What is Depreciation and Why Does It Matter?
Depreciation is the process of allocating the cost of a fixed asset over its useful life. Instead of recording the entire purchase amount as an expense in the year you buy it, you spread the cost across the years you actually use the asset.
For business owners, depreciation matters for three practical reasons. First, it reduces your taxable income because depreciation is an allowable expense under the Income Tax Act. Second, it shows you the true book value of your assets, which is critical for insurance claims, loan applications, and resale decisions. Third, it helps you plan when equipment needs replacement by tracking how much value has been written off.
Whether you own kitchen equipment, POS hardware, delivery vehicles, or office furniture, every fixed asset loses value over time. This calculator helps you compute that value loss accurately using both the Straight Line and Written Down Value methods recognised under Indian law.
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Straight Line Method (SLM): Formula and Example
The Straight Line Method charges equal depreciation every year. It is the simplest method and is used under the Companies Act 2013 for financial reporting.
Annual Depreciation = (Cost - Salvage Value) / Useful Life
Example: Commercial Refrigerator
Cost: Rs 2,00,000
Salvage Value: Rs 10,000 (5% of cost)
Useful Life: 15 years (Plant & Machinery as per Schedule II)
Annual Depreciation: (2,00,000 - 10,000) / 15 = Rs 12,667 per year
SLM Rate: (12,667 / 2,00,000) x 100 = 6.33% per year
Under the Companies Act 2013, Schedule II prescribes the useful life for each asset class rather than a fixed rate. The depreciation rates as per Companies Act are derived from these useful life values. The salvage value is generally taken as 5% of the original cost.
Written Down Value (WDV) Method: Formula and Example
The Written Down Value method charges higher depreciation in the early years and lower depreciation in later years. It is used under the Income Tax Act for computing taxable income.
Depreciation = Opening Book Value x WDV Rate
Example: Kitchen Equipment at 15% WDV
Cost: Rs 3,00,000
Year 1: 3,00,000 x 15% = Rs 45,000 (Book Value: Rs 2,55,000)
Year 2: 2,55,000 x 15% = Rs 38,250 (Book Value: Rs 2,16,750)
Year 3: 2,16,750 x 15% = Rs 32,513 (Book Value: Rs 1,84,237)
Under WDV, the depreciation amount decreases each year because it is calculated on the reducing book value, not the original cost. This method front-loads the expense, which is beneficial for tax planning because you get larger deductions in the early years when the asset is generating maximum output.
Depreciation Rates for Common Business Assets in India
The depreciation rate depends on which law you are following. The Companies Act 2013 prescribes useful life (from which you derive the SLM rate), while the Income Tax Act prescribes WDV rates directly.
| Asset Type | Useful Life (Companies Act) | SLM Rate | WDV Rate (Income Tax) |
|---|
| Plant & Machinery (Kitchen Equipment) | 15 years | 6.33% | 15% |
| Furniture & Fittings | 10 years | 9.50% | 10% |
| Computers & POS Hardware | 3 years | 31.67% | 40% |
| Motor Vehicles | 8 years | 11.88% | 15% |
| Buildings (non-factory) | 60 years | 1.58% | 10% |
| Commercial Vehicles | 6 years | 15.83% | 30% |
| Electrical Installations | 10 years | 9.50% | 10% |
These rates assume a 5% salvage value for SLM calculations. If you are filing income tax returns, use the WDV rate. If you are preparing financial statements under the Companies Act, use the useful life with SLM. For generating proper invoices that reflect asset values, the GST Calculator can help compute tax on asset sales.
SLM vs WDV: Which Method Should You Use?
The choice between SLM and WDV depends on the purpose of your calculation and which regulatory framework applies:
| Parameter | SLM (Straight Line) | WDV (Written Down Value) |
|---|
| Used Under | Companies Act 2013 | Income Tax Act |
| Annual Amount | Equal every year | Higher in early years, lower later |
| Calculated On | Original cost minus salvage | Opening book value each year |
| Best For | Financial reporting | Tax computation |
| Salvage Value | Deducted from cost | Not deducted (rate applied on book value) |
| Simplicity | Simple and predictable | Slightly more complex |
Most small business owners need WDV for tax filing, since the Income Tax Act mandates it. SLM is used for financial statements under the Companies Act. If you are managing both, run both calculations using this tool and compare the results. Understanding these numbers also helps when calculating your profit margins, as depreciation is an operating expense that directly affects net profit.
The 180-Day Rule for Depreciation in India
Under the Income Tax Act, if you purchase and put an asset to use for less than 180 days during a financial year, you can only claim 50% of the normal depreciation for that year. This is an important rule that affects your first-year tax deduction.
Example: You buy a commercial oven on 15 November 2026 for Rs 4 lakh. The financial year ends on 31 March 2027. The oven was used for roughly 136 days, which is less than 180 days.
Normal WDV rate for Plant & Machinery: 15%
First-year depreciation: 4,00,000 x 15% x 50% = Rs 30,000 (instead of Rs 60,000)
From Year 2 onwards, the full rate of 15% applies on the remaining book value of Rs 3,70,000.
This rule means timing your asset purchases matters. Buying equipment before October in a financial year lets you claim the full depreciation for that year, while a purchase after October means you only get half. Plan large equipment purchases early in the financial year to maximise your tax benefit.
How to Use This Depreciation Calculator
- Step 1: Enter the asset cost (total purchase price including installation and setup costs).
- Step 2: Enter the salvage value. Under the Companies Act, this is typically 5% of the cost. For WDV under Income Tax, you can enter 0 or leave it at 5%.
- Step 3: Choose the depreciation method: SLM for Companies Act financial reporting, or WDV for Income Tax computation.
- Step 4: For SLM, enter the useful life in years. For WDV, enter the depreciation rate percentage.
- Step 5: Select the asset type to categorise your PDF report.
- Step 6: Click "Calculate Depreciation" to see the annual depreciation, book value, and complete year-by-year schedule.
Download the PDF report for your records. The year-by-year depreciation schedule is useful for attaching to your balance sheet or sharing with your accountant during tax filing season.
