- SAP Managed Tags
Introduction:
Income Tax Depreciation India
Depreciation under the Income Tax Act is a deduction allowed for the reduction in the real value of a tangible or intangible asset used by a taxpayer.
Depreciation is defined as a reduction in the value of the asset due to wear and tear of the asset. People claim the deduction of depreciation only for accounting or for the purpose of taxation.
Difference between Book Depreciation & Tax Depreciation.
Book depreciation can be described as the amount registered in a company’s general ledger accounts. Book depreciation is always reported on the specific company’s financial statements.
Tax depreciation is the amount specified in the company’s income tax returns.
The major difference between book depreciation and tax depreciation is timing. It includes the timing of when the price of an asset will reflect as depreciation expenditure on the company’s financial statement against depreciation expenditure on the organization's income tax return. Therefore, the depreciation expenditure will remain different in each year. However, the total of all years’ depreciation expenditure for any asset is expected to add up the same total. The organization needs to maintain depreciation records for financial statement depreciation. The organization should also need to maintain depreciation records for the tax return depreciation.
Tax depreciation is calculated for the purpose of income tax. Book depreciation is prepared in accordance with the matching concept. In other words, to prepare book depreciation the revenue and expenditures produced must be recognized and registered for a similar accounting period. The organization needs to maintain two kinds of records for depreciation namely for financial reporting purpose and income tax purposes.
Depreciation under Income Tax Act
Section 32 of the Income Tax Act 1961 talks about depreciation.
Income Tax Act of 1961 allows the depreciation of tangible assets and intangible assets. In the case of a tangible asset, we can claim the deduction against building, plant, and machinery. In the case of an intangible asset, we can claim a deduction against the patents, trademark, copyright, license, franchise or any other business or commercial right of similar nature. We can claim the deduction on depreciation on those assets which have been used by the assessee for the purpose of business or profession during the previous year.
If any asset which has been used for less than 180 days then 50% of depreciation is allowable in that year.
For Financial Year (April - March):
- Asset which has been put to use till 2nd October, 100% depreciation will be charged
- Asset which has been put to use after 3rd October, 50 % of depreciation rate will be charged.
Block of Assets
Depreciation is calculated on the WDV of a Block of assets. Block of assets is a group of assets falling within a class of assets comprising of:
Tangible assets, being building, machinery, plant or furniture.
Intangible assets, being know how, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature.
The block of assets is classified further depending on the similar use, life of the asset and nature of the asset.
Written down value method (Block wise)
Every year the book value of the asset decreases and depreciation of the asset is computed on the book value of the asset. The written down value (WDV) method is the best way to calculate the depreciation of the asset because the depreciation amount goes on decreasing with time.
WDV under the Income Tax Act means:
Where the asset is acquired in the previous year, the actual cost of the asset shall be treated as WDV.
Where the asset is acquired in an earlier year, the WDV shall be equal to the actual cost incurred less depreciation actually allowed under the Act.
Additional depreciation under the Income Tax Act
The Income Tax Act only permits the written down value method. As per the Additional depreciation method, you can get the deduction only on those assets which have been used in the business or profession. However, an assessee can get the deduction only when assets are used in the year in which it was purchased.
If an asset has been used for less than 180 days then additional depreciation is allowed at 50% of the rate of additional depreciation.
Who is non-eligible for the additional depreciation
Additional depreciation can not be claimed on plants and machinery which has been used outside India, before being installed in India.
You cannot claim the deduction on those plants and machinery which have been installed in the office premises or in residential accommodation.
Depreciation will be computed as follows:
Name of asset | Block 1 | Block 2 | Block 3 |
| Machine – 15% | Furniture – 10% | Car -15% |
Opening Value | 0 | 0 | 0 |
Add- Purchases (>or = 180 days) Purchase (<180 days) | 500000+40000 | 20000 | 300000 |
Less- Sold during the year | 0 | 0 | 0 |
Closing value of block before depreciation | 540000 | 20000 | 300000 |
Depreciation | 78000 | 2000 | 22500 |
(500000*15% + 40000*15%*1/2) | (20000*10%) | (300000*15%*1/2) | |
Closing WDV after depreciation | 462000 | 18000 | 277500 |
Configuration in SAP S/4 HANA:
- Business Function FIN_LOC_CI_8 should be activated in SAP. If not then activate the same. (SFW5)
- Depreciation Area 15 to be created.
Financial Accounting - Asset Accounting - General Valuation - Depreciation Area - Define Depreciation Area
Here, area does not post should be ticket to avoid accounting entry creation, as ITD is only used for reporting and not for accounting.
- Add India Specific Tab added in the asset master tab specific layout, to get India specific tab activated in the Asset Master.
Financial Accounting - Asset Accounting - Master Data - Screen Layout - Specify Tab Layout for Asset Master Record
- Depreciation area to be assigned to Asset class, each Asset class should be assigned to depreciation area 15, to get the ITD activated for the specific asset class.
- Block key field to be kept as mandatory in asset master. This is an optional step, if the business wants that the block in the asset master should be mandatory then this activity can be done.
Financial Accounting - Asset Accounting - Master Data - Screen Layout - Define Screen Layout for Asset Master Data
- Asset Block Key Creation, this can be done via upload tool as well (J1INBLK).
Financial Accounting - Asset Accounting - Master Data - Country-/Region-Specific Functions - India - Maintain Asset Block Details
After all the steps are done, block keys can be mapped in the master and the testing can be done.
Below are the list of t-code which is required for income tax depreciation.
| S.No. | T-code | Description |
| 1 | AS01 | Asset Creation |
| 2 | AS02 | Asset Change (Assign Block key) |
| 3 | J1INBLK | Update Asset block key using excel file |
| 4 | J1INBLKTOAST | Assign block to existing asset using excel file |
| 5 | J1INBLKOWDV | Assign Opening WDV to Asset block |
| 6 | J1INBLKADJST | Adjustment in Opening WDV of Asset Block |
| 7 | J1INBLKTRNS | Update asset transaction at block level |
| 8 | J1IDISPBLK | Display transaction details at Asset level |
| 9 | J1IDEPCALPOST | Income Tax Depreciation calculation report &Closing WDV Update |
The file format which SAP supports is .csv, below is the screenshot of the file format.
J1INBLK - To upload Asset block keys
J1INBLKTOAST - Assign block to existing asset using excel file
Below is the list of manual activities which should be done on each server.
| S.No. | Manual (Cutover) Activities |
| 1 | Asset master with block key |
| 2 | Assigning opening WDV to asset block |
| 3 | Adjustment of opening WDV with block key |
| 4 | Update asset transaction detail at block level |
SAP Menu path "ZITD - Income Tax Depreciation for Fixed Assets" can also be created via SE43 for the users ease.
Thank you for reading, and happy automating!
Regards,
Tanya Srivastava
Bluesky
