GUIDE · DEPRECIATION

Depreciation as per Companies Act and Income Tax Act, with Claude

Last updated: 4 November 2026 | By CA Varsha Varyani | 14 min read

Want to run this on your own files? Learn it in Claude for Accountants.

This guide gives you both rate tables checked against the government sources, the formulas, a worked example on sample data, the journal entries, and the exact prompts to build the whole schedule in Claude. You finish with a depreciation schedule you can check line by line.

Run it on your own files: the Claude for Accountants course teaches the fixed asset depreciation workflow step by step, on sample data.

Which law applies to which number

You will see the word "depreciation" used for two different calculations. Keep them apart.

Which year of tax law? The Income-tax Act, 2025 came into force on 1 April 2026 (CBDT press release dated 1 April 2026) and replaced the Income-tax Act, 1961. The Income-tax Rules, 2026 were notified on 20 March 2026. So for the tax year 2026-27 (1 April 2026 to 31 March 2027) the depreciation rules are section 33 of the 2025 Act and Appendix I of the 2026 Rules. For earlier years, up to the year ended 31 March 2026, the 1961 Act (section 32) and Rule 5 with Appendix I of the 1962 Rules still apply. The percentages for the common blocks in this guide are the same in both rule books (I checked the two tables; the rows are marked below).

Quick facts

Part 1. Companies Act: useful lives in Schedule II

Schedule II (see section 123 of the Act) says a company charges depreciation over the useful life of the asset, and that the useful life "shall not ordinarily be different from the useful life specified in Part C". Depreciation, in the Schedule's own words, is "the systematic allocation of the depreciable amount of an asset over its useful life", where the depreciable amount is cost less residual value.

Schedule II has not changed since the consolidated Act on MCA's site (header "Last update 29-7-2022"). I went through MCA's list of notifications up to 4 November 2026: none amends Schedule II (the only Schedule amended in 2026 is Schedule VII, on CSR). So the lives below are current.

The most used lines of Part C:

Source: Companies Act, 2013, Schedule II, Part C, para 5, MCA's published Act (the PDF header reads "Last update 29-7-2022"). The full table has far more lines (power, telecom, steel, ships, construction); use the full table for those.

Three rules that cause most errors:

1. Residual value. Not more than 5% of original cost, unless you disclose and justify a different figure.
2. Pro rata, from the date the asset is put to use. An asset added on 1 July is not depreciated for a full year. Schedule II says depreciation is calculated "on a pro rata basis from the date of such addition", and the accounting standards say depreciation begins when the asset is available for use, that is, in the location and condition to operate as intended (Ind AS 16, para 55; ICAI's Foundation study material says the same). So the date that counts is the date put to use, not the invoice date. Schedule II does not say whether to count days or months. ICAI's own study example counts complete months (an asset bought on 1 March gets one month in a year ending 31 March); this guide counts actual days, which is more precise. Pick one method and apply it every year.
3. Intangibles. Schedule II sends you to the accounting standards: Ind AS for companies under Ind AS, and the Accounting Standards under the Companies (Accounting Standards) Rules, 2006 for others (Part A, para 3(ii)). ICAI's list of Accounting Standards as on 1 April 2025 includes AS 10 (Property, Plant and Equipment) and AS 26 (Intangible Assets).

Part B adds that if a regulator or the Central Government has notified a useful life for a specific asset, that life applies instead.

“In a manufacturing company, I’ve seen new machinery commissioned late in the year but charged a full year of depreciation, because the schedule used the invoice date instead of the date put to use. The giveaway was that the charge looked too high for an asset that had only run a few months. I now check the date of use on every addition before anything else.” — CA Varsha Varyani

Part 2. Income Tax Act: rates on the block of assets

For tax, you do not depreciate each asset on its own. Assets of the same class form a block of assets, and the allowance is a percentage of the written down value (WDV) of the block (section 33(3)(a) of the Income-tax Act, 2025). The block WDV is worked out by this formula in section 41:

WDV of block = (opening WDV) + (cost of assets bought in the year) - (sale proceeds of assets sold in the year)

(Section 41(1)(c) writes it as [(A - D) + B - C] - E, where A is last year's WDV, D the depreciation allowed last year, B the cost of additions, C the sale money, and E applies only to a slump sale. A minus D is simply this year's opening WDV.)

