What is meant by the depreciation of assets?
Equipment used by a freelancer for the purpose of their work is generally termed as capital assets. Laptops, for instance, are capital assets. Buying a laptop is considered as an expense towards the work that you are doing and hence should be set off against your income for the year, to arrive at your taxable income. However, you cannot claim the entire purchase amount as an expense when filing a tax return.
This is because the equipment is classified as a capital asset and so will last a few years. Hence, a portion of the cost of the asset can be claimed every year, until fully recovered. This annual charge that is allowed as an income tax deduction for the decreasing value of a fixed asset over a while is referred to as depreciation of assets.
How is asset depreciation taxed?
The rate of depreciation of assets is decided by tax authorities and published in a schedule declared by them. This ensures that when you claim a tax deduction on asset depreciation, the rate of inflation is accounted for the corresponding year. Different assets have their own depreciation rates, methods of calculation and standards, all of which are laid down by the Income Tax(IT) Act. So whether it is a vehicle, camera, or laptop that you are claiming asset depreciation for, be sure to check the current rates for the same.
How to claim tax deduction on asset depreciation
As per Income Tax rules, written down value (WDV) method is preferred over straight-line method for calculating depreciation. This is because as per WDV method depreciation is deducted at a fixed rate every year. Suppose you buy a laptop worth ₹30,000 in FY 2019-20 to help you with your work as a consultant.
The depreciation rate for computers as per IT Act is at 40%. So, for the first year depreciation for the laptop is ₹12,000( 40% of 30,000). Closing WDV is ₹18,000, that becomes the opening WDV for FY 2020-21 and tax deduction will be ₹7200 (40% of ₹18,000). You can claim tax deduction on asset depreciation every year, until the cost is recovered. WDV is a logical way to compute depreciation and is also known as the reducing balance method since the amount of depreciation only decreases with time.
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