How to Calculate Depreciation Step by Step (India)

Why Indian businesses need to calculate depreciation

Every asset you buy for your business slowly wears out. A freezer in a kirana store, a laptop in a CA office or a delivery van all lose value each year. Depreciation is the way accountants spread that loss over the years the asset is used.

In India you usually calculate it twice. Once for your books, under the Companies Act, 2013 (Schedule II) or the relevant accounting standard. And once for tax, under Section 32 of the Income Tax Act, 1961 and its block-of-assets rules. The two numbers are often different, and that is fine as long as you know why.

This guide walks you through the calculation in six plain steps. You can also check your answer with our free depreciation calculator once you understand the logic.

Step 1: Find the cost of the asset

Start with the full cost, not just the invoice price. Cost includes the purchase price, GST that you cannot claim as input credit, freight, installation and any other amount spent to make the asset ready for use.

Suppose a Delhi kirana owner buys a deep freezer for Rs 55,000, pays Rs 3,000 for transport and Rs 2,000 for installation. The cost for depreciation is Rs 60,000. If you can claim GST input credit on the invoice, that GST is left out of the cost.

Step 2: Decide the useful life

Useful life is the number of years you expect to use the asset. For companies, Schedule II of the Companies Act, 2013 lists standard lives. Computers and laptops are 3 years, servers and networks 6 years, office equipment 5 years, furniture 10 years and general plant and machinery 15 years. Motor vehicles other than buses and lorries are 8 years. Always check the current Schedule II on the mca.gov.in website for your exact asset class.

Sole proprietors and partnership firms are not bound by Schedule II for their books, but many use the same lives because it keeps things simple and defensible.

Step 3: Estimate the scrap or residual value

Scrap value is what you expect to get when you sell or dispose of the asset at the end of its life. Schedule II says residual value should not be more than 5% of the original cost. So for a Rs 60,000 asset, scrap value can be at most Rs 3,000 if you follow that limit. Many small businesses simply assume it at 5% or zero.

Step 4: Choose the method

There are two methods you will meet most often in India.

• Straight-line method (SLM): the same amount is charged every year.
• Written-down value method (WDV): a fixed percentage is charged on the reducing balance, so the charge is higher in early years.

For income tax, SLM is not available for most businesses. The law uses WDV on blocks of assets, with fixed rates. For your books, a company can pick either method and should use it consistently.

Key takeaway: Books and tax are two separate calculations. Schedule II gives lives and the method is your choice; the Income Tax Act gives fixed WDV rates by block.

Step 5: Apply the formula

The straight-line formula is simple:

Annual depreciation = (Cost – Scrap value) / Useful life

The WDV formula is:

Depreciation for the year = Opening WDV x Rate %

Then closing WDV is opening WDV minus depreciation, and it becomes next year’s opening WDV.

Step 6: Adjust for part-year use and record it

If you buy an asset mid-year, books under Schedule II charge depreciation for the days it was available for use. For tax, the rule is different. If the asset is used for fewer than 180 days in the year, only half of the normal rate is allowed in that year. If used for 180 days or more, the full rate applies.

Finally, pass the journal entry: debit Depreciation expense and credit Accumulated depreciation (or the asset account directly, in small firms).

Worked example 1: Kirana freezer under SLM and WDV

Cost Rs 60,000, life 10 years, scrap value Rs 3,000 (5% of cost, the Schedule II ceiling).

SLM: (60,000 – 3,000) / 10 = Rs 5,700 per year, or Rs 475 per month.

Tax WDV at 15% (plant and machinery):

• Year 1: 15% of 60,000 = Rs 9,000. Closing WDV Rs 51,000.
• Year 2: 15% of 51,000 = Rs 7,650. Closing WDV Rs 43,350.
• Year 3: 15% of 43,350 = Rs 6,502.50. Closing WDV Rs 36,847.50.

Notice how tax depreciation is front-loaded. In year 1 the tax claim (Rs 9,000) is higher than the SLM charge (Rs 5,700).

Worked example 2: A CA firm buys five laptops

A CA firm in Pune buys 5 laptops at Rs 70,000 each, a total of Rs 3,50,000. Computers (including software) fall under the 40% block for tax.

Tax depreciation, bought in April (more than 180 days of use):

• Year 1: 40% of 3,50,000 = Rs 1,40,000. Closing WDV Rs 2,10,000.
• Year 2: 40% of 2,10,000 = Rs 84,000. Closing WDV Rs 1,26,000.
• Year 3: 40% of 1,26,000 = Rs 50,400. Closing WDV Rs 75,600.

Now say the laptops were bought on 10 February, so they were used for fewer than 180 days. Year 1 gets half the rate, 20%: Rs 70,000, closing WDV Rs 2,80,000. In year 2 the full 40% applies: Rs 1,12,000, closing WDV Rs 1,68,000.

For the books under Schedule II: life 3 years, scrap 5% = Rs 17,500. Depreciable amount = 3,50,000 – 17,500 = Rs 3,32,500. SLM per year = 3,32,500 / 3 = about Rs 1,10,833.

