{"id":3461,"date":"2026-11-02T09:30:00","date_gmt":"2026-11-02T04:00:00","guid":{"rendered":"https:\/\/digitoolkit.in\/blog\/?p=3461"},"modified":"2026-10-15T12:32:45","modified_gmt":"2026-10-15T07:02:45","slug":"what-is-depreciation-simple-guide-india","status":"publish","type":"post","link":"https:\/\/digitoolkit.in\/blog\/what-is-depreciation-simple-guide-india\/","title":{"rendered":"What Is Depreciation? A Simple Guide for Indian Businesses"},"content":{"rendered":"<div style=\"background:#f2f7fb;border-left:4px solid #2271b1;padding:16px 20px;margin:0 0 24px;border-radius:4px;\">\n<p><strong>Quick Answer:<\/strong> Depreciation is the way a business spreads the cost of a long-lasting asset, like a freezer, laptop or van, over the years it is used. It is a non-cash expense that lowers reported profit and, for tax in India, taxable income. A Rs 48,000 freezer used 10 years loses Rs 4,800 a year.<\/p>\n<p><strong>Key takeaways:<\/strong><\/p>\n<ul>\n<li>Depreciation allocates cost; it does not track market price.<\/li>\n<li>Land and stock in trade are not depreciated.<\/li>\n<li>Companies Act Schedule II sets useful lives for books.<\/li>\n<li>The Income Tax Act uses WDV block rates such as 15% and 40%.<\/li>\n<li>It is a non-cash charge, so no money leaves the bank.<\/li>\n<\/ul>\n<\/div>\n<h2>Depreciation in plain words<\/h2>\n<p>Think about the scooter you bought five years ago. It runs fine, but it would sell for much less than you paid. That fall in value over time is depreciation.<\/p>\n<p>In accounting, depreciation means spreading the cost of a long-lasting asset over the years you use it. Instead of showing the whole Rs 60,000 cost of a freezer as an expense in one year, you show a small part each year. This gives a fair picture of profit.<\/p>\n<p>The word often confuses people, because it is used in two ways. In everyday talk, it means a drop in market value. In accounting and tax, it means a planned, formula-based charge. Your balance sheet is not trying to guess the market price of your freezer. It is allocating its cost.<\/p>\n<h2>Why depreciation exists<\/h2>\n<p>Accounting follows the matching idea: an expense should appear in the same period as the income it helps earn. A freezer helps a kirana store sell cold drinks and ice cream for many years. So its cost is shared across those years.<\/p>\n<p>Without depreciation, the year you buy the freezer would show a huge loss, and the next years would show inflated profits. Lenders, partners and tax officers would all get a misleading picture.<\/p>\n<h2>What can and cannot be depreciated<\/h2>\n<p>An asset can be depreciated when it has a limited useful life, you own it, and it is used in your business.<\/p>\n<ul>\n<li><strong>Can be depreciated:<\/strong> machinery, computers, furniture, vehicles, buildings, and intangibles such as software, patents and licences.<\/li>\n<li><strong>Cannot be depreciated:<\/strong> land, because it does not wear out; stock in trade, because it is sold; and assets not used for business.<\/li>\n<\/ul>\n<p>Small items are sometimes written off directly as expenses. Repairs that only keep an asset running, like changing a tyre, are also expenses, not additions to the asset&#8217;s cost.<\/p>\n<h2>The main kinds of depreciation charge<\/h2>\n<table>\n<thead>\n<tr>\n<th>Term<\/th>\n<th>Applies to<\/th>\n<th>Example<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Depreciation<\/td>\n<td>Physical assets<\/td>\n<td>Laptop, van, machine<\/td>\n<\/tr>\n<tr>\n<td>Amortisation<\/td>\n<td>Intangible assets<\/td>\n<td>Software licence, patent<\/td>\n<\/tr>\n<tr>\n<td>Depletion<\/td>\n<td>Natural resources<\/td>\n<td>Mines, oil wells<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Depreciation methods include straight-line, written-down value and units of production. You can test each of them numerically with a free <a href=\"https:\/\/digitoolkit.in\/calculators\/depreciation-calculator\/\">depreciation calculator<\/a>.