 × 20% = ₹4,00,000.
Additional depreciation on Y = 10,00,000 × 10% = ₹1,00,000, because it was used for under 180 days. Total = ₹5,00,000.
Closing WDV = 30,00,000 + 30,00,000 − 8,25,000 − 5,00,000 = ₹46,75,000.
In 2027-28 the balance additional depreciation on Y is 10,00,000 × 10% = ₹1,00,000, claimed with the normal depreciation for that year.

Answer: Normal depreciation is ₹8,25,000. Additional depreciation is ₹5,00,000. Total deduction is ₹13,25,000. Closing WDV is ₹46,75,000. Additional depreciation of ₹1,00,000 on machine Y is allowed in 2027-28.

Exam tips

Write the eligibility conditions first. Many case MCQs hinge on one disqualifier, such as second-hand plant, a vehicle, or a trading business.
Show the date of use for each addition and the day count. Examiners award marks for the 180-day test.
Show the sale proceeds deduction and the block figure in the working. If proceeds exceed the opening WDV plus additions, the excess is deemed short-term capital gain even if assets remain, and the WDV becomes nil. If all assets are sold, a positive balance is a short-term capital loss and a negative balance a short-term capital gain. None of these is business income.
Keep normal depreciation and additional depreciation on separate lines, and show the closing WDV every time.
For a full capital deduction, state the condition and the rule that depreciation cannot also be claimed.

Practice questions from Profits and Gains of Business or Profession

Depreciation and Capital Expenditure Deductions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Depreciation and Capital Expenditure Deductions: frequently asked questions

What is a block of assets in income tax?

It is a group of assets of the same class, such as buildings, furniture or plant and machinery, that take the same depreciation rate. Depreciation is worked out on the block's total WDV, not asset by asset.

When is additional depreciation allowed?

It is allowed on new plant or machinery bought and installed by an assessee in manufacturing, production, or power generation, transmission or distribution. The rate is 20% of actual cost. Ships, aircraft, second-hand plant or machinery (including plant used outside India before import), office appliances and vehicles are excluded. Check the exclusions in the Act.

What happens if I do not claim depreciation?

Depreciation is treated as allowed whether you claim it or not. Your WDV is reduced by the amount that would have been allowed, so you cannot carry it forward to claim later.

What if an asset is sold for more than the block WDV?

If the sale proceeds exceed the opening WDV plus all additions, the excess is deemed short-term capital gain, even if other assets remain in the block. The block WDV then becomes nil and no depreciation is allowed. If all assets in the block are sold, a positive balance is a short-term capital loss and a negative balance is a short-term capital gain.