The percentages are in Appendix I of the Income-tax Rules, 2026 (under Rule 25). The common rows:

† I also read the matching row in Appendix I of the Income-tax Rules, 1962 (the table for tax years up to 2025-26) and the percentage is the same. The Rules list many more special blocks at 15%, 30% and 40% (pollution control, energy saving, renewable energy and others); use the full Appendix I for those.

Four tax rules to know:

• Under 180 days. An asset bought in the year and used for fewer than 180 days gets only half the rate (section 33(4)). What counts is the number of days it was in use during the tax year.
• Cap at 40%. For taxpayers on the concessional regimes, block depreciation cannot exceed 40% of WDV (Rule 25(2)). These are: a domestic company that has opted under section 199(3) (manufacturing company, 25% rate), 200(5) (domestic company, 22% rate) or 201(2) (new manufacturing company, 15% rate); an individual, HUF, association of persons or body of individuals taxed under section 202(1), which is the default new tax regime; and a co-operative society that has opted under section 203(5) or 204(2). Almost every Appendix I rate is 40% or lower, so the cap rarely changes the common blocks. The one higher row is a legacy 45% row for hire buses and lorries bought between 23 August 2019 and 31 March 2020.
• Used partly for business. If an asset is not used wholly for business, the allowance is restricted to the business share (section 33(3)(b)).
• Claiming is automatic. Depreciation is allowed "whether or not the assessee has claimed" it (section 33(7)). You cannot skip a year to save it for later.

Capital gains on block sales are separate. If the sale money exceeds the block WDV and additions, the excess is a short-term capital gain (section 74).

“In a services business, laptops and servers sitting in the 15% plant and machinery block instead of the 40% computer block. They’d been under-claiming for years without noticing. Every March I check three things: is each addition in the right block, was anything used for less than 180 days, and does opening WDV match last year’s closing.” — CA Varsha Varyani

One note on servers: Appendix I names the block "Computers including computer software" and does not list servers separately. Varsha puts laptops and servers in that 40% block, and so does the worked example below.

Part 3. Methods and formulas

Straight line method (SLM). The same charge every year.

Annual depreciation = (Cost - Residual value) / Useful life
Rate (%)            = Annual depreciation / Cost x 100

Example: a server costs Rs 3,00,000, residual value is 5% (Rs 15,000), useful life 6 years. Annual depreciation = (3,00,000 - 15,000) / 6 = Rs 47,500.

Written down value method (WDV, also called reducing balance). A fixed percentage of the balance each year, so the charge falls over time.

Rate = 1 - (Residual value / Cost) ^ (1 / n)      where n = useful life in years

For the same server: rate = 1 - (15,000 / 3,00,000) ^ (1/6) = about 39.30%. Year 1 = Rs 1,17,911 (closing balance Rs 1,82,089); year 2 = Rs 71,568 (closing Rs 1,10,521); year 3 = Rs 43,439 (closing Rs 67,082).

ICAI's Foundation study material on depreciation (Chapter 5) gives the same two formulas and notes that the Income Tax Rules prescribe the diminishing balance method, except for power generation undertakings.

Changing the method. ICAI's material says a change in the depreciation method is treated as a change in accounting estimate: the method is reviewed at least at each year-end, the effect is quantified and disclosed, and the change affects the current and later periods (not earlier years). Its example: a Rs 10,50,000 machine with Rs 50,000 residual value and 10-year life, SLM for two years (Rs 2,00,000 charged), then WDV at 25%: year 3 depreciation is 25% of Rs 8,50,000 = Rs 2,12,500, against Rs 1,00,000 had SLM continued.

