Taxation · Profits and Gains of Business or Profession

Depreciation and Other Capital Allowances for CA Inter Taxation

Updated 5 October 2026 · Fact-checked

Depreciation under the Income-tax Act, 2025 is a deduction on business assets, calculated by the block of assets on the written down value method. Add additions to opening WDV, subtract sale proceeds, apply the block rate, halve it on assets used under 180 days, then add additional depreciation if eligible.

Understand Depreciation and Other Capital Allowances

Depreciation is the tax law's way of letting you deduct the cost of a business asset over its life. You do not deduct the full cost in year one. Instead, you claim a fixed percentage every year.

The law does not track each asset on its own. It groups assets of the same class and the same rate into a block of assets. Examples are residential buildings at 5%, furniture at 10%, general plant and machinery at 15% and computers at 40%. You keep one written down value (WDV) for each block. Depreciation is a percentage of the block WDV, not of each asset's cost.

The block WDV moves like this. You start with the opening WDV. You add the actual cost of assets bought in the year. You subtract the sale proceeds of assets sold in the year, net of transfer expenses. You apply the rate to the result. The depreciation allowed is then deducted to give the closing WDV, which becomes next year's opening WDV.

To claim depreciation, the asset must be owned wholly or partly by you. It must be used for your business or profession in the tax year. It must also be put to use, not just bought. Depreciation is not optional. It is treated as allowed whether or not you claim it, so the WDV falls either way. Land and goodwill are not depreciable.

Sale of an asset rarely creates a capital gain. If assets remain in the block and the sale proceeds are less than the opening WDV plus additions, nothing happens except lower depreciation. A short-term capital gain or loss arises only in two cases. One is when sale proceeds (net of transfer expenses) exceed the opening WDV plus additions, so the block turns negative. The gain is that excess. The other is when all assets of the block are sold and the block ceases to exist. Capital expenditure allowances, such as scientific research and specified business, sit alongside this and are usually allowed in full.

Key rules to remember

Block WDV before depreciation: Opening WDV + Actual cost of additions − Sale proceeds (net of transfer expenses); Do this for each block separately. Never mix blocks with different rates.
Normal depreciation: Rate × (Opening WDV + Additions put to use for 180 days or more − Sale proceeds) + (Rate ÷ 2) × (Additions put to use for less than 180 days − any excess of Sale proceeds over the first bracket); Set sale proceeds first against opening WDV plus additions used for 180 days or more. Only if sale proceeds exceed that total does the excess reduce the additions used for less than 180 days. If the whole block (opening WDV plus all additions minus sale proceeds) is zero or negative, there is no depreciation, and a negative block gives a short-term capital gain.
Half-rate rule: Rate ÷ 2 on additions put to use for less than 180 days in the tax year; Applies only to additions. The opening WDV always gets the full rate. If sale proceeds exceed the opening WDV plus additions used for 180 days or more, the excess reduces the additions used for less than 180 days.
Common block rates: Residential building 5%; general non-residential buildings 10%; furniture and fittings 10%; plant and machinery 15%; motor cars 15% (30% if used in a business of running on hire); buses and lorries 15% (30% only if used in a business of running on hire); computers and software 40%; intangible assets 25%; Rates vary by class and use. Buses and lorries not used on hire fall in the 15% block. The 30% rate applies only when they are used in a business of running on hire. Purely temporary erections such as wooden structures have a rate of 40%. The rate for ships depends on the type of ship, so it is not listed here. Use the rate given in the question. Check the exact class and use of the asset before applying a rate.
Additional depreciation: 20% × Actual cost of new plant or machinery; Only for an assessee engaged in manufacture or production, or in generation, transmission or distribution of power. If the asset is used for under 180 days, claim 10% this year and the other 10% next year. If the question says the assessee has opted for a concessional tax regime, follow the conditions stated in the question.
Short-term capital gain when the block turns negative: Sale proceeds (net of transfer expenses) − (Opening WDV + Additions), if positive; The gain is the excess of net sale proceeds over opening WDV plus additions. It arises even if assets remain in the block. Always short-term, whatever the holding period. No depreciation is allowed on that block.
Block ceasing to exist: STCG or STCL = Sale proceeds (net of transfer expenses) − (Opening WDV + Additions); If all assets of the block are sold, a positive result is a short-term capital gain and a negative result is a short-term capital loss. Depreciation is nil.
Cost for depreciation: Actual cost = price paid + installation cost − subsidy or grant received; A cash payment above ₹10,000 in a day to one person is excluded from actual cost. Input tax credit claimed under GST is also excluded.
Preliminary expenses: Deduction = 1/5 of eligible expense in each of 5 successive years; This is a separate deduction under its own provision of the Income-tax Act, 2025. It is not a block of assets item, so no WDV is kept and no depreciation rate applies. It covers expenditure incurred before commencement of business, or in connection with extension of an undertaking or setting up of a new unit. It applies to Indian companies and resident non-corporate assessees. Eligible expense is capped at 5% of the cost of the project. A resident non-corporate assessee uses only the cost of the project. For a company, the cap is 5% of the cost of the project or, at the company's option, 5% of the capital employed, as the question provides. Use the base the question gives.