<\/p>\n<h2>How Indian law treats depreciation<\/h2>\n<p>Two sets of rules matter in India.<\/p>\n<h3>1. Companies Act, 2013 and accounting standards<\/h3>\n<p>Schedule II of the Companies Act, 2013 lists useful lives for different assets. Computers and laptops are 3 years, office equipment is 5 years, furniture 10 years, general plant and machinery 15 years, and motor vehicles other than buses and lorries 8 years. Residual value is generally not more than 5% of cost. Companies using Ind AS follow Ind AS 16, while others follow AS 10 issued by ICAI. You can read the original text on mca.gov.in.<\/p>\n<h3>2. Income Tax Act<\/h3>\n<p>For tax, depreciation is claimed under Section 32 of the Income Tax Act, 1961, using the written-down value method on blocks of assets at fixed rates. From 1 April 2026, the Income-tax Act, 2025 applies, and you should confirm section numbers on incometax.gov.in. Common block rates are:<\/p>\n<ul>\n<li>Computers and software: 40%<\/li>\n<li>Plant and machinery (general): 15%<\/li>\n<li>Motor cars not on hire: 15%<\/li>\n<li>Furniture and fittings: 10%<\/li>\n<li>Commercial buildings: 10%<\/li>\n<li>Residential buildings: 5%<\/li>\n<li>Intangible assets: 25%<\/li>\n<\/ul>\n<p>If an asset is used for fewer than 180 days in the year, only half the rate is allowed in that year.<\/p>\n<blockquote>\n<p><strong>Key takeaway:<\/strong> Depreciation is a cost allocation, not a cash payment. It lowers your reported profit and your tax, but the cash left your account the day you bought the asset.<\/p>\n<\/blockquote>\n<h2>Example 1: A freezer in a Delhi kirana<\/h2>\n<p>A kirana owner in Delhi buys a freezer for Rs 48,000 and expects to use it for 10 years with no resale value. Using straight-line:<\/p>\n<p>Annual depreciation = 48,000 \/ 10 = Rs 4,800.<\/p>\n<p>After 4 years, accumulated depreciation is 4 x 4,800 = Rs 19,200, and the book value is 48,000 &#8211; 19,200 = Rs 28,800.<\/p>\n<p>Suppose the shop earns Rs 3,00,000 profit before depreciation from selling cold drinks and ice cream. After this freezer&#8217;s Rs 4,800 charge, profit is Rs 2,95,200. Small change, but across many assets it adds up.<\/p>\n<h2>Example 2: A laptop at a CA firm<\/h2>\n<p>A CA firm buys a laptop for Rs 60,000. For tax, computers are in the 40% block.<\/p>\n<ul>\n<li>Year 1: 40% of 60,000 = Rs 24,000. Closing WDV Rs 36,000.<\/li>\n<li>Year 2: 40% of 36,000 = Rs 14,400. Closing WDV Rs 21,600.<\/li>\n<\/ul>\n<p>If the firm&#8217;s income falls in the 30% tax slab (ignoring cess and surcharge), the year-1 tax saving is 30% of 24,000 = Rs 7,200. The cost of the laptop has not vanished. It has simply been shared over the years, with the bigger part claimed first.<\/p>\n<h2>Example 3: Electric scooters for a delivery business<\/h2>\n<p>A Pune grocery delivery start-up buys 10 electric scooters at Rs 1,20,000 each, so Rs 12,00,000 in total. Tax depreciation at 15% (motor vehicles, not on hire):<\/p>\n<ul>\n<li>Year 1: 15% of 12,00,000 = Rs 1,80,000. Closing WDV Rs 10,20,000.<\/li>\n<li>Year 2: 15% of 10,20,000 = Rs 1,53,000. Closing WDV Rs 8,67,000.<\/li>\n<\/ul>\n<p>Some vehicles may qualify for higher or special rates, for example when used in a business of running them on hire, or under specific policy benefits, so check the latest rate chart or ask your CA.<\/p>\n<h2>Depreciation, book value and market value are different things<\/h2>\n<p>Beginners often mix up three ideas. Depreciation is the yearly charge. Book value is cost minus all depreciation charged so far. Market value is what a buyer would pay today.<\/p>\n<p>Take the Delhi kirana freezer again. After 4 years the book value is Rs 28,800. But if the model is popular and well kept, a second-hand dealer might offer Rs 20,000, or Rs 35,000. The accounts do not change with that offer. Only when you actually sell does the difference show up as a profit or loss on sale.