Part 4. A worked example: Sample Traders Pvt Ltd, FY 2026-27

Sample data only. The company's books and tax year are 1 April 2026 to 31 March 2027. In this sample every asset is put to use on the date shown as "Bought"; in a real file, use the date put to use, not the invoice date.

Step 1. Books depreciation under Schedule II

Residual value 5%, SLM, pro rata by days.

• Server: (3,00,000 - 15,000) / 6 = Rs 47,500 for the full year.
• Laptops 1 Jul 2026: residual 3,000; yearly charge (60,000 - 3,000) / 3 = Rs 19,000; days in use 1 Jul 2026 to 31 Mar 2027 = 274; 19,000 x 274 / 365 = Rs 14,263.
• Laptops 15 Oct 2026: residual 2,000; yearly charge (40,000 - 2,000) / 3 = Rs 12,667; days = 168; 12,667 x 168 / 365 = Rs 5,830.

Step 2. Tax depreciation under the Income-tax Rules, 2026

Computers block (40%): opening WDV Rs 1,00,000 (from earlier years); additions in the year are the server (Rs 3,00,000), the first laptops (Rs 60,000) and the second laptops (Rs 40,000).

• Opening WDV: 1,00,000 x 40% = 40,000.
• Server, put to use 1 Apr 2026 (365 days, over 180): 3,00,000 x 40% = 1,20,000.
• 1 Jul laptops, used 274 days (180 or more): 60,000 x 40% = 24,000.
• 15 Oct laptops, used 168 days (under 180): half rate, 20%: 40,000 x 20% = 8,000.
• Total allowance = Rs 1,92,000. Closing WDV = 1,00,000 + 3,00,000 + 60,000 + 40,000 - 1,92,000 = Rs 3,08,000.

Furniture block (10%): opening WDV Rs 2,00,000; one item sold for Rs 30,000. WDV after the sale = 2,00,000 - 30,000 = 1,70,000; allowance 10% = Rs 17,000; closing WDV = Rs 1,53,000.

Step 3. Book vs tax

Compare the three assets bought in this year. Book depreciation (server 47,500 + laptops 14,263 + 5,830) is Rs 67,593. Tax allowance on the same three (1,20,000 + 24,000 + 8,000) is Rs 1,52,000. The Rs 84,407 difference is a timing difference between books and tax; it normally feeds deferred tax and your tax computation. (The Rs 40,000 allowance on the opening block belongs against the book depreciation of the older assets, which this sample does not list.) The deferred tax standard is AS 22, Accounting for Taxes on Income, for companies under the Companies (Accounting Standards) Rules and for non-company entities that follow ICAI's standards. Companies that must follow Ind AS (decided by the Companies (Indian Accounting Standards) Rules, 2015) use Ind AS 12, Income Taxes.

Part 5. Run it in Claude: the prompts

Before you paste anything: remove client names, PAN, GSTIN and account numbers, or use a copy with sample values. Claude can make mistakes. Every number it gives must be tied back to your source documents before it reaches the books or a return. Ask it to show its working, as the prompts below do.

The trick is to give Claude the rate tables from the Act yourself, so it uses your numbers and does not guess.

Prompt 1. Books depreciation (Schedule II)

You are helping a chartered accountant in India. This is SAMPLE data.

Task: build the book depreciation schedule for FY 2026-27 (1 Apr 2026 to 31 Mar 2027)
under Schedule II of the Companies Act, 2013.

Rules to use (do not use any other rule):
- Straight line method.
- Residual value = 5% of cost.
- Useful life: use only the life I give in the column "Life (years)".
- Depreciation for the year = (Cost - Residual) / Life, charged pro rata
  by actual days from the date put to use to 31 Mar 2027, over 365 days.

