Taxation can be a tricky subject, but understanding key provisions can help investors and business owners make informed financial decisions. One such important provision in Indian tax laws is section 32 of the Income Tax Act. This section deals with depreciation and how businesses can claim deductions on their assets to reduce taxable income. In simple terms, it allows businesses to account for the wear and tear of their assets over time, which ultimately helps in lowering their tax burden.
If you’re a business owner or an investor, knowing about section 32 can help you optimise tax savings while ensuring compliance with the law. In this article, we’ll break down the meaning of section 32, how depreciation works, and why this provision is beneficial for businesses.
Understanding Depreciation Under Section 32
Before diving into section 32, let’s first understand what depreciation means. When businesses buy assets like machinery, vehicles, or buildings, these assets lose value over time due to use and age. Instead of deducting the full cost of an asset in the year of purchase, businesses can spread this cost over several years. This process is called depreciation, and it helps in reducing taxable income gradually.
Section 32 provides clear guidelines on how businesses can claim depreciation on their assets, ensuring they get tax benefits for the natural wear and tear of their equipment and infrastructure.
Types of Depreciation Under Section 32
Under section 32, depreciation is classified into two types:
1. Normal Depreciation
Every business can claim depreciation on its assets under section 32(1)(ii). The rates of depreciation are prescribed under the Income Tax Act, and they vary for different types of assets. The depreciation rates are determined based on the expected lifespan of an asset and how quickly it loses value.
For example:
- Buildings: 10% to 40%
- Plant and machinery: 15%
- Computers: 40%
- Vehicles: 15%
These depreciation rates help businesses account for asset usage and reduce their taxable income accordingly.
2. Additional Depreciation
In certain cases, businesses can claim additional depreciation under section 32(1)(iia). This is applicable when:
- A business acquires new machinery or plant (except second-hand equipment and some restricted items)
- The asset is used in a manufacturing or production business
- The asset is installed after 31 March 2005
The additional depreciation rate is 20% of the cost of the new asset. This helps businesses reduce their taxable income further and encourage investment in new technology.
Who Can Claim Depreciation Under Section 32?
Depreciation under section 32 is available to:
Depreciation under Section 32 of the Income Tax Act is a valuable tax benefit available to businesses and professionals who use assets for income-generating activities. It allows them to deduct the gradual loss in value of assets over time, reducing their taxable income. Below are the categories of taxpayers who can claim depreciation under this section:
1. Businesses
Businesses operating in any legal structure can claim depreciation under Section 32, provided the assets are used for business purposes. This includes:
- Sole Proprietorships – Individual business owners who use assets like machinery, vehicles, or office equipment for business operations can claim depreciation.
- Partnership Firms – Partnerships involved in trade, commerce, or manufacturing can claim depreciation on assets used in business operations.
- Limited Liability Partnerships (LLPs) – LLPs, which combine features of a partnership and a company, are eligible to claim depreciation on assets used for business activities.
- Private and Public Limited Companies – Registered companies, whether small enterprises or large corporations, can claim depreciation on tangible and intangible assets used in their business operations.
Example: A manufacturing company that purchases new machinery for ₹10 lakh can claim depreciation on it, reducing its taxable income over time.
2. Professionals Using Depreciable Assets
Self-employed professionals and freelancers who own and use assets for their practice can claim depreciation under Section 32. This includes:
- Doctors – Medical practitioners who own diagnostic equipment, surgical tools, or medical devices used in their clinic or hospital.
- Chartered Accountants (CAs) and Company Secretaries (CSs) – Professionals who use computers, office furniture, and other business assets in their consulting firms.
- Lawyers and Advocates – Legal professionals who have office premises, law books, or technology equipment necessary for their profession.
- Architects and Engineers – These professionals invest in design software, high-end computers, and technical tools, which qualify for depreciation deductions.
Example: A dentist purchasing dental chairs and X-ray machines for their clinic can claim depreciation on these assets, reducing their taxable income.
It is important to note that individuals who purchase assets for personal use cannot claim depreciation under section 32. The asset must be used for generating income.
Conditions for Claiming Depreciation
To claim depreciation under section 32, businesses must fulfil the following conditions:
- The asset must be owned by the business.
- The asset must be used for business purposes during the financial year.
- Depreciation is calculated based on the written down value method unless the company opts for the straight-line method in certain cases.
- Depreciation must be claimed every year; it cannot be carried forward if missed in a financial year.
Benefits of Section 32 for Businesses
- Reduces tax liability: By deducting depreciation from taxable income, businesses can lower their tax payments.
- Encourages investment in assets: Businesses are encouraged to invest in new machinery and equipment due to the additional depreciation benefits.
- Supports economic growth: Incentives for purchasing new assets lead to higher production and employment generation.
- Aligns with international tax standards: Depreciation is a common tax-saving mechanism used globally, ensuring India’s tax system remains competitive.
Recent Updates and Amendments
In recent years, the government has introduced changes to section 32 to promote economic growth. Some key updates include:
- Reduction of depreciation rates for certain assets
- Temporary suspension of additional depreciation for some sectors
- Extension of benefits for MSMEs to encourage small businesses to invest in assets
It is advisable to check the latest income tax rules or consult a tax expert to understand the most recent changes applicable to your business.
Conclusion
Understanding section 32 of the Income Tax Act is essential for businesses looking to optimise their tax savings. By claiming depreciation on eligible assets, businesses can reduce their taxable income and reinvest their savings into growth. Whether you are a small business owner or a large corporation, utilising section 32 effectively can make a significant difference in your financial planning.
For the latest updates and expert advice, consulting a tax professional is always a good idea. This ensures that your business remains compliant with tax laws while maximising deductions available under section 32.
FAQs
Can depreciation be claimed on all assets?
No, depreciation can only be claimed on tangible assets (like machinery, buildings, and vehicles) and certain intangible assets (like patents and trademarks) used for business purposes.
Can a salaried individual claim depreciation under Section 32?
No, only businesses and professionals using assets for income-generating activities can claim depreciation.
What happens if depreciation is not claimed in a year?
Depreciation must be claimed every year. If missed, it cannot be carried forward or adjusted in future years.
What is the difference between normal and additional depreciation?
Normal depreciation is available to all businesses based on prescribed rates. Additional depreciation is given only to new machinery used in manufacturing, with an extra deduction of 20%.