How to solve Depreciation and Other Capital Allowances questions

Use this order for any depreciation question. It keeps blocks separate and picks up every mark for each step.

1List each asset by its block and rate. Drop land, goodwill and assets not used for business. Allow only the business-use part of mixed-use assets.
2Find the actual cost of each addition. Remove subsidies and cash payments above the limit. Note the date it was put to use, not the purchase date.
3For each block, write the opening WDV, add the additions, and subtract the sale proceeds, net of transfer expenses. Do this separately for every block.
4Check the result. If the block is negative, or all its assets are sold, compute short-term capital gain or loss. Depreciation is nil in that case. Otherwise go on.
5Split the base into opening WDV net of sales, and additions. Apply the full rate to the first part. Apply half the rate to additions used for less than 180 days. Set sale proceeds first against opening WDV plus additions used for 180 days or more. Only an excess beyond that total reduces the additions used for less than 180 days.
6Check the conditions for additional depreciation. It needs a manufacturer or power generator, with new plant or machinery. Take 20%, or 10% where used under 180 days, and note the balance 10% for next year. If the question states that the assessee has opted for a concessional tax regime, follow the conditions given in the question.
7Add normal and additional depreciation for the total deduction. Show the closing WDV as WDV before depreciation minus depreciation allowed.
8Put the total depreciation in the business income computation. Show any capital gain under capital gains. Mention any unabsorbed depreciation to be carried forward.

Quickest way: Block table in the margin plus MCQ elimination

When to use it: Use this for time-pressed MCQs and the first part of a written depreciation problem.

Write one line per block: Opening + Additions − Sale = Base. Do the arithmetic first and look at the sign.
If the base is zero or negative, jump to capital gain at once. If all assets are sold, gain or loss is just Sale proceeds − (Opening + Additions).
Split the base into two columns: assets held at the start of the year at the full rate, and additions used for under 180 days at half rate.
For MCQs, test traps in order. Is the asset used by the business? Is it land or goodwill? Is the asset second-hand or in an office? Does the question ask for normal or total depreciation?
In a written answer, give each block its own heading and show every working. Step marks go to the base, the rate, the half-rate calculation, the additional depreciation test and the closing WDV.

Common mistakes in Depreciation and Other Capital Allowances

Treating a sale of one asset as a capital gain or loss.
Students use the asset-by-asset method learned for capital gains.
Fix: For a block, reduce the block WDV by the sale proceeds. A gain or loss arises only if the block turns negative or ceases to exist.
Applying the half rate to the whole block.
Students see an addition made in the year and halve everything.
Fix: Apply the half rate only to additions put to use for under 180 days. The opening WDV net of sale gets the full rate.
Claiming additional depreciation on second-hand machinery, ships, aircraft, office appliances or road transport vehicles.
Students remember '20% on plant and machinery' but forget the exclusions.
Fix: Check that the assessee is a manufacturer or power generator and that the plant is new. Exclude ships and aircraft, second-hand plant, assets whose whole cost is allowed as a deduction, office appliances (other than computers), road transport vehicles (other than those used in a business of running on hire), and assets installed in residential accommodation or guest houses.
Counting days from the purchase date instead of the date put to use.
The question gives the purchase date first and the date put to use later.
Fix: Count from the date the asset was put to use to the end of the tax year, 31 March. Compare with 180 days.
Thinking depreciation is optional and can be skipped to save WDV.
Students assume it works like other deductions, which must be claimed.
Fix: Depreciation is deemed allowed even if not claimed, so the WDV is reduced anyway. Always deduct it in the closing WDV.
Including land, goodwill, or the cash-paid portion of cost in the depreciable base.
Students take the invoice or total cost as the actual cost.
Fix: Use actual cost after removing land, goodwill, subsidy and cash payments above ₹10,000 a day to one person.

Worked examples

Example 1

A manufacturer's block of plant and machinery (rate 15%) has an opening WDV of ₹10,00,000 on 1 April 2026. In tax year 2026-27 it buys a new machine for ₹4,00,000 and puts it to use on 10 June 2026. It buys another new machine for ₹2,00,000 and puts it to use on 5 January 2027. It sells an old machine for ₹3,00,000 in October 2026. Compute total depreciation and closing WDV.