Worked example 3: A delivery fleet

A small e-commerce seller in Hyderabad buys 4 delivery vans at Rs 8,00,000 each, a total of Rs 32,00,000, for its own use. The vans are not run on hire, so the 15% block rate for motor vehicles applies (higher rates such as 30% apply to vehicles used in a business of running them on hire).

• Year 1: 15% of 32,00,000 = Rs 4,80,000. Closing WDV Rs 27,20,000.
• Year 2: 15% of 27,20,000 = Rs 4,08,000. Closing WDV Rs 23,12,000.
• Year 3: 15% of 23,12,000 = Rs 3,46,800. Closing WDV Rs 19,65,200.

For one van in the books: life 8 years, scrap 5% = Rs 40,000. SLM = (8,00,000 – 40,000) / 8 = Rs 95,000 per van per year, or Rs 3,80,000 for the fleet.

Quick comparison of the three examples

Asset	Cost (Rs)	Tax rate (WDV)	Year 1 tax depreciation (Rs)	Year 1 SLM in books (Rs)
Kirana freezer	60,000	15%	9,000	5,700
5 laptops	3,50,000	40%	1,40,000	1,10,833
4 delivery vans	32,00,000	15%	4,80,000	3,80,000

How depreciation fits into the bigger picture

Depreciation does not take cash out of your bank account. The cash left the day you paid for the asset. Depreciation only moves that cost into your profit and loss account gradually. This is why a business can show a small profit and still have healthy cash, or the other way round.

It also affects decisions. If your freezer will be worth only Rs 36,847 in tax books after three years, you can compare that with a replacement cost and see if repairs still make sense. Pairing depreciation with a return check, such as the ROI calculator, tells you whether the new machine earns more than it costs.

For listed and larger companies, Ind AS 16 adds a few more rules, such as depreciating major parts of an asset separately and reviewing useful life every year. Smaller companies following Indian GAAP refer to AS 10. If you are a proprietor, ICAI guidance notes and your CA can tell you which standard applies to you.

Benefits of calculating depreciation properly

A correct calculation shows your true profit, because the cost of an asset is matched with the years it helps you earn. It also lowers taxable business income, since depreciation is an allowed deduction. Banks and investors read your books, and clean depreciation figures make your balance sheet more believable. It also helps you plan replacement, because you can see how much value is left in each asset.

Challenges and limitations

Depreciation is an estimate. Useful life and scrap value are judgements, and two honest accountants can choose different numbers. The tax block system also makes it hard to track a single asset, because depreciation is on the whole block. Sale of one asset reduces the block, and the effect can surprise first-time filers. Finally, the Income-tax Act, 2025 has applied from 1 April 2026, so section numbers you read in older articles may differ. Check incometax.gov.in or ask your CA before filing.

Common mistakes to avoid

1. Using only the invoice price and forgetting freight, installation and non-creditable GST.
2. Applying the full tax rate to an asset used for fewer than 180 days instead of half.
3. Depreciating land, which is not a depreciable asset.
4. Mixing books and tax depreciation in one column, so neither figure is right.
5. Changing the method every year without a clear reason.
6. Forgetting to remove sold assets from the register or the block.

Best practices

1. Keep a fixed asset register with date of purchase, cost, vendor and put-to-use date.
2. Note the date the asset was ready for use, since that decides the 180-day test.
3. Match each asset to the right block and rate before you calculate.
4. Keep books depreciation and tax depreciation in two separate schedules and reconcile them.
5. Review useful life and scrap value at least once a year.
6. Cross-check your hand calculation with a tool such as the payback period calculator when you decide whether a purchase pays for itself, and save invoices for audit.

Conclusion

To calculate depreciation, find the true cost, pick a life and scrap value, choose a method, apply the formula and adjust for part-year use. Do it once for your books and once for tax. With a little practice, the arithmetic is the easy part. The real skill is keeping clean records.

If you want to confirm the numbers quickly, run them through the online depreciation tool, then take the final figures to your CA.

FAQs

Which depreciation method should a small Indian business use?
For tax, the Income Tax Act uses the WDV method on blocks, so you have little choice. For your books, SLM is the easiest and is widely used by small firms. Pick one and stay consistent.

What is the depreciation rate for computers in India?
Under the Income Tax Act, computers including software fall in the 40% WDV block. Under Schedule II of the Companies Act, 2013, the useful life of computers is 3 years.

What happens if I use an asset for less than 180 days?
For tax, you can claim only half of the normal rate in that year. The remaining WDV carries forward and gets the full rate from the next year.

Is depreciation allowed on land?
No. Land has no wear and tear in the accounting sense, so it is not depreciated. Only the building on it is.

Can I claim depreciation if I paid in cash?
Large cash payments for an asset can create problems with the actual cost under the Income Tax Act. Pay by bank or UPI wherever possible and confirm the current limit with your CA.