Section 32 of the Income Tax Act – Depreciation Rules Unlocked

Vijay owns a business and is renting a place to establish his plant at a price of ₹50,00,000. According to Section 32 of the Income Tax Act, Vijay has an option of asserting depreciation on this property, and this will reduce his taxable income.

• Depreciation means the property’s value decreases over time due to wear and tear, and the tax law allows this loss as a deduction.

How Depreciation Works for Vijay:
 

• Result: Vijay pays tax on ₹5,00,000 less, saving money.
   
• Simple Rule: The more you use an asset for business, the more depreciation you can claim.

This helps businessmen like Vijay save tax legally.

Importance of Section 32

Why is Section 32 Important?
 

• It allows businesses to claim depreciation on assets (like machinery, buildings, and vehicles) used for work.
   
• Depreciation reduces taxable profit, so businesses pay less tax.
   
• It helps in recovering the cost of assets over time.

Example: Vijay’s Business
 

• Vijay bought a property for ₹50,00,000 to run his plant.
   
• Since the property wears out over time, the tax department lets him deduct 10% depreciation every year.
   

Benefits for Vijay:
 

• Lower Tax: His taxable income drops by ₹5,00,000, so he pays less tax.
   
• Better Cash Flow: Saves money, which he can reinvest in his business.
   
• Fair System: Recognises that assets lose value over time.

Final Point: Section 32 helps businesses like Vijay’s grow by reducing the tax burden fairly.

Objectives of Section 32

Why Does Section 32 Exist?
 

• To recognise the wear and tear of business assets over time.
   
• To reduce taxable income fairly, since assets lose value with use.
   
• To encourage businesses to invest in machinery, buildings, and equipment.

Example: Vijay’s Business
 

• Vijay bought a property for ₹50,00,000 to run his manufacturing plant.
   
• The tax department allows him to claim 10% depreciation yearly, acknowledging that the property’s value decreases.
   

Key Takeaways:
 

• Fairness: Taxes only on real profit, not full asset cost.
   
• Encouragement: Helps businesses afford big purchases.
   
• Logic: Assets don’t last forever, and tax rules reflect that.

Final Point: Section 32 makes taxes fairer and helps businesses like Vijay’s expand wisely.

TDS Rate Under Section 32

• Does Section 32 Have TDS?
   
  • No, Section 32 is about depreciation (tax deduction for asset value loss).
     
  • TDS (Tax Deducted at Source) rules apply to payments (like rent and salary), not depreciation.

• Example: Vijay’s Case
   
  • Vijay leases (rents) his plant property for ₹50,00,000/year to another business.
     
  • TDS applies to rent payments, not to his depreciation claim.
     

Key Points:
 

• Depreciation (Section 32): Reduces Vijay’s taxable income.
   
• TDS on Rent (Section 194-I): The Tenant deducts 10% tax before paying Vijay.
   
• No TDS on Depreciation: It’s a deduction, not income.

Final Note:
 

• Vijay saves tax via depreciation but receives rent after TDS.
   
• Section 32 and TDS are separate rules.

Exemption Under Section 32

What is Exemption Under Section 32?
 

• Section 32 does not provide exemptions – it allows depreciation deductions on business assets.
   
• No income is exempt, but taxable profit is reduced due to asset value loss.

Example: Vijay’s Business
 

• Vijay bought machinery for ₹50,00,000 for his plant.
   
• He cannot claim exemption, but can deduct 15% yearly as depreciation (for machinery).
   

Key Points:
 

• No tax exemption: only depreciation benefit.
   
• Reduces taxable income, not tax rate.
   
• Applies only to business assets (machinery, buildings, vehicles).

Final Note:
 

• Vijay saves tax legally by claiming depreciation, but no income is exempt.
   
• Helps businesses recover asset costs gradually.

Due Date and Compliance Requirements 
 

• Depreciation Claim Deadline:
   
  • Must be claimed when filing yearly income tax returns (by July 31 for most businesses).
     
  • It cannot be claimed after the due date.

• Records Vijay Needs to Maintain:
   
  • Purchase bills of assets (like property/machinery).
     
  • Proof of usage for business (not personal use).
     
  • Details of previous depreciation claims (if any).

• Example for Vijay:
   
  • Bought ₹50,00,000 machinery on April 1, 2023.
     
  • Must claim 15% depreciation (₹7,50,000) while filing ITR by July 31, 2024.
     
  • If missed, lose tax benefits for that year.

• Key Compliance:
   
  • File ITR on time.
     
  • Keep asset records for 8 years.
     
  • Use assets only for business.

Late Filing? No depreciation for that year. Vijay pays extra tax.

Practical Examples 
 

Vijay’s Machinery Purchase:
 

• Bought ₹20,00,000 machines for his factory in April 2023.
   
• Can claim 15% depreciation (₹3,00,000) each year as a tax deduction.
   
• After 5 years, total tax saved = ₹15,00,000 (₹3,00,000 x 5 years).

Office Furniture Example:
 

• Purchased ₹5,00,000 furniture for his office.
   
• 10% depreciation (₹50,000) claimed yearly.
   
• Reduces taxable profit by ₹50,000 annually.

Car for Business Use:
 

• Bought a ₹10,00,000 car for business travel.
   
• 15% depreciation (₹1,50,000) claimed in the first year.
   
• Next year, 15% of the remaining ₹8,50,000 value.

Key Points:
 

• Different assets have different depreciation rates.
   
• Only business-use assets qualify.
   
• Cannot claim depreciation if the asset is sold.

Conclusion 

A business owner like Vijay will save money because section 32 of the Income Tax Act takes into consideration the natural depreciation of business assets. As an illustration, when Vijay purchased the machinery for ₹50,00,000 in his factory, the tax laws permitted him to claim a deduction of 15% (₹7,50,000) per year of his tax liability. 

This implies that he will pay a lower tax as he winds up the cost of his machinery over time goes by. The legislation favours the enterprises as it considers the fact that the property depreciates as it is employed, which makes the taxes more reasonable. Claiming depreciation correctly can help Vijay earn tax savings that he can invest in his business, and Section 32 can effectively serve as a business-friendly clause for entrepreneurs.

FAQs

What is depreciation under Section 32?
It is a tax deduction for the wear and tear of business assets (like machines and buildings) over time.

Who can claim depreciation?
Only business owners and professionals using assets for work can claim it. Personal assets like a home car don’t qualify unless used for business.

What assets qualify for depreciation?
Machines, office equipment, vehicles, buildings, and furniture are used for business. Land and personal items don’t count.

How is the depreciation rate decided?
The Income Tax Department fixes rates (e.g., 15% for machinery and 10% for buildings). Vijay must use these rates, not his own.

Can I claim depreciation on old assets?
Yes, if you still use them for business. The deduction reduces yearly as the asset’s value drops.

What if I sell the asset?
No more depreciation can be claimed. The sale profit (after deducting the depreciated value) is taxed as capital gains.

Is there a limit on the depreciation amount?
No fixed limit, but you can’t claim more than the asset’s cost. For ₹50,00,000 machinery, the maximum deduction is ₹50,00,000 spread over the years.

Do I need proof to claim depreciation?
Yes. Keep purchase bills, payment proofs, and records showing that the asset is used for business.

Can I skip depreciation for a year?
No. If you don’t claim it in the right year, you lose the benefit forever for that year.

What happens if my business closes?
Depreciation stops. The remaining asset value (if sold) is taxed as income in the closure year.

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