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Jan 25, 2024

How to Claim Depreciation on Office Equipment under Income Tax Act 1961

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Raja Ray

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Office equipment is an essential asset for any business or profession. It includes computers, printers, scanners, fax machines, photocopiers, telephones, etc. that are used for carrying out various office functions.

Office equipment is also subject to wear and tear, obsolescence, and technological changes over time. Therefore, the cost of office equipment cannot be deducted fully in the year of purchase but has to be spread over its useful life. This is done by claiming depreciation on office equipment as per the Income Tax Act 1961.

What is Depreciation? How is it Calculated?

Depreciation is an allowance that reduces the taxable income of a taxpayer by taking into account the loss in value of an asset due to its use, passage of time, or other factors.

Depreciation is calculated as a percentage of the written down value (WDV) or the actual cost of the asset, depending on the method chosen by the taxpayer.

The Income Tax Act 1961 prescribes different rates of depreciation for different types of assets, based on their nature, usage, and block of assets.

Block of Assets and Depreciation Rates

A block of assets is a group of assets falling within a class of assets, on which the same rate of depreciation is prescribed.

The Income Tax Act 1961 divides assets into two categories: tangible assets and intangible assets.

Tangible assets are further classified into five blocks: building, furniture and fittings, plant and machinery, ships, and vehicles.

Also Read: Depreciation: Rates & Provisions in India's Companies Act, 2013

Intangible assets are classified into one block: know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature.

Office equipment falls under the block of plant and machinery, which includes any machinery, plant, furniture, or fittings that are not permanently attached to the building or premises and are used for business or profession.

The rate of depreciation for office equipment as per the Income Tax Act 1961 is 15% of the WDV or 25.89% of the actual cost, depending on the method chosen by the taxpayer.

If the office equipment is acquired and put to use for less than 180 days in a previous year, then the rate of depreciation will be half of the normal rate, i.e., 7.5% of the WDV or 12.77% of the actual cost.

Calculation of Depreciation on Office Equipment

To calculate the depreciation on office equipment, the taxpayer has to follow the steps given below:

  • Determine the actual cost of the office equipment, which includes the purchase price, installation charges, freight, insurance, and any other expenses incurred for bringing the asset to its present location and condition. Yet, the actual cost does not include any subsidy or grant received from the government or any other authority, or any amount paid by the seller or the previous owner on behalf of the buyer.

  • Determine the WDV of the office equipment, which is the actual cost of the asset as reduced by the depreciation already allowed in the previous years. The WDV of the office equipment at the beginning of the previous year is the WDV of the office equipment at the end of the immediately preceding previous year. But, if the office equipment is acquired during the previous year, then the WDV of the office equipment at the beginning of the previous year is nil.

  • Choose the method of depreciation, either the WDV method or the actual cost method, and apply the rate of depreciation accordingly. The rate of depreciation depends on the period of use of the office equipment in the previous year. If the office equipment is used for 180 days or more, then the normal rate of depreciation is applicable. If the office equipment is used for less than 180 days, then the half rate of depreciation is applicable.

  • Calculate the amount of depreciation by multiplying the WDV or the actual cost of the office equipment by the rate of depreciation. The amount of depreciation cannot exceed the WDV of the office equipment at the beginning of the previous year. The amount of depreciation is allowed as a deduction from the income of the taxpayer under section 32 of the Income Tax Act 1961.

  • Calculate the WDV of the office equipment at the end of the previous year by subtracting the amount of depreciation from the WDV of the office equipment at the beginning of the previous year. The WDV of the office equipment at the end of the previous year will be the WDV of the office equipment at the beginning of the previous year.

Example of Depreciation on Office Equipment

Suppose a taxpayer purchased a computer for Rs. 50,000 on 1st April 2020 and put it to use for his business on the same date. He has chosen the WDV method of depreciation and has claimed depreciation on the computer for the previous year 2020-21. The rate of depreciation for the computer as per the Income Tax Act 1961 is 15% of the WDV. The calculation of depreciation on the computer for the previous year 2020-21 is as follows:

  • The actual cost of the computer is Rs. 50,000.
  • The WDV of the computer at the beginning of the previous year 2020-21 is nil, as the computer was acquired during the previous year.
  • The rate of depreciation for the computer is 15% of the WDV, as the computer is used for more than 180 days in the previous year.
  • The amount of depreciation on the computer is Rs. 50,000 x 15% = Rs. 7,500.
  • The WDV of the computer at the end of the previous year 2020-21 is Rs. 50,000 - Rs. 7,500 = Rs. 42,500.

The taxpayer can claim Rs. 7,500 as a deduction from his income under section 32 of the Income Tax Act 1961. The WDV of the computer at the end of the previous year 2020-21 will be the WDV of the computer at the beginning of the next previous year 2021-22.

Conclusion

Office equipment is an important asset for any business or profession, but it also loses its value over time due to various factors. Therefore, the taxpayer can claim depreciation on office equipment as per the Income Tax Act 1961, which allows him to reduce his taxable income by taking into account the loss in value of the asset.

The rate of depreciation for office equipment as per the Income Tax Act 1961 is 15% of the WDV or 25.89% of the actual cost, depending on the method chosen by the taxpayer. The calculation of depreciation on office equipment involves determining the actual cost, the WDV, the rate of depreciation, and the amount of depreciation for each previous year.

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