Capitalise or Expense: The Repairs Decision
- The four questions that settle a borderline case
- Size is a practical filter, not a rule
- The tax consequence of getting it wrong
- One rule specific to buildings
- Where the two sets of books diverge
- What to write down at the time
- Where this fits
- Sources
The test is not how much you spent. It is what the spending did.
Money that restores an asset to the condition it was already in is a repair, and it goes to the profit and loss account this year. Money that makes the asset better than it was, or makes it last materially longer, is capital, and it joins the asset to be depreciated over time.
That sentence decides most cases. The rest of this page is about the ones it does not.
The four questions that settle a borderline case
- Did capacity, quality or efficiency increase? More output per hour, tighter tolerances, lower power draw. If yes, capital.
- Did the useful life extend beyond the original estimate? Not “the asset will now last five more years” but “it will last longer than we originally expected it to”. If yes, capital.
- Was the asset working before the spend? If it was, you are probably maintaining. If it was not, ask what stopped it working.
- Would you have had to spend this anyway to keep it running? Recurring and expected points to revenue. One-off and transformative points to capital.
Six cases, worked
| Spend | Answer | Why |
|---|---|---|
| Annual servicing of a generator, ₹40,000 | Expense | Recurring, restores the same condition |
| Replacing a worn engine in a delivery truck with an identical unit, ₹2,80,000 | Usually expense | Large, but it restores the truck to the condition assumed when its life was estimated. The truck is not better than new |
| Replacing that engine with a higher-output unit that raises payload, ₹3,60,000 | Capital | Capacity increased |
| Re-roofing a factory shed with the same material, ₹6,00,000 | Expense | Restoration. The shed is not larger, stronger or longer-lived than designed |
| Replacing that roof with insulated panels that cut cooling load, ₹9,50,000 | Capital | Efficiency improved; the building is better than before |
| Annual licence renewal for accounting software, ₹35,000 | Expense | A right to keep using it, not a new asset |
The two engine rows are the point of the table. The same physical job, on the same truck, at similar cost, goes two different ways depending entirely on whether the new engine is equivalent or better.
Size is a practical filter, not a rule
Most companies set a capitalisation threshold, often somewhere between ₹5,000 and ₹50,000 depending on scale, below which everything is expensed regardless. That is a materiality convenience and it is perfectly sensible. It is not a test. A ₹2,000 part that doubles a machine’s throughput is still conceptually capital; you expense it because chasing it is not worth the effort, and you should be able to say that is why.
The reverse error is more expensive. Treating a large repair as capital because it was large, when it merely restored the asset, defers a deduction you were entitled to take this year.
The tax consequence of getting it wrong
Take that ₹6,00,000 re-roofing on a non-residential factory building, where Appendix I gives 10% on written down value.
| Expensed | Capitalised | |
|---|---|---|
| Deduction in year 1 | ₹6,00,000 | ₹60,000 |
| Tax saved in year 1 at 30% | ₹1,80,000 | ₹18,000 |
| Deduction in year 2 | Nil | ₹54,000 |
| Deduction in year 3 | Nil | ₹48,600 |
Assumes a 30% marginal rate before surcharge and cess, the asset in use for 180 days or more in year one, and no other movement in the block.
Nothing is lost permanently. On written down value the deduction stretches out and never quite finishes. The difference is entirely one of timing, and timing is worth real money when the amounts are large.
One rule specific to buildings
If the spend is capital and it relates to a building, it does not get a rate of its own. Note 3 to Appendix I of the Income-tax Rules, 2026 deals with renovation or improvement in relation to a building referred to in section 33(6) of the Income-tax Act, 2025, meaning a building you occupy on lease or another right of occupancy, where the work is treated as a building you own, and the improvement takes the rate of the relevant building sub-item. For a building you own, the improvement simply becomes part of that building in the same block.
So an insulated roof on a factory shed depreciates at the non-residential building rate of 10%, not at any rate you might associate with the panels themselves. People reach for the plant and machinery rate of 15% here and it is wrong.
Where the two sets of books diverge
Your financial statements start from the same idea but apply it through the accounting standard. AS 10 and Ind AS 16 expense day-to-day servicing, but capitalise the cost of replacing a significant part, such as an engine or a roof, when it meets the recognition criteria, and derecognise the carrying amount of the part replaced. So the like-for-like engine and roof in the table may be capitalised in the books even where tax treats them as repairs. Anything capitalised is depreciated over its useful life under Schedule II of the Companies Act, 2013. Your tax computation adds the capitalised amount to a block of assets and forgets it was ever a separate thing.
A repair expensed in both systems creates no difference. A capitalised improvement usually creates one, because the book life and the Appendix I rate rarely agree. That difference is ordinary and is dealt with in the reconciliation between the two.
What to write down at the time
The decision is far easier to defend if the file records, at the point of spending, what condition the asset was in beforehand, what the work did, and whether capacity or life changed. Reconstructing that from an invoice two years later during an audit is the hard version of this problem.
Where this fits
- Once it is capital, where it goes: block of assets
- The two systems side by side: income tax vs Companies Act depreciation
- Your own figures: depreciation calculator
- Catching these at period end: month-end close checklist
- Terms used here: accounting glossary
Sources
Income-tax Rules, 2026, Appendix I note 3, read with section 33(6) of the Income-tax Act, 2025, as notified in the Gazette of India, Extraordinary, Part II section 3(i), 20 March 2026. The classification test itself is a matter of established accounting principle rather than a quoted rule, and is described as such.