Assets:
| Asset | Date put to use | Cost (Rs) | Life (years) |
| Server | 01-04-2026 | 300000 | 6 |
| Laptops set 1 | 01-07-2026 | 60000 | 3 |
| Laptops set 2 | 15-10-2026 | 40000 | 3 |

Give me one table with columns: Asset, Cost, Residual, Depreciable amount,
Annual charge, Days in use, Depreciation for FY 2026-27, Closing book value.
Show the formula for each row so I can check it. Round to the nearest rupee.
If anything is unclear, ask me before you calculate.

Check: server Rs 47,500; laptops set 1 Rs 14,263; laptops set 2 Rs 5,830 (these are the figures in Part 4).

Prompt 2. Tax depreciation (block of assets)

SAMPLE data. Compute income tax depreciation for tax year 2026-27 under the
Income-tax Act, 2025, section 33, using block of assets and written down value.

Rates to use (do not use any other):
- Computers block: 40% of WDV.
- Furniture and fittings block: 10% of WDV.
- If an asset bought in the year is used for fewer than 180 days, charge half the rate on that asset.

Block: Computers. Opening WDV 100000.
  Additions: 300000 put to use 01-04-2026; 60000 put to use 01-07-2026;
  40000 put to use 15-10-2026.
Block: Furniture. Opening WDV 200000. Sales in the year: one item sold for 30000.

For each block show: opening WDV, additions, sales, WDV for depreciation,
rate applied (and why), depreciation, closing WDV. Show every step.

Check: computers Rs 1,92,000, closing WDV Rs 3,08,000; furniture Rs 17,000, closing WDV Rs 1,53,000.

Prompt 3. Journal entries and the book-tax difference

SAMPLE data. Using the two schedules above, (1) draft the journal entry for
book depreciation for FY 2026-27 as at 31-03-2027, with narration, and
(2) list the difference between book depreciation and tax depreciation
for the three assets bought in FY 2026-27 (server, laptops set 1, laptops set 2). Do not give tax advice; just show the numbers and
which lines need a CA's judgement.

Prompt 4. Let Claude review your own schedule

Here is my depreciation schedule (SAMPLE). Act as a careful reviewer.
Recompute each row independently. List every row where your number differs
from mine, and explain the difference. Check specifically for: residual value
over 5%, a full year charged on a mid-year addition, a useful life that does
not match the table I gave you, and an asset in the wrong tax block.

“I give Claude the schedule and ask it to check it like a reviewer. It’s good at spotting inconsistent formulas, a useful life that doesn’t match Schedule II, mid-year additions that weren’t prorated, and roll-forwards where opening doesn’t equal last year’s closing. Where it gets it wrong is anything that depends on facts that aren’t in the file. It doesn’t know when the asset was really put to use, or whether something should have been capitalised at all. And I never trust a rate or useful life it quotes without checking the Act myself. It’s a fast second pair of eyes, not the final reviewer.” — CA Varsha Varyani

Journal entries for depreciation

Two forms are in common use. ICAI's study material describes both.

With an accumulated depreciation account (the one most organisations prefer, because the asset stays at cost):

Depreciation A/c                      Dr   67,593
    To Accumulated Depreciation A/c        67,593
(Being depreciation on computers for FY 2026-27)

Profit and Loss A/c                   Dr   67,593
    To Depreciation A/c                    67,593
(Being depreciation transferred to P&L)

Direct form (depreciation credited to the asset account): Depreciation A/c Dr, To Asset A/c, then P&L A/c Dr, To Depreciation A/c.

For the full set of entries (sale of an asset, accumulated depreciation, asset register) see the how-to articles linked below.

Common mistakes

• Full-year depreciation on a mid-year purchase, or counting from the invoice date. Both Schedule II (pro rata) and tax (the 180-day half-rate rule) treat part-year assets differently, and both look at when the asset was put to use. Check the date of use on every addition of the year.
• Putting the asset in the wrong tax block. A laptop is 40%, not the 15% of general plant. A car is 15%, but a car used in a hire business is a different block.
• Mixing up the two laws. Schedule II lives are not tax rates. The tax percentage is applied to the block, not the asset.
• Residual value above 5% without a note. Schedule II requires disclosure and justification.
• Using last year's rates or section numbers. From 1 April 2026 the rules are in the Income-tax Rules, 2026; check which law applies to the year you are working on.
• Forgetting the assets already fully depreciated. In books they stay in the register until they are sold or discarded.