<\/p>\n<p>This is also why depreciation is not a savings plan. Setting a depreciation charge does not put any money aside. If you want cash ready to replace the freezer in ten years, you need to save or invest separately. A business that ignores this often finds that profits look healthy while the bank balance cannot fund a new machine.<\/p>\n<h2>When unabsorbed depreciation comes into play<\/h2>\n<p>Sometimes a business has so little profit that the full tax depreciation cannot be deducted in that year. The unabsorbed amount can be carried forward and set off against future income, with no time limit under the law as it stands. Because such rules can change with each Finance Act, always confirm the current position on incometax.gov.in or with your CA before relying on it.<\/p>\n<h2>How depreciation shows up in your books<\/h2>\n<p>Depreciation appears in two places. In the profit and loss account, it is an expense that reduces profit. In the balance sheet, the asset is shown at cost less accumulated depreciation, also called book value or net block.<\/p>\n<p>A simple journal entry at year end is:<\/p>\n<ul>\n<li>Debit: Depreciation expense<\/li>\n<li>Credit: Accumulated depreciation (or the asset account)<\/li>\n<\/ul>\n<p>No cash moves in this entry. That is why depreciation is called a non-cash expense, and why cash flow statements add it back.<\/p>\n<h2>Benefits of depreciation<\/h2>\n<p>Depreciation matches costs with income, so your yearly profit is closer to the truth. It reduces taxable business income, which can lower your tax bill. It tells you how much of your assets have been used up, which helps you plan replacements. And it keeps your balance sheet from overstating what you own. Pair it with a quick look at your <a href=\"https:\/\/digitoolkit.in\/calculators\/net-worth-calculator\/\">net worth<\/a> to see how asset values affect your overall financial position.<\/p>\n<h2>Challenges and limitations<\/h2>\n<p>Depreciation is an estimate, not a measurement. The book value rarely equals market value. Different methods give different yearly charges, which can confuse beginners. The gap between book depreciation and tax depreciation leads to separate records. Fast changes, like new technology making a machine obsolete early, can make your original estimate wrong. Rules also change, so a rate you learned from an older article might not match the current chart.<\/p>\n<h2>Common mistakes to avoid<\/h2>\n<ol>\n<li>Thinking depreciation is cash paid out. It is not.<\/li>\n<li>Depreciating land or stock.<\/li>\n<li>Treating major improvements as repairs, or repairs as improvements.<\/li>\n<li>Forgetting the date the asset was first put to use.<\/li>\n<li>Using the market value of the asset instead of its cost as the base.<\/li>\n<li>Not updating the register when an asset is sold or scrapped.<\/li>\n<\/ol>\n<h2>Best practices<\/h2>\n<ol>\n<li>Record each asset on the day it is bought, with invoice, cost and use date.<\/li>\n<li>Use a consistent method for similar assets.<\/li>\n<li>Keep tax and book depreciation in separate sheets.<\/li>\n<li>Review the asset list once a year and remove disposed items.<\/li>\n<li>Take advice from a CA when buying high-value assets or changing methods.<\/li>\n<li>Keep invoices and payment proof. Bank or UPI payments leave a better trail than cash.<\/li>\n<\/ol>\n<h2>Conclusion<\/h2>\n<p>Depreciation is just a fair way of sharing an asset&#8217;s cost over its life. It does not take money out of your account, but it changes the profit you report and the tax you pay. Learn the basic terms, know the Schedule II lives and the common tax rates, and you will handle most small-business cases with confidence.