Show the solution

Block WDV before depreciation = 10,00,000 + 4,00,000 + 2,00,000 − 3,00,000 = ₹13,00,000. The block still exists and the base is positive, so there is no capital gain.
Days for the second machine from 5 January to 31 March 2027: 27 in January, 28 in February, 31 in March = 86 days, which is under 180. The first machine, from 10 June, is used for more than 180 days.
Full-rate base = opening WDV 10,00,000 − sale 3,00,000 + first machine 4,00,000 = ₹11,00,000. Depreciation at 15% = ₹1,65,000.
Half rate on second machine = 7.5% × 2,00,000 = ₹15,000.
Normal depreciation = 1,65,000 + 15,000 = ₹1,80,000.
Additional depreciation, as the assessee is a manufacturer and both machines are new: first machine 20% × 4,00,000 = ₹80,000. Second machine used for under 180 days: 10% × 2,00,000 = ₹20,000. Total = ₹1,00,000.
Total depreciation = 1,80,000 + 1,00,000 = ₹2,80,000.
Closing WDV = 13,00,000 − 2,80,000 = ₹10,20,000. The balance additional depreciation of ₹20,000 on the second machine is allowed next year.

Answer: Total depreciation for tax year 2026-27 is ₹2,80,000 (normal ₹1,80,000 plus additional ₹1,00,000). Closing WDV is ₹10,20,000. A further ₹20,000 additional depreciation is available next year.

Example 2

Case A: In tax year 2026-27, the block of plant and machinery (15%) of a trader has opening WDV of ₹2,00,000. The trader buys new machinery for ₹1,00,000 in the year and sells an old machine for ₹4,00,000. Other assets remain in the block. Case B: The furniture block (10%) of the same trader has opening WDV of ₹80,000, with no additions. All the furniture is sold for ₹50,000. Find the capital gain or loss and depreciation in each case.

Show the solution

Case A: Opening WDV + additions = 2,00,000 + 1,00,000 = ₹3,00,000.
Sale proceeds are ₹4,00,000, which is more than ₹3,00,000. The block value is 3,00,000 − 4,00,000 = −₹1,00,000, which is negative.
The excess of ₹1,00,000 is a short-term capital gain, even though assets remain in the block. The block WDV becomes nil, so depreciation is nil.
Case B: All assets of the block are sold, so the block ceases to exist. Opening WDV = ₹80,000.
Sale proceeds ₹50,000 − WDV ₹80,000 = −₹30,000. This is a short-term capital loss of ₹30,000.
Depreciation on the furniture block is nil, because no asset remains in the block.

Answer: Case A: short-term capital gain ₹1,00,000, depreciation nil. Case B: short-term capital loss ₹30,000, depreciation nil.

Exam tips

Look at the sign of the block first. Negative, or nothing left in the block, means capital gain or loss and no depreciation. Many questions are built on this single check.
For 180-day tests, count from the date put to use to 31 March. Examiners often give a purchase date well before the date put to use.
Before any additional depreciation, check three things: the business is manufacturing or power, the plant is new, and the asset is not an excluded type such as a ship, an aircraft, a road transport vehicle (other than one used on hire) or an office appliance (other than computers).
In written answers, show the block table with opening WDV, additions, sales, base, rate and depreciation for each block. Then show any capital gain separately, so you earn step marks even if one figure is wrong.
Read the question for any statement about the assessee's tax regime. Claim additional depreciation only if the assessee meets the conditions above and the question does not rule it out.

Practice questions from Profits and Gains of Business or Profession

Depreciation and Other Capital Allowances 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 Other Capital Allowances: frequently asked questions

What is a block of assets under the Income-tax Act, 2025?

It is a group of assets of the same class, with the same depreciation rate, that are tracked together with one WDV. Depreciation is a percentage of the block WDV, not of each asset. Plant and machinery at 15% and furniture at 10% are separate blocks.

When does a short-term capital gain arise on a block of assets?

It arises when sale proceeds exceed the opening WDV plus additions, so the block turns negative. It also arises, as a gain or a loss, when all assets of the block are sold and the block ceases to exist. In both cases it is short-term, whatever the holding period.

What are the conditions for additional depreciation?

The assessee must be in manufacture or production, or in generation, transmission or distribution of power. The plant or machinery must be new. Ships, aircraft, second-hand plant, assets whose whole cost is deductible, office appliances (other than computers), road transport vehicles (other than those used in a business of running on hire) and assets in residential accommodation or guest houses are excluded. If used for under 180 days, only half is allowed that year and the balance next year.

Is depreciation compulsory or can I choose not to claim it?

It is not a choice. Depreciation is treated as allowed even if you do not claim it, and the WDV is reduced. This is why the closing WDV always deducts depreciation.