Depreciation allowance is a tax benefit that allows businesses to account for the gradual loss in value of their assets over time. Under the Income Tax Act, 1961, depreciation can be claimed as a deduction from taxable income—helping businesses lower tax outgo while accurately reflecting asset wear and tear.
Depreciation applies to fixed assets such as machinery, buildings, vehicles, and equipment. The Income Tax Department prescribes specific depreciation rates for different asset categories to ensure uniform and accurate calculations. Businesses can choose between the straight-line method (SLM) and the written-down value (WDV) method, with WDV being the most commonly followed approach in India for tax purposes.
To encourage capital investment, the government also allows additional depreciation for certain sectors, particularly manufacturing. For example, new plant or machinery used in production may qualify for an extra 20% depreciation in the first year itself.
While depreciation helps optimise business taxes, individuals often look for clarity and certainty in personal savings—making Bajaj Finance Fixed Deposits a preferred choice for predictable returns. Invest now and start earning up to 7.30% p.a. returns.
Depreciation in accounting
In accounting, depreciation refers to spreading the cost of a tangible asset over its useful life. This ensures that financial statements reflect the asset’s declining value due to usage, obsolescence, or time.
Businesses follow the matching principle, where the cost of an asset is matched with the revenue it generates over multiple years. Instead of expensing the entire asset cost upfront, depreciation distributes it across accounting periods—resulting in more accurate profit reporting.
Common depreciation methods used in accounting include:
- Straight-line method (SLM):
The asset’s cost is evenly spread across its useful life. It is commonly used for buildings and office equipment. - Written-down value (WDV) method:
Depreciation is charged at a fixed percentage on the reduced asset value each year. This method is popular in India due to its tax efficiency. - Units of production method:
Depreciation depends on actual asset usage, making it suitable for manufacturing businesses with variable output.
Accurate depreciation accounting directly impacts financial statements, investment decisions, and regulatory compliance.
Just as depreciation spreads asset cost over time, Bajaj Finance Fixed Deposits help individuals grow savings steadily with clearly defined tenures and returns. Open FD.
