The monetary value of an asset gets generally reduced over time due to wear and tear or obsolescence and regular usage. This reduced value of the asset is known as “Depreciation”.
Not considering the depreciation rate of assets like air conditioners can greatly affect an organisation’s profit and loss statement. As per Income Tax Act, entities/businesses can claim the depreciation as a deduction. It typically depends on the Income Tax Department depreciation rates and the asset's value.
Air conditioning is the perfect example of a fixed asset getting older as time passes, and as a result, the value of the asset reduces. So, to know everything about the depreciation rate of air-conditioners, scroll down.
Air Conditioner Depreciation Rate
In recent years, air conditioning systems have become an integral part of organisations due to scorching heat and rise in temperature.
Air conditioner is considered an immovable fixed asset for businesses and falls under the “Office furniture and Equipment” or “Plant and Equipment” asset class. Therefore, under Income Tax Act, like any other tangible asset, certain depreciation rates are applicable to air conditioner units. To know about its depreciation rates, keep scrolling.
Air Conditioner Depreciation Rate As Per the Income Tax Act
Under Section 32 of the Income Tax Act of 1961, depreciation is the decreased value of an asset that has been used over a period of time. The Act allows deduction against depreciation for all real tangible and intangible properties. For tangible properties, you can claim a deduction for the depreciation amount.
As per Section 32(1) of the IT Act, the depreciation estimation needs to be as per the prescribed percentage of the Written Down Value Method (WDV). If an air-conditioner is used in a business and falls under the category of a block of assets (collection of assets that falls under the same asset class), the applicable depreciation rate is 15%.
As per Section 32(1) (ii), different depreciation rates are applicable for different assets. So if you are confused about how to find the depreciation rate according to the Income Tax Act, navigate to the official website of the IT department. Here is a step-by-step guide:
- After going to theIncome Tax India- Tax Charts and Tables website, a search bar will appear on your screen.
- In this required space, enter the depreciation rate and click on the ‘Search’ button.
- You will get to see the depreciation rates for different assets.
Air Conditioner Depreciation Rate As Per Companies Act
Under the Companies Act, in case you buy any asset on or after 1 April 2014, the depreciation rate is applicable. This depreciation is permitted on the residual value and useful life of assets. This specified depreciation rate came into effect in FY 2014-2015. However, the Straight Line Method or Written Down Value Method has to be used to calculate the depreciation rate.
The depreciation rate applicable to air-conditioners as per the Companies Act of 2013 is 13.91% (Written Down Value). In Straight Line Method case, the applicable depreciation rate is 4.75%. Also, it is mentioned that the residual value should not exceed 5% of the asset's original cost.
However, corporations and organisations can implement useful life more than what is specified in Schedule II with the residual value exceeding 5%. In such a scenario, it is imperative to mention it in their financial statement and provide justification. Also, if any asset is sold or purchased, it is crucial for the organisation to mention the method of depreciation.
According to this Companies Act, for assets with No Extra Shift depreciation (NESD), the depreciation rate is the same irrespective of the number of work shifts. In case of other assets, if the company uses an asset for a double shift, then its depreciation will increase by 50% for that specified period. Simultaneously, if a company uses an asset for a triple shift, the depreciation rate will decrease by 100%.
Air Conditioner Depreciation Rate Calculator
The life of depreciable assets and depreciation methods may differ from asset to asset. Simultaneously, depending on the industry and asset type, it may vary for taxation and accounting purposes. Here are the two calculations methods prescribed by the Income Tax Department:
- Written Down Value Method (WDV):
Let's look into this formula for calculating the depreciation of an air conditioner using WDV:
R = {1 – (S/C) ^1/n}
In this given formula,
- 'S' stands for scrap value at the end of the asset's useful life
- ‘n’ signifies the remaining useful life of the asset
- ‘C’ is the written down value of the asset or cost of the asset.
For a comprehensive understanding, let’s consider an example:
Suppose a company purchased air conditioners in the year 2019 for Rs 10 lakh. The estimated useful value is 10 years, and the scrap value at the end of its useful life is Rs 2.5 lakh. Using the above-mentioned formula, the WDV rate is:
WDV Rate= 1 – [2.5/10]^1/10 = 1 – 0.25^0.1 = 12.95% (approximately). Using this WDV rate, you can estimate the required depreciation.
Therefore, depreciation for Year 1 = 10,00,000 x 12.95% = 1,29,500.
- Straight Line Method (SLM)
The formula for calculating depreciation using Straight Line Method (SLM) is as follows:
Depreciation = Original Cost – Residual Value / Useful Life.
From the above formula, it is evident that calculating the depreciation rate of air-conditioners can be a tedious task and are more prone to mistakes. In such a scenario, you can take help from an online calculator. All you need to do is input the residual value in percentage, cost and life of an asset, and depreciation method. After entering these details, you will get the desired result promptly.
Final Words
The Income Tax Act and Companies Act use WDV and SLM to estimate asset depreciation. Both of these methods adopt different approaches to calculating depreciation. Section 32 of the Income Tax Act mandates deduction against depreciation in the profit and loss statement. Therefore, to claim a deduction on the depreciation rate, it is imperative to know the calculation methods.
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