Depreciation Rates Under Companies Act 2013
Under the Companies Act 2013, depreciation is calculated based on the useful life of assets prescribed in Schedule II - not on fixed percentage rates like under the Income Tax Act. This means accountants must determine the annual charge using the asset's cost, residual value (5% of cost), and useful life.
Schedule II: The Framework
Schedule II to the Companies Act 2013 prescribes the useful life of assets. Companies must charge depreciation such that the asset is fully written off (to its residual value of 5% of original cost) over its useful life.
Key principle
Companies Act depreciation = (Cost − Residual Value) ÷ Useful Life (SLM) or declining balance equivalent (WDV). The Act does not specify a percentage - you derive the percentage from the useful life.
SLM vs WDV Methods
| Method | Full Name | How It Works | Effect on P&L |
|---|---|---|---|
| SLM | Straight Line Method | Equal charge every year = (Cost − Residual) ÷ Useful Life | Consistent annual charge |
| WDV | Written Down Value | Fixed % on book value each year; charge is higher in early years | Higher charge initially, lower later |
Both methods are permitted under the Companies Act. WDV is more conservative - it front-loads the depreciation charge - and is also the method prescribed under the Income Tax Act (though at different rates). Many companies use SLM for financial statements and WDV for tax purposes, creating a deferred tax timing difference.
Useful Lives for Common Asset Categories
| Asset Category | Useful Life (Years) | Implied SLM Rate (approx.) |
|---|---|---|
| Buildings - factory | 30 | 3.17% |
| Buildings - other (offices, warehouses) | 60 | 1.58% |
| Buildings - temporary | 3 | 31.67% |
| Plant and Machinery - general | 15 | 6.33% |
| Plant and Machinery - continuous process | 25 | 3.80% |
| Computers and data processing | 3 | 31.67% |
| Servers and networks | 6 | 15.83% |
| Furniture and fittings | 10 | 9.50% |
| Motor vehicles - cars and taxis | 8 | 11.88% |
| Motor vehicles - heavy vehicles | 12 | 7.92% |
| Ships | 25 | 3.80% |
| Aircraft | 20 | 4.75% |
| Office equipment | 5 | 19.00% |
| Electrical installations | 10 | 9.50% |
| Intangible assets - knowhow, patents, copyrights | 10 (or life, whichever shorter) | Depends |
Companies Act vs Income Tax Act: Key Differences
| Aspect | Companies Act (Schedule II) | Income Tax Act (Schedule XIV) |
|---|---|---|
| Basis | Useful life of asset | Fixed percentage (WDV method mostly) |
| Method | SLM or WDV (company choice) | WDV mandated for most assets |
| Residual value | 5% of cost | Nil (depreciated to zero) |
| Computer rate | Derived from 3-year life (~31.67%) | 40% WDV |
| Building - factory | Derived from 30-year life | 10% WDV |
| Purpose | True and fair financial reporting | Tax deduction calculation |
Because rates differ, nearly every company will have a deferred tax liability or asset (AS 22 / Ind AS 12) arising from the timing difference between book depreciation and tax depreciation.
Component Accounting
Schedule II requires component accounting for significant assets - if a major component of an asset has a different useful life from the asset as a whole, it must be depreciated separately. For example, a factory building's roof may have a 20-year life while the structure has a 30-year life.
This requirement significantly increases complexity for companies with large fixed asset bases. Many smaller companies apply it only to assets where the impact is material.
QCan a company use a useful life different from Schedule II?
Yes, but only if supported by a technical assessment. The company must disclose the deviation and the basis for the different useful life in the notes to accounts. Auditors scrutinise such deviations.
QWhat is the residual value under the Companies Act?
Schedule II states that residual value shall not exceed 5% of the original cost of the asset. Most companies use exactly 5% unless a specific assessment suggests a different realisation value.
QDoes depreciation under Companies Act affect my tax liability?
No. Tax depreciation under the Income Tax Act is separate. You calculate book depreciation for financial statements and tax depreciation separately on your ITR. The difference creates deferred tax entries in your books.
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