Accounting

Income Tax vs Companies Act Depreciation: Why Two Numbers

Every company in India computes depreciation twice. Once for its financial statements under Schedule II of the Companies Act, 2013, and once for its tax computation under the Income-tax Act. The two numbers rarely match, and they are not supposed to.

Understanding why they differ is the difference between a clean deferred tax working and a reconciliation nobody can explain.

What changed on 1 April 2026

The Income-tax Act, 2025 came into force on 1 April 2026 and replaced the Income-tax Act, 1961. The first year it governs is tax year 2026-27. The Act also retires the phrase “previous year” in favour of “tax year”.

For depreciation this matters mainly for the references. Depreciation now sits in section 33. Rule 25 of the Income-tax Rules, 2026 sets out how it is computed, and the rates are in Appendix I to those Rules.

The mechanism is carried over rather than rebuilt. Rule 25(1) reads:

“the allowance under section 33(3), in respect of depreciation of any block of assets specified in column (2) of the Table in Appendix I shall be calculated at the percentages specified in the column (3) of the said Table on the written down value of such block of assets as are used for the purposes of the business or profession of the assessee at any time during the tax year.”

Block of assets, written down value, prescribed percentages. If you knew the old regime, you know this one. What you must update is the citation, because “section 32” now points at a repealed Act.

The four differences that matter

1. One works on assets, the other on blocks

Schedule II depreciates each asset over its own useful life. You can point at a specific machine and say what its carrying amount is.

The tax computation does not work that way. Assets are pooled into a block sharing the same rate, and depreciation is computed on the block’s written down value. An individual asset inside a block has no separate tax carrying amount.

The practical consequence catches people out on disposal. Sell one machine out of a block and there is no profit or loss on that asset for tax. The sale proceeds simply reduce the block. A gain arises only if the proceeds exceed what remains in the block; if the block empties out entirely, the result is a short-term capital gain or loss under section 74(3) of the Income-tax Act, 2025. The books, meanwhile, will show a perfectly ordinary profit or loss on sale.

2. One gives you a life, the other gives you a rate

Schedule II prescribes useful lives and caps residual value at 5% of original cost. The rate is something you derive from those two inputs, which is covered in detail in the Schedule II article.

Appendix I does the opposite. It gives you the percentage directly, applied to written down value.

Look at furniture. Schedule II says 25.89% on WDV, Appendix I says 10%. The book charge is more than twice the tax charge. For a laptop the book rate is higher again, 63.16% against 40%. Buildings go the other way, marginally, and a company using straight line in its books will usually find tax running ahead on plant. There is no consistent direction to the difference, which is why it has to be computed rather than estimated.

3. Timing works differently

Schedule II depreciates from the date the asset is available for use, pro rata by days. Buy in January, commission in March, and you get roughly one month.

The tax computation uses a 180-day convention. An asset put to use for fewer than 180 days in the tax year attracts half the normal rate for that year. The notified depreciation schedule in the Rules sets this out explicitly, with separate rows for additions held 180 days or more, additions held less than 180 days, and “amount on which depreciation at half rate to be allowed”.

So the same asset bought in January gives you about a month of book depreciation and half a year of tax depreciation.

4. One is a choice, the other mostly is not

Under Schedule II a company selects the method that reflects how it consumes the asset, and discloses it. Straight line or written down value are both available.

Under the Act, written down value on the block is the default and for most businesses the only option. Rule 25(3) provides a straight line alternative, on actual cost, using Appendix II, but only for undertakings engaged in generation, or generation and distribution, of power under section 33(2). Rule 25(5) lets such an undertaking opt into the Appendix I WDV system instead, and Rule 25(6) makes that option final for all subsequent tax years.

If you are not a power undertaking, you do not have a method choice on the tax side. This is covered further in WDV or SLM.

Where the difference goes

The gap between book and tax depreciation is a timing difference. Over the asset’s full life both systems write off broadly the same cost; they disagree about which year gets the charge.

Timing differences create deferred tax. Where tax depreciation runs ahead of book depreciation, the company has taken the deduction sooner than the expense, and recognises a deferred tax liability. Where book depreciation runs ahead, a deferred tax asset arises, subject to the usual recognition tests.

This is the practical reason the two computations must be kept separate and reconciled rather than merged. If your accounts and your tax computation show the same depreciation figure, something has gone wrong in one of them.

A note on the two rate caps

Rule 25 carries two restrictions worth knowing. Rule 25(2) caps depreciation at 40% of written down value for a domestic company that has exercised an option under section 199(3), 200(5) or 201(2), a resident co-operative society that has opted under section 203(5) or 204(2), and an individual, HUF, AOP, BOI or artificial juridical person whose income is taxed under section 202(1), the default regime. Rule 25(7) allows a 40% block for new plant using technology developed in a government-financed or public sector laboratory, subject to a certificate from the Secretary, Department of Scientific and Industrial Research.

A drafting point worth knowing

Appendix I to the 2026 Rules still refers in places to “section 80-IA(4)(i) of the Income-tax Act, 1961” for infrastructure facilities. That is deliberate, not an oversight. The Rules describe it as the facility referred to in the Explanation to that section “as it existed prior to its repeal”, which is how a new statute borrows a settled definition from an old one.

The lesson generalises. Not every reference to the 1961 Act in current material is an error, and not every reference is correct either. You have to read what the reference is doing.

Which number goes where

• Financial statements, board reporting, ratios, valuations: Schedule II
• Tax computation, advance tax, the return: section 33 with Appendix I
• Deferred tax working: the difference between the two

Where this fits

• Deriving the book rates: Schedule II depreciation
• Method choice and its limits: WDV or SLM
• Run the numbers: depreciation calculator
• First principles: the depreciation lesson
• Where the charge shows up: reading a balance sheet and reading a cash flow statement
• Terms used here: accounting glossary

Sources

• Income-tax Act, 2025, section 33. In force 1 April 2026; the Income-tax Act, 1961 stands repealed from that date.
• Income-tax Rules, 2026, rule 25 and Appendix I, as notified in the Gazette of India, Extraordinary, Part II section 3(i), 20 March 2026. Rule 25(1) and the Appendix I rates are quoted and tabulated from that notification.
• Companies Act, 2013, Schedule II. Useful lives from Part C; the 5% residual cap from Part A paragraph 3.