You bought a ₹10 lakh machine, but your accountant says only ₹1.5 lakh is this year's expense — and the tax return shows a different figure than the P&L. Welcome to depreciation, where one asset legitimately has two lives: one under the Companies Act (for your financial statements) and one under the Income Tax Act (for your tax). Founders don't need the tables memorised; they need the logic, the headline rates and the traps. Here they are.
Why depreciation exists at all
An asset serving five years shouldn't crush one year's profit. Depreciation spreads the cost over the asset's working life, matching expense to the revenue it helps earn. Consequences founders should internalise: buying assets doesn't reduce profit much in year one (cash out ≠ expense); depreciation is a non-cash expense (profit falls, bank doesn't); and the asset's book value declines annually toward scrap — which is why old balance sheets show big machines at small numbers.
Income Tax method: blocks and WDV
- Assets group into 'blocks' by type and rate; depreciation applies to the block's written-down value (WDV), not asset by asset
- Headline rates: buildings 10% (5% residential), furniture 10%, plant & machinery 15%, computers and software 40%, motor vehicles 15% (30% for commercial hire)
- The 180-day rule: assets used less than 180 days in the year of purchase get half the rate that year — buy in September, not October, when the math matters
- Additional depreciation (20% extra, year one) for new plant & machinery in manufacturing — a genuine incentive many miss
- Sell an asset: proceeds reduce the block; the block itself continues — individual profit/loss on one machine usually doesn't hit the P&L separately
Companies Act method: useful life
Companies compute book depreciation from Schedule II useful lives — e.g., general plant & machinery 15 years, computers 3, vehicles 8, furniture 10 — via straight-line or WDV. Because tax and book methods differ, companies carry a 'deferred tax' line reconciling the two; founders can safely treat that as an accounting echo of the timing difference rather than new economics. Proprietorships and firms without statutory-audit needs typically live on income-tax depreciation alone.
Planning a major machine purchase late in the year? Commissioning before the 180-day midpoint (put to use by early October) doubles that year's depreciation versus a few weeks later. Time asset commissioning — not just purchase — with the calendar in view.
Founder mistakes that cost real money
- Expensing capital items (or capitalising repairs): misclassification distorts both profit and tax — the ₹40,000 laptop is an asset; the ₹40,000 machine overhaul is usually expense
- Missing 'put to use': depreciation runs from usage, not invoice date — keep installation/commissioning evidence
- Ignoring additional depreciation in manufacturing — 20% left on the table
- No fixed asset register: every audit, loan and insurance claim asks for it; build it from day one (asset, date, cost, location, rate)
- Forgetting GST interplay: claim ITC on the machine and depreciation is computed on the ex-GST cost — claiming depreciation on the tax component too is a classic audit para
Depreciation as a planning tool
Within the rules, timing is legitimate strategy: accelerate purchases into profitable years (the 180-day rule permitting), use additional depreciation where eligible, and remember that under presumptive schemes (44AD/44ADA) depreciation is deemed absorbed — the WDV still notionally erodes, which matters if you later exit presumptive. When selling the business or its assets, the tax story runs through block values, so a maintained register quietly becomes negotiation ammunition.
How Aidwish helps
Aidwish builds fixed-asset registers, maps assets to correct blocks and rates with your CA, and times capex against the 180-day and incentive rules inside its setup and CFO-support work — so machines pay you back in tax as designed.