<\/p>\n<div data-dtk-related=\"1\" style=\"background:#f8f9fb;border:1px solid #e2e8f0;border-radius:6px;padding:16px 20px;margin:28px 0;\"><strong>Related tools &amp; guides on DigiToolkit<\/strong><\/p>\n<ul>\n<li><a href=\"https:\/\/digitoolkit.in\/calculators\/depreciation-calculator\/\">Try the free Depreciation Calculator &rarr;<\/a><\/li>\n<li><a href=\"https:\/\/digitoolkit.in\/blog\/how-to-calculate-depreciation-step-by-step-india\/\">How to Calculate Depreciation Step by Step (India)<\/a><\/li>\n<li><a href=\"https:\/\/digitoolkit.in\/blog\/depreciation-formula-explained-slm-wdv-units-of-production\/\">Depreciation Formula Explained: SLM, WDV and Units (India)<\/a><\/li>\n<li><a href=\"https:\/\/digitoolkit.in\/blog\/depreciation-calculator-free-online-tool-guide\/\">Depreciation Calculator: Free Online Tool and Guide (India)<\/a><\/li>\n<li><a href=\"https:\/\/digitoolkit.in\/blog\/depreciation-examples-for-beginners-india\/\">Depreciation Examples for Beginners: 7 Easy Indian Cases<\/a><\/li>\n<li><a href=\"https:\/\/digitoolkit.in\/blog\/blog\/cagr-calculator-free-online-tool-guide\/\">CAGR Calculator: Free Online Tool + Guide (India)<\/a><\/li>\n<li><a href=\"https:\/\/digitoolkit.in\/blog\/blog\/what-is-npv-simple-guide\/\">What Is NPV? A Simple Guide<\/a><\/li>\n<li><a href=\"https:\/\/digitoolkit.in\/blog\/category\/finance-investment\/\">More Finance &amp; Investment guides<\/a><\/li>\n<\/ul>\n<\/div>\n<h2>FAQs<\/h2>\n<p><strong>What is depreciation in simple words?<\/strong><br \/>Depreciation is the gradual spreading of an asset cost over the years you use it. It shows that the asset loses value through wear, age or obsolescence. It is an accounting charge, not a cash payment.<\/p>\n<p><strong>Is depreciation an expense?<\/strong><br \/>Yes, it is shown as an expense in the profit and loss account. But it is a non-cash expense because no money leaves the bank when it is recorded.<\/p>\n<p><strong>What is the difference between depreciation and amortisation?<\/strong><br \/>Depreciation applies to physical assets like machines and vehicles. Amortisation applies to intangible assets such as software and patents. The idea behind both is the same.<\/p>\n<p><strong>Does depreciation reduce income tax?<\/strong><br \/>Yes. Depreciation allowed under Section 32 of the Income Tax Act is deducted from business income, so taxable profit and tax both fall. The rates are fixed by block of assets.<\/p>\n<p><strong>Can depreciation be negative or skipped?<\/strong><br \/>No, you cannot skip it in a year simply because profit is low. In books, it must be charged every year. For tax, unabsorbed depreciation can be carried forward under the law, so ask your CA about the exact rules.<\/p>\n<p><script type=\"application\/ld+json\">{\"@context\":\"https:\/\/schema.org\",\"@type\":\"FAQPage\",\"mainEntity\":[{\"@type\":\"Question\",\"name\":\"What is depreciation in simple words?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"Depreciation is the gradual spreading of an asset cost over the years you use it. It shows that the asset loses value through wear, age or obsolescence. 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A simple India-focused guide with Schedule II lives, Income Tax rates, and easy examples for kirana shops, CA firms and fleets.<\/p>\n","protected":false},"author":1,"featured_media":3501,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"footnotes":""},"categories":[23],"tags":[],"class_list":["post-3461","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance-investment"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.2 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>What Is Depreciation? A Simple Guide for Indian Businesses<\/title>\n<meta name=\"description\" content=\"What is depreciation? 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