What's Depreciation and Why It Matters

Depreciation is basically the reduction in value of an asset over time. When you buy machinery, equipment, or buildings for your business, they wear out and lose value. The Income Tax Act lets you claim this loss as a deduction, which directly reduces your taxable income.

So what does this mean for you? It means you can recover the cost of your assets gradually through tax deductions. This is really important because it helps improve your cash flow and reduces your overall tax burden.

Depreciation is governed by Section 32 of the Income Tax Act. The rates and methods change based on the type of asset and its classification. For FY 2025-26, you need to know the exact rates to claim the right deductions.

Understanding Block of Assets

Before we jump into rates, you need to understand the concept of a block of assets. The Income Tax Act groups assets into blocks based on their nature and depreciation rate. Each block is treated as a single unit.

And here's the thing: you don't claim depreciation on individual assets. You claim it on the entire block. So if you buy five computers in a year, they all go into the same block and depreciation is calculated on the total cost.

This approach simplifies calculations but you need to track which assets fall into which block. Let me break down the main blocks for you.

Depreciation Rates for FY 2025-26: Complete Breakdown

The depreciation rates for FY 2025-26 remain consistent with the standard rates under the Income Tax Act. These rates are applied on a written down value basis, which means depreciation is calculated on the remaining value of assets, not the original cost.

These rates apply to assets acquired on or after April 1, 2026. The written down value method means you calculate depreciation on the closing balance of each block, not the opening balance.

Practical Example: How to Calculate Depreciation

Let's say you own a manufacturing business and bought machinery worth Rs. 10,00,000 on June 15, 2026. You want to know how much depreciation you can claim.

Here's how it works: The machinery falls under the plant and machinery block with a 15% depreciation rate. Since you bought it mid-year, you get half-year depreciation in the first year (this is called the half-year convention).

Calculation for FY 2025-26:

• Cost of machinery: Rs. 10,00,000
• Depreciation rate: 15%
• Half-year convention: 15% ÷ 2 = 7.5%
• Depreciation in FY 2025-26: Rs. 10,00,000 × 7.5% = Rs. 75,000
• Written down value at end of FY 2025-26: Rs. 9,25,000
• Depreciation in FY 2026-27: Rs. 9,25,000 × 15% = Rs. 1,38,750

See the difference? In the second year, you claim depreciation on the remaining value, not the original cost. This is what written down value means.

Key Rules You Need to Know

Depreciation isn't just about knowing the rates. You need to follow specific rules to claim it correctly. Let me walk you through the important ones.

• Half-year convention applies when you buy an asset mid-year. You get only 50% of the depreciation rate in the first year, regardless of when you bought it.
• Additions and deletions are tracked separately within each block. When you sell an asset, you deduct its written down value from the block.
• Depreciation is allowed only on assets used for business purposes. Personal assets don't qualify.
• The asset must be owned by you on the last day of the financial year to claim depreciation for that year.
• Depreciation is compulsory. You can't choose not to claim it just to carry it forward to the next year.
• Assets costing less than Rs. 5,000 can be fully depreciated in the year of purchase if you want.

Basically, you need to maintain detailed records of all assets, their acquisition dates, costs, and sales. The Income Tax Department asks for this documentation during audits.

Assets That Don't Qualify for Depreciation

Not everything you buy for your business gets depreciation. There are specific exclusions you should know about.

• Land and leasehold improvements (though buildings on land do qualify)
• Inventory and stock-in-trade (these are covered under different rules)
• Cash, bank balances, and securities
• Animals and livestock used for breeding or dairy
• Vehicles used for personal purposes
• Goodwill and other intangible assets acquired before April 1, 2020

The thing is, many business owners claim depreciation on assets that don't qualify and end up facing penalties during assessments. Be careful here.

Special Cases and Exceptions

Some assets have special depreciation rules. Let me cover the ones that come up most often.

Computers and IT equipment get 40% depreciation, which is much higher than other assets. This is because technology becomes obsolete quickly. If you bought a server for Rs. 5,00,000 in 2026, you'd claim Rs. 2,00,000 as depreciation in the first year itself (after applying half-year convention).

Renewable energy equipment like solar panels has special rates too. If you install solar power systems, you might get accelerated depreciation under certain government schemes. Check with your CA about current incentives.

Buildings used for manufacturing get 10% depreciation, but residential buildings used for business (like a guest house) get only 5%. The classification matters a lot here.