Where to go next

• Related workflow: Bank reconciliation, with Claude
• Run this on your own files: the Claude for Accountants course has the fixed asset depreciation workflow as one of its five modules, recorded step by step.

Frequently asked questions

Sources (primary; read on 3 and 4 November 2026)

• Companies Act, 2013, section 123(2) and Schedule II (Useful lives to compute depreciation), Parts A, B, C and Notes. Ministry of Corporate Affairs, consolidated Act PDF, header "Last update 29-7-2022" (re-fetched 4 November 2026, unchanged): https://www.mca.gov.in/content/dam/mca/pdf/CompaniesAct2013.pdf
• MCA e-book, Notifications (Companies Act, 2013), checked to 4 November 2026 for any amendment to Schedule II (none; Schedule VII amended by G.S.R. 416(E), 27 May 2026): https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/notifications.html
• MCA, G.S.R. 169(E), 10 March 2026, Companies (Accounting Standards) Amendment Rules, 2026 (amends AS 22, Accounting for Taxes on Income, confirming it as the current deferred tax standard for companies not under Ind AS): same MCA notifications page.
• MCA, G.S.R. 111(E), 16 February 2015, Companies (Indian Accounting Standards) Rules, 2015 (Ind AS 12 Income Taxes; Ind AS 16 Property, Plant and Equipment, para 55 on when depreciation begins): same MCA notifications page.
• Income-tax Act, 2025 (as amended by Finance Act 2026; department page "last reviewed and updated 02-Nov-2026", PDF re-checked 4 November 2026): section 2(17) (block of assets), section 33 (deduction for depreciation, including section 33(4), the half-rate rule for assets used under 180 days), sections 199 to 202 (concessional regimes named in Rule 25(2)), section 41 (written down value), section 74 (capital gains on depreciable assets). Income Tax Department: https://www.incometaxindia.gov.in/income-tax-act-2025
• The Taxation and Other Laws (Amendment) Bill, 2026 (Bill No. 150 of 2026; passed by Lok Sabha 6 August and Rajya Sabha 10 August 2026). Its text and PRS summary amend the Act for exemptions to foreign investors and companies, business trust SPVs and data centres, and the Finance Act, 2026 surcharge; they do not touch section 33, depreciation or Appendix I: https://prsindia.org/billtrack/the-taxation-and-other-laws-amendment-bill-2026
• Income-tax Rules, 2026: Rule 25 (including the 40% cap in Rule 25(2)), Rule 136 (names of the options), and Appendix I (Table of rates at which depreciation is admissible). Income Tax Department, "last reviewed and updated 02-Nov-2026": https://www.incometaxindia.gov.in/income-tax-rule-2026
• Income-tax Rules, 1962: Appendix I (rates for tax years up to 2025-26), same department site: https://www.incometaxindia.gov.in/income-tax-rules
• CBDT press release, "Income-tax Act, 2025 comes into force from 1st April, 2026", 1 April 2026: https://www.incometaxindia.gov.in/documents/d/guest/press-release-income-tax-act-2025-comes-into-force-from-01-april-2026-pdf
• ICAI, Foundation Course Paper 1: Accounting, Chapter 5, Depreciation and Amortisation (methods, formulas, accounting entries, change of method): https://resource.cdn.icai.org/74614bos60479-fnd-cp5.pdf
• ICAI, Accounting Standards as on 1 April 2025 (list including AS 10 Property, Plant and Equipment, AS 22 Accounting for Taxes on Income and AS 26): https://publication.icai.org/post-data/accounting-standards-april-2025
• ICAI Accounting Standards Board, amendments to AS 22 for non-company entities, 29 July 2024 (shows AS 22 applies to non-company entities applying ICAI's standards): https://www.icai.org/post/amendments-to-as22-nce