What is depreciation under the Companies Act 2013?
Depreciation under the Companies Act 2013 is the systematic allocation of an asset’s depreciable amount (cost minus residual value) over its useful life, governed by Schedule II read with Section 123. Unlike the pre-2014 regime, which prescribed fixed depreciation rates directly, Schedule II prescribes the useful life of each asset class and leaves the company to derive the rate using SLM or WDV formulas, a fundamentally different, more judgment-based approach.
How Schedule II Changed the Depreciation Approach
Before the 2013 Act, Schedule XIV gave companies a ready reckoner of fixed depreciation rates for each asset; you looked up the rate and applied it, full stop. Schedule II of the 2013 Act moved to a useful-life model borrowed from accounting standards internationally. The stated useful life in Schedule II (Part C) is only a default assumption; a company can adopt a different useful life or residual value if it discloses the justification in its financial statement notes and, for listed companies, gets it backed by technical assessment. This shift means two companies running identical machinery can legitimately show different depreciation rates if their usage patterns genuinely differ, provided the deviation is disclosed.
Useful Life Table for Common Asset Classes
| Asset Class | Useful Life (Years) | Residual Value | Indicative SLM Rate |
|---|---|---|---|
| Buildings (other than factory buildings, RCC frame) | 60 | 5% | ~1.58% |
| Factory buildings | 30 | 5% | ~3.17% |
| Plant & machinery (general, continuous process) | 15 | 5% | ~6.33% |
| Computers and data processing units — servers | 6 | 5% | ~15.83% |
| Computers and data processing units — end-user devices (laptops, desktops) | 3 | 5% | ~31.67% |
| Furniture and fittings | 10 | 5% | ~9.50% |
| Motor vehicles (other than for hire) | 8 | 5% | ~11.88% |
| Office equipment | 5 | 5% | ~19.00% |
These are the Schedule II default useful-life figures; always verify the exact figure for your specific sub-category against the current Schedule II text before finalizing your fixed asset register, since several categories (like plant and machinery) have sector-specific sub-entries with different useful lives.
How to Calculate the Depreciation Rate Yourself
What is the formula for the depreciation rate under Schedule II?
Under the Straight Line Method, the rate is derived as Rate = [(Cost − Residual Value) ÷ Useful Life] ÷ Cost × 100. Under the Written Down Value method, the rate is derived using the formula Rate = 1 − [(Residual Value ÷ Cost) ^ (1 ÷ Useful Life)].
Here is how it plays out for a piece of plant and machinery costing ₹10,00,000 with a 15-year useful life and 5% residual value:
- Residual value = ₹50,000
- Depreciable amount = ₹950,000
- SLM depreciation per year = ₹950,000 ÷ 15 = ₹63,333
- SLM rate = ₹63,333 ÷ ₹10,00,000 × 100 = 6.33% per year
Under WDV, the same asset would show a higher depreciation charge in the early years and a lower charge as the book value shrinks, converging to the same residual value at the end of the 15-year useful life.
SLM vs WDV: Which Method Should You Choose?
Straight Line Method (SLM) charges an equal amount every year, simpler to plan around, and is predictable for budgeting and better suited to assets that generate steady value over time like office furniture or buildings.
Written Down Value (WDV) front-loads depreciation, charging more in the early years, this better matches assets that lose productive efficiency faster when new, such as machinery, vehicles, and technology hardware, and it also tends to reduce book profit (and therefore distributable reserves) in the earlier years of an asset’s life.
A company can use different methods for different classes of assets but must apply the same method consistently within a class, year after year; switching methods requires disclosure and retrospective recalculation under Ind AS/AS-5 principles.
Companies Act vs. Income Tax Act Depreciation: Why Both Matter
Founders often assume one depreciation number does the job everywhere. It does not. Companies' Act depreciation (Schedule II, useful-life based) determines your book profit and what you can legally distribute as dividend. Income Tax Act depreciation (Section 32, block-of-assets, fixed percentage rates like 15% for general plant and machinery) determines your taxable income. The two numbers will almost never match in a given year, which is exactly why every company reconciles book depreciation against tax depreciation through deferred tax entries. Confusing the two; say, using the income tax block rate in your statutory books; is a red flag auditors catch immediately.
Common Filing Mistakes We See
- Applying the old Schedule XIV flat rates instead of deriving a rate from Schedule II useful life; a leftover habit from pre-2014 accountants
- Forgetting to charge additional depreciation on the increased value of an asset after a revaluation or on capitalized subsequent expenditure
- Not depreciating an asset for the actual number of days it was used in the year of purchase or sale; Schedule II requires pro-rata depreciation based on the date the asset is put to use, not a full-year or nil-year shortcut
- Missing the mandatory disclosure when a company adopts a useful life different from Schedule II’s default
Key Takeaways
- Schedule II of the Companies Act 2013 gives useful life, not a fixed rate, the rate is derived using SLM or WDV formulas.
- A company can deviate from the default useful life if it discloses the technical justification in its financial statements.
- Depreciation must be charged pro-rata from the date the asset is put to use, not from the start of the financial year.
- Book depreciation (Companies Act) and tax depreciation (Income Tax Act) are calculated differently and will not match; this creates deferred tax.
- Growthora’s compliance team helps MSMEs build a Schedule II-compliant fixed asset register from day one.
FAQs
Is depreciation rate the same for all companies under Schedule II?
Not necessarily. Schedule II gives a default useful life for each asset class, but a company can adopt a different useful life if it discloses proper technical justification in its financial statement notes.
What is the depreciation rate for computers as per Companies Act 2013?
Under Schedule II, end-user devices such as laptops and desktops have a default useful life of 3 years, while servers and networks have a default useful life of 6 years, the exact SLM/WDV rate is derived from that useful life and the asset’s residual value.
Can a private limited company use WDV method for one asset class and SLM for another?
Yes. A company can use different depreciation methods for different classes of assets, as long as the same method is applied consistently, year after year, within each asset class.
Is Schedule II depreciation the same as Income Tax Act depreciation?
No. Schedule II governs book depreciation for financial statements based on useful life, while Section 32 of the Income Tax Act governs tax depreciation using fixed block-of-assets rates; the two figures are calculated separately and will differ.
What residual value should I use if Schedule II doesn’t specify one for my asset? Schedule II sets a default residual value of not more than 5% of the original cost for most assets, unless the company can technically justify and disclose a different figure.
Do I need a technical valuer to justify a different useful life?
It is advisable, and for listed companies it is effectively required by audit practice; using a qualified technical assessment to support a deviation from Schedule II’s default useful life protects you during statutory audit and ROC scrutiny.
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