And here's something many people miss: if you buy used assets, you still claim depreciation on the cost you paid, not on the original cost. The depreciation rate remains the same.

How to Track and Maintain Records

The Income Tax Department takes record-keeping seriously. During an audit, they'll ask for proof of every asset you've claimed depreciation on.

You should maintain:

• Purchase invoices and bills for all assets
• Proof of payment (bank statements, cheques)
• Asset register with details of cost, date of purchase, and depreciation claimed
• Photos or physical evidence of asset ownership
• Sales invoices and documentation for assets you've sold
• Depreciation schedules showing year-wise calculations

Put simply, you're building a paper trail that proves you owned these assets and used them for business. Digital records are fine, but keep them backed up.

Common Mistakes to Avoid

I've seen business owners make the same depreciation mistakes year after year. Let me help you avoid them.

First mistake: claiming depreciation on personal assets mixed with business assets. If you buy a car and use it 50% for business and 50% personally, you can only claim depreciation on 50% of the cost.

Second mistake: forgetting the half-year convention. Many people claim full depreciation in the year of purchase. You don't get that unless the asset was owned for the entire financial year.

Third mistake: not adjusting the block when you sell an asset. When you sell machinery, you must deduct its written down value from the plant and machinery block. Forgetting this inflates your depreciation in future years.

Fourth mistake: claiming depreciation on assets that haven't been put to use. If you buy equipment in March 2026 but don't use it until July 2026, you still get half-year depreciation in FY 2025-26, but only if it was available for use.

Fifth mistake: mixing up different asset classes. A computer goes into the IT equipment block at 40%, not the plant and machinery block at 15%. Getting this wrong costs you money.

Impact of Depreciation on Your Income Tax

Depreciation directly reduces your taxable income. Let's look at a real scenario.

Say your business made a profit of Rs. 50,00,000 in FY 2025-26. You also claimed depreciation of Rs. 8,00,000 on various assets. Your taxable income becomes Rs. 42,00,000 instead of Rs. 50,00,000.

If your tax rate is 30%, you save Rs. 2,40,000 in taxes just by claiming depreciation correctly. That's significant money.

But here's what's important: depreciation is a non-cash expense. You didn't actually spend Rs. 8,00,000 in that year. You spent it when you bought the assets. So depreciation gives you a tax benefit without affecting your cash flow negatively in the current year.

This is why depreciation is sometimes called a tax shield. It protects your income from taxation.

Depreciation in Different Business Structures

The depreciation rules apply differently depending on your business structure.

For sole proprietorships and partnerships, depreciation is claimed in the individual's or firm's income tax return. Each partner gets their share of depreciation based on profit-sharing ratio.

For companies, depreciation is claimed at the company level. Directors can't claim personal depreciation on company assets. The company claims it, which reduces the company's taxable income.

For LLPs (Limited Liability Partnerships), depreciation is claimed at the LLP level, similar to companies. Individual members don't claim depreciation separately.

For trusts and associations, depreciation is allowed if the assets are used for earning income. The rules are similar to companies.

Compliance Requirements for FY 2025-26

When you file your income tax return for FY 2025-26, you need to show depreciation clearly. The Income Tax Department wants to see:

• Opening written down value of each block of assets
• Additions during the year with dates
• Deletions and sales during the year
• Depreciation rate applied
• Depreciation claimed for the year
• Closing written down value

This information goes into Schedule DA (Depreciation and Amortization) of your income tax return. If you file your return without proper depreciation schedules, the Income Tax Department might raise queries.

And that's really it: show your work, provide documentation, and be consistent year after year. Don't suddenly change depreciation rates or asset classifications without good reason.

FAQs on Depreciation Rates FY 2025-26

Final Thoughts

Depreciation is one of the most valuable tax deductions available to businesses. Getting it right saves you significant money, but getting it wrong invites audit trouble.

For FY 2025-26, the rates I've shared are consistent with the standard Income Tax Act provisions. But tax laws evolve, and there might be specific provisions or amendments that apply to your situation.

My advice? Work with a qualified CA who understands your business. They'll help you classify assets correctly, track depreciation properly, and file your returns without issues. The small fee you pay is worth the tax savings and peace of mind.

Keep your records organized, update your asset register regularly, and review your depreciation schedules before filing your return. These simple steps prevent most depreciation-related problems.