Income Tax

Fixed Asset Depreciation: Companies Act vs Income Tax Act

Q: Why is depreciation different in the financial statements and the income tax return?

The Companies Act, 2013 (Schedule II) requires depreciation to be calculated based on the useful life of each asset as estimated by management, reflecting the asset's actual economic consumption for financial reporting purposes. The Income Tax Act, 1961 prescribes fixed depreciation rates applied to 'blocks of assets' (groups of similar assets) using the written-down value (WDV) method, regardless of an individual asset's actual useful life, because tax law prioritises administrative simplicity and uniform treatment over precise economic measurement. These two purposes — fair financial reporting versus tax administration — naturally produce different annual depreciation figures for the same asset.

Q: What is a 'block of assets' under the Income Tax Act?

A block of assets is a group of assets of the same class (such as 'plant and machinery' or 'furniture and fittings') that carry the same depreciation rate under the Income Tax Rules. Instead of tracking depreciation separately for each asset, the WDV (written-down value) of the entire block is depreciated together each year. When an asset within a block is sold, its sale proceeds are deducted from the block's WDV rather than being treated as a separate gain or loss — a capital gain or loss only arises if the block's WDV becomes negative (short-term capital gain) or if the entire block ceases to exist.

Q: What is deferred tax and why does it arise from depreciation differences?

Deferred tax is the accounting recognition of the future tax impact of temporary differences between the carrying amount of an asset in the books and its tax base. When tax depreciation (often accelerated, e.g. 40% WDV on plant and machinery) exceeds book depreciation (e.g. 10% straight-line) in early years, the company pays less tax now than its book profit would suggest — creating a deferred tax liability that represents tax payable in later years when book depreciation exceeds tax depreciation and the difference reverses. Ind AS 12 / AS 22 require this liability (or asset, in the opposite case) to be recognised in the financial statements.

Fixed Asset Depreciation: Companies Act vs Income Tax Act

FININ2MIN RESEARCH Updated Jun 2026 · 8 min read

Reviewed by CA Nikhil Gupta · Last reviewed 16 June 2026

Buy a machine for ₹10 lakh and you'll get three different depreciation numbers for it — one for your financial statements, one for your income tax return, and a "difference" that becomes deferred tax. None of these numbers are wrong; they're answering different questions.

Two Laws, Two Purposes

	Companies Act, 2013 (Schedule II)	Income Tax Act, 1961
Purpose	Fair presentation of financial position — depreciation should reflect actual economic consumption of the asset	Tax administration — simple, uniform rates applied across all taxpayers regardless of actual usage
Basis	Useful life of each asset class (management estimate, within Schedule II indicative lives)	Fixed percentage rates prescribed in the Income Tax Rules, applied to "blocks of assets"
Method	Straight-line (SLM) or written-down value (WDV) — company's choice, applied consistently	WDV method only (with limited exceptions like power generation undertakings)
Unit of account	Individual asset or asset class	Block of assets (group of similar assets at the same rate)

How Schedule II Depreciation Works

Schedule II to the Companies Act, 2013 specifies indicative useful lives for various classes of assets — for example, general plant and machinery is indicated at 15 years, computers and laptops at 3 years, and furniture and fittings at 10 years. Companies depreciate the asset's cost (less residual value, typically estimated at 5%) over this useful life using SLM or WDV. Management can deviate from the indicative life if it can justify a different useful life based on technical evaluation — but this must be disclosed.

How Income Tax (Block of Assets) Depreciation Works

The Income Tax Act groups assets into blocks by category and prescribed rate — common rates include 10% for buildings (general), 15% for plant and machinery (general), 40% for computers and software, and 15% for furniture and fittings. Each year, depreciation is calculated as the prescribed rate applied to the opening WDV of the block (plus additions during the year, minus disposals), not to individual assets.

⚠ Half-year rule: If an asset is put to use for less than 180 days in the year of acquisition, only 50% of the normal depreciation rate is allowed for that year under the Income Tax Act — a rule with no direct Schedule II equivalent.

Worked Example: ₹10 Lakh Plant & Machinery

Assume a machine costing ₹10,00,000, acquired and used for more than 180 days in Year 1. Books: Schedule II useful life of 15 years, SLM, 5% residual value. Tax: plant and machinery block at 15% WDV.

Year	Book Depreciation (SLM, 15 yrs)	Tax Depreciation (15% WDV)	Timing Difference
Year 1	₹63,333 (9,50,000 ÷ 15)	₹1,50,000 (15% × 10,00,000)	₹86,667 (tax > book)
Year 2	₹63,333	₹1,27,500 (15% × 8,50,000)	₹64,167 (tax > book)
Year 3	₹63,333	₹1,08,375 (15% × 7,22,500)	₹45,042 (tax > book)

In the early years, tax depreciation exceeds book depreciation — the company's taxable profit is lower than its book profit purely due to this timing difference, so it pays less tax now. In later years (once the WDV balance shrinks below the SLM amount), the relationship reverses and book depreciation exceeds tax depreciation, so taxable profit becomes higher than book profit.

Deferred Tax: Recognising the Future Reversal

Because the total depreciation over an asset's life is the same under both methods (subject to residual value differences), the early-year tax saving is temporary — it reverses in later years. Ind AS 12 (and AS 22 under the earlier framework) require companies to recognise this as a deferred tax liability (when tax depreciation has exceeded book depreciation cumulatively) or a deferred tax asset (in the opposite case), computed by applying the applicable tax rate to the cumulative timing difference.

Year	Cumulative Timing Difference	Deferred Tax Liability @ 25%
Year 1	₹86,667	₹21,667
Year 2	₹1,50,833	₹37,708
Year 3	₹1,95,875	₹48,969

Why This Matters for Finance Teams

Fixed asset registers typically need to track both Schedule II useful-life depreciation (for books) and block-wise WDV (for tax) — maintaining both from the start avoids painful reconstruction at year-end
Capex planning should consider that accelerated tax depreciation (e.g., 40% on computers) provides a cash tax benefit upfront even though the book P&L impact is spread more evenly
Asset disposals are treated very differently — a profit/loss on sale flows through the P&L for books, but for tax, sale proceeds simply reduce the block's WDV (a capital gain/loss arises only if the block's WDV goes negative or the block ceases to exist)

This depreciation difference is one of the most common sources of book-tax differences finance teams encounter, alongside provisions covered under Section 43B disallowances and other timing differences that feed into the deferred tax computation each quarter.

Frequently Asked Questions

Why is depreciation different in the financial statements and the income tax return? ▼

The Companies Act (Schedule II) bases depreciation on each asset's estimated useful life for fair financial reporting. The Income Tax Act applies fixed rates to "blocks of assets" using the WDV method for administrative simplicity. These different purposes produce different annual depreciation figures for the same asset, with the cumulative difference recognised as deferred tax.

What is a 'block of assets' under the Income Tax Act? ▼

A block of assets is a group of similar assets (e.g., "plant and machinery") depreciated together at the same rate using WDV. Individual assets aren't tracked separately for tax — when an asset is sold, proceeds reduce the block's WDV, and capital gain/loss only arises if the block's WDV goes negative or the block ceases to exist entirely.

What is deferred tax and why does it arise from depreciation differences? ▼

Deferred tax recognises the future tax impact of temporary book-tax differences. When tax depreciation (often accelerated) exceeds book depreciation early on, the company pays less tax now, creating a deferred tax liability for the higher tax payable later when the relationship reverses. Ind AS 12/AS 22 require this to be recognised in the financial statements.

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