Office equipment is an essential asset for any business or profession. It includes computers, printers, scanners, fax machines, photocopiers, telephones, etc. that are used for carrying out various office functions.
Office equipment is also subject to wear and tear, obsolescence, and technological changes over time. Therefore, the cost of office equipment cannot be deducted fully in the year of purchase but has to be spread over its useful life. This is done by claiming depreciation on office equipment as per the Income Tax Act 1961.
What is Depreciation? How is it Calculated?
Depreciation is an allowance that reduces the taxable income of a taxpayer by taking into account the loss in value of an asset due to its use, passage of time, or other factors.
Depreciation is calculated as a percentage of the written down value (WDV) or the actual cost of the asset, depending on the method chosen by the taxpayer.
The Income Tax Act 1961 prescribes different rates of depreciation for different types of assets, based on their nature, usage, and block of assets.
Block of Assets and Depreciation Rates
A block of assets is a group of assets falling within a class of assets, on which the same rate of depreciation is prescribed.
The Income Tax Act 1961 divides assets into two categories: tangible assets and intangible assets.
Tangible assets are further classified into five blocks: building, furniture and fittings, plant and machinery, ships, and vehicles.
Intangible assets are classified into one block: know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature.
Office equipment falls under the block of plant and machinery, which includes any machinery, plant, furniture, or fittings that are not permanently attached to the building or premises and are used for business or profession.
The rate of depreciation for office equipment as per the Income Tax Act 1961 is 15% of the WDV or 25.89% of the actual cost, depending on the method chosen by the taxpayer.
If the office equipment is acquired and put to use for less than 180 days in a previous year, then the rate of depreciation will be half of the normal rate, i.e., 7.5% of the WDV or 12.77% of the actual cost.
Also Read: Depreciation: Rates & Provisions in India's Companies Act, 2013
Step-by-Step Guide: Calculating Depreciation on Office Equipment
Here’s how you can calculate depreciation on office equipment while ensuring all important details are covered:
1. Determine the Actual Cost
- Include: Purchase price, installation charges, freight, insurance, and other expenses incurred to bring the asset to its current state.
- Exclude: Subsidies, grants, or payments made by others (e.g., government or seller).
2. Find the Written Down Value (WDV)
- Existing Equipment: Use the WDV from the previous year's end.
- New Purchases: WDV starts at zero for the acquisition year.
3. Choose a Depreciation Method
- WDV Method: Common for tax purposes.
- Actual Cost Method: Used less frequently.
4. Apply the Depreciation Rate
- Normal Rate: For usage of 180 days or more during the year.
- Half Rate: For usage of less than 180 days.
5. Calculate Depreciation Amount
- Formula: WDV (or actual cost) × Depreciation rate.
- Rule: Depreciation cannot exceed the opening WDV.
6. Update the WDV
- Subtract the depreciation amount from the opening WDV to find the closing WDV. This value carries forward to the next financial year. By following these steps, you can accurately calculate depreciation and claim deductions under Section 32 of the Income Tax Act, 1961.
Example of Depreciation on Office Equipment
Suppose a taxpayer purchased a computer for Rs. 50,000 on 1st April 2020 and put it to use for his business on the same date.
He has chosen the WDV method of depreciation and has claimed depreciation on the computer for the previous year 2020-21. The rate of depreciation for the computer as per the Income Tax Act 1961 is 15% of the WDV.
The calculation of depreciation on the computer for the previous year 2020-21 is as follows:
- The actual cost of the computer is Rs. 50,000.
- The WDV of the computer at the beginning of the previous year 2020-21 is nil, as the computer was acquired during the previous year.
- The rate of depreciation for the computer is 15% of the WDV, as the computer is used for more than 180 days in the previous year.
- The amount of depreciation on the computer is Rs. 50,000 x 15% = Rs. 7,500.
- The WDV of the computer at the end of the previous year 2020-21 is Rs. 50,000 - Rs. 7,500 = Rs. 42,500.
The taxpayer can claim Rs. 7,500 as a deduction from his income under section 32 of the Income Tax Act 1961. The WDV of the computer at the end of the previous year 2020-21 will be the WDV of the computer at the beginning of the next previous year 2021-22.
Depreciation on Office Equipment: Key Takeaways for Taxpayers
Office equipment is an important asset for any business or profession, but it also loses its value over time due to various factors.
Therefore, the taxpayer can claim depreciation on office equipment as per the Income Tax Act 1961, which allows him to reduce his taxable income by taking into account the loss in value of the asset.
The rate of depreciation for office equipment as per the Income Tax Act 1961 is 15% of the WDV or 25.89% of the actual cost, depending on the method chosen by the taxpayer.
The calculation of depreciation on office equipment involves determining the actual cost, the WDV, the rate of depreciation, and the amount of depreciation for each previous year.
