Companies Act vs Income-tax Depreciation Explained

Ask an Indian finance team what an asset is worth and the honest answer is often "which book?". The same machine carries one value in the financial statements and another in the tax computation, because company law and income-tax law depreciate it on different rules. Neither figure is wrong. The problem is only ever that the two are kept in different places, by different people, and stop agreeing.

Book one: the Companies Act

For the financial statements, Schedule II to the Companies Act, 2013 sets indicative useful lives for classes of assets, rather than fixed rates. A company depreciates the depreciable amount, cost less residual value, over the useful life, using a method that reflects how the asset’s benefits are consumed, typically straight-line or written-down value. Schedule II generally expects residual value not to exceed five per cent of original cost; where a company adopts a different useful life or residual value, it must justify and disclose that choice. Where a significant part of an asset has a different useful life from the rest, it is depreciated separately as a component.

Accounting standards sit alongside Schedule II: Ind AS 16 for companies on Ind AS, and AS 10 for others. They add the rules on capitalisation, componentisation, revaluation and derecognition.

Book two: income tax

For tax, depreciation works on blocks of assets rather than individual items. Assets of the same class and rate are pooled into a block, and depreciation is allowed at the prescribed written-down-value rate on the block as a whole. Additions increase the block; sale proceeds reduce it. Where an asset is put to use for less than 180 days in the year it is acquired, only half the normal rate is allowed on it for that year. Rates, blocks and conditions are prescribed in the income-tax law and rules, and the Income-tax Act, 2025 has replaced the Income-tax Act, 1961, so any section number taken from an older working paper should be verified against the current Act before it is relied on.

Why the two never agree

• Basis: useful life per asset in the accounts, a pooled rate per block for tax.
• Method: often straight-line in the accounts, always written-down value for tax.
• Timing: accounts depreciate from the date an asset is available for use, often pro rata by day or month; tax applies a full or half rate for the year.
• Disposals: the accounts compute a gain or loss on each asset sold; for tax, sale proceeds reduce the block, and a gain or loss arises only in specific circumstances, such as when the block is exhausted or ceases to exist.

The difference between the two carrying amounts is a temporary difference. It is what drives deferred tax in the financial statements, under Ind AS 12 or AS 22, so the gap between the books is not just a reconciliation chore; it feeds a number on the balance sheet.

What goes wrong in practice

The common pattern is a fixed asset register in a spreadsheet for the accounts and a separate tax depreciation schedule maintained by the tax team or the auditor. Additions are keyed twice, disposals are missed in one of them, put-to-use dates drift, and at year-end someone spends days rebuilding the tax block from the asset list. When the auditor asks how a specific asset moved through both books, there is no single place that shows it.

Keeping both books on one record

• Capture once: one asset record with cost, put-to-use date, location and class, used by both books.
• Run depreciation per book: the accounts book on useful lives and the chosen method; the tax book on block rates with the half-year rule.
• Post journals that reconcile: depreciation and disposal journals should tie to the general ledger, period by period.
• Bring opening balances for both: when moving from spreadsheets, load accumulated depreciation and written-down values for each book and check them against audited totals.

How FixedAsset Pro handles it

FixedAsset Pro keeps Companies Act and Income-tax books side by side on every asset. An asset capitalised from a goods receipt or from CWIP starts depreciating in every book from its put-to-use date; depreciation runs per book; and journals reconcile with the GL. Disposals record the gain or loss and the disposal journal, and the evidence is kept. Existing registers can be imported from Excel, CSV or JSON with opening balances for both books, checked against your audited totals.

Two books are a feature of Indian law, not a failure of accounting. The failure is keeping them on two records.

Frequently asked questions

Why is depreciation different in the books and in the income-tax return?

Because the two laws use different rules. The Companies Act, 2013 (Schedule II) depreciates each asset over its useful life using a method such as straight-line or written-down value. Income-tax law pools assets into blocks and allows written-down-value depreciation at prescribed rates, with half the rate for assets used less than 180 days in the year of acquisition. The resulting difference is a temporary difference for deferred tax.

Does Schedule II prescribe depreciation rates?

Schedule II to the Companies Act, 2013 prescribes indicative useful lives for asset classes rather than rates. Companies depreciate cost less residual value over the useful life, generally with residual value not exceeding five per cent of cost. A company may use a different useful life or residual value if it can justify it, and must disclose that choice.

What is the 180-day rule for tax depreciation?

Under income-tax law, when an asset is acquired and put to use for less than 180 days in the previous year, depreciation on it for that year is allowed at half the normal block rate. Verify the current provision and rates against the Income-tax Act, 2025 and the applicable rules.

Can one fixed asset register maintain both Companies Act and tax depreciation?

Yes. A register that holds one asset record and runs depreciation separately for each book avoids double entry and drift. FixedAsset Pro maintains Companies Act and Income-tax books side by side on each asset, with depreciation runs per book and journals that reconcile with the general ledger.