Depreciation Tax Calculation, Finance, Other Engineering

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Depreciation Calculation

Two most popular methods of charging depreciation are: straight line and diminishing balance or written-down value (WDV) methods. For reporting to the shareholders, companies in India could charge depreciation either on the straight-line or the written down value basis. Depreciation in computed on the written down value of the block of assets. Block of assets means a group of assets falling within a class of which, being building, machinery, plant or furniture, in respect of which some percentage of depreciation is prescribed. Ocean-going ships are also included in the block of assets. For example, plant and machinery have been divided into three blocks with three rates if depreciation: 25 per cent, 50 per cent and 100 per cent depreciation block, no depreciation is allowed on land.

Depreciation base

In the case of block of assets, the written down value is calculated as follows:

The aggregate of the written down value of all assets in the block at the beginning of the year plus the actual cost of any assets in the block acquired during the year minus the proceeds from the sale of any asset in the block during the year (provided such reduction does not exceed the written down value of the block arrived in the first two items above)

Thus, in a replacement decision, the depreciation base of a new asset (assuming that the new and the old assets belong to the same block of assets will be equal to:

Cost of new equipment + written down value of old equipment ¬– salvage value of old equipment

Tax Incentives

The government provides a number of tax benefits to firm to encourage capital investment. The most significant incentives in Indian have been investment allowance (withdrawn now) and benefits under section 80HH and 801 of the income tax act.

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