Depreciation Calculator
Calculate asset depreciation
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About Depreciation Calculator
Depreciation is the systematic allocation of an asset's cost over its useful life. It represents the reduction in value of an asset due to wear and tear, obsolescence, or age. It's a non-cash expense that reduces taxable income (providing tax benefit), matches expenses with revenue generation, and is required by accounting standards. Depreciation helps businesses accurately report financial position, claim tax deductions, plan for asset replacement, and make informed investment decisions.
Depreciation Methods Explained
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1
Straight-Line Method: (Asset Cost - Salvage Value) ÷ Useful Life - Equal depreciation every year, simple to calculate, best for buildings and furniture
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2
Declining Balance Method: Book Value × (1 ÷ Useful Life) - Accelerated depreciation with higher expense in early years, best for vehicles and computers
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3
Double Declining Balance: Book Value × (2 ÷ Useful Life) - Most aggressive method with maximum early year deductions, best for technology and machinery
Example:
For an asset costing ₹5,00,000 with salvage value of ₹50,000 and 5-year useful life: Straight-Line gives ₹90,000/year, Declining Balance gives higher amounts initially (₹1,00,000, ₹80,000, ₹64,000...), and Double Declining gives the most aggressive depreciation in early years.
Key Benefits
Tax Savings: Depreciation reduces taxable income legally, improving cash flow and reducing tax liability
Asset Planning: Track accumulated depreciation to plan for timely asset replacement and avoid sudden capital expenses
Accurate Costing: Calculate true cost of using assets to price products/services accurately
Financial Compliance: Maintain accurate balance sheet values and comply with accounting standards
Investment Decisions: Assess asset productivity and make informed decisions on new investments
Retirement Savings: EPF contributions build long-term retirement corpus with employer matching
Frequently Asked Questions
What is the difference between depreciation and amortization?
Depreciation applies to tangible assets (machinery, vehicles, buildings) while amortization applies to intangible assets (patents, copyrights, software). Both represent the allocation of cost over time, but apply to different types of assets. The calculation principles are similar.
Can land be depreciated?
No, land cannot be depreciated because it doesn't wear out or become obsolete. Land is considered to have an indefinite useful life. However, land improvements (fencing, paving, landscaping) can be depreciated as they have limited useful lives.
How does depreciation reduce tax liability?
Depreciation is a deductible business expense that reduces taxable income without requiring cash outflow. For example, if your profit is ₹10 lakhs and depreciation is ₹2 lakhs, you only pay tax on ₹8 lakhs. At 30% tax rate, you save ₹60,000 in taxes.
What happens when an asset is fully depreciated?
When accumulated depreciation equals the depreciable amount (cost minus salvage value), the asset is fully depreciated. You can continue using it, but can't claim further depreciation. The asset stays on books at salvage value. If you sell it, any amount above salvage value is a capital gain.
Can I change depreciation method once chosen?
Generally, you should maintain consistency, but method changes are allowed with proper justification and disclosure. Tax authorities may scrutinize changes. Any change must be applied prospectively (from current year forward), not retrospectively. Consult a CA before making changes.
What is accumulated depreciation?
Accumulated depreciation is the total depreciation claimed on an asset since purchase. It's a contra-asset account that reduces the asset's book value. Example: Asset cost ₹5 lakhs, accumulated depreciation ₹2 lakhs, current book value ₹3 lakhs. It helps track how much of an asset's cost has been expensed.
How do I determine an asset's useful life?
Consider: manufacturer specifications, industry standards, usage intensity, maintenance quality, and technological obsolescence. Income Tax Act prescribes useful lives for different asset classes. For accuracy, consult technical experts, review historical data, and consider your specific usage patterns.
What is salvage value and how to estimate it?
Salvage value is the estimated resale value at the end of useful life. Estimate by: researching similar used asset prices, consulting industry standards, considering technological changes, and assessing asset condition. Conservative estimates (lower salvage value) give higher depreciation deductions.
Does depreciation apply to assets purchased on loan?
Yes, depreciation applies regardless of how you finance the asset. You claim depreciation on the full asset cost even if purchased on loan. The loan interest is a separate deductible expense. This makes financing advantageous - you get both depreciation and interest deductions.
What is depreciation recapture?
When you sell an asset for more than its depreciated book value, the gain up to original cost is treated as depreciation recapture and taxed as ordinary income. Gain above original cost is capital gain. Example: Asset cost ₹10L, depreciated to ₹4L, sold for ₹7L - ₹3L is recapture.
How to handle major repairs or improvements?
Regular repairs are expensed immediately. Major improvements that extend useful life or increase value are capitalized (added to asset cost) and depreciated. Examples of improvements: engine replacement, major renovation, significant upgrades. Consult accounting standards for proper treatment.
Can I claim 100% depreciation in first year?
In India, Section 32 allows depreciation based on prescribed rates, not 100% in first year (except very specific cases). However, in the year of purchase, only 50% of normal rate applies if asset is used for less than 180 days. Some countries allow 100% bonus depreciation for specific assets - check local tax laws.