Introduction to Depreciation as per Income Tax Act 2058
Provisions for Depreciation as per Income Tax Act 2058 are clearly presented within the Schedule 2 of Income Tax Act 2058. This schedule contains the guidelines on what kinds of assets attracts depreciation, what is its rate and how is the unclaimed depreciation dealed with in the next Fiscal Year. So, lets dive under this section with the types of assets and their applicability for depreciation as per Income Tax Act 2058.
Asset Types as per Income Tax Act 2058
- Trading Stock/ Inventory: These are the assets owned which are intended to be sold in the ordinary course of a business conducted by the person. It also includes the assets that are working in progress & the materials incorporated into such assets. Examples include vehicles for Vehicles traders business, furniture for furniture trading businesses, etc. However, it does not include assets whose value is in foreign currency. No Depreciation is allowed for these assets.
- Business Asset: Business assets are any assets used in any business. However, it does not include Trading stock/inventory and Depreciable assets. Examples include Land used in the business. No Depreciation is allowed for Business Assets.
- Non Business Chargeable Assets: These are the land, building, security or interest in any entity except the following:-
- Business Asset, Trading Stock or Depreciable Assets.
- Private building of a natural person such that the owner is residing on that owned property for at least 10 years.
- Interest or security of a beneficiary in a retirement fund
- Land, private building or both of a natural person sold for a value less than 10 lakhs.
- Transfer of assets within 3 generation of family. No Depreciation is allowed for Non Business Chargeable Assets.
- Depreciable Assets: These are the assets used by the business for the production of income such that the asset losses its value over the period of time due to wear and tear. However, it does not include Trading Stock/ Inventory. Depreciation is allowed only for this class of assets.
|Asset Types||Is Depreciation allowed?|
|Trading Stock||Depreciation is not allowed.|
|Business Asset||Depreciation is not allowed.|
|Non-Business Chargable Asset||Depreciation is not allowed.|
|Depreiable Asset||Depreciation is allowed.|
Can we claim depreciation on all Depreciable assets?
No, depreciation cannot be claimed on every depreciable assets. Only those depreciable assets fulfilling the criteria below can claim depreciation for tax purposes.
- The Asset must be owned by the person claiming the depreciation.( In other words, only the assets owned by the business can be depreciated. Assets received under Short term lease, assets on rent, asset of third party, etc are not owned by the business and thus depreciation can not be claimed on those assets(
- The asset must be used during the income year. (Ideal Unused assets, assets under construction & unfinished assets are not allowed for claiming depreciation. Similarly depreciation arisen on assets unused due to shortage of machine operator also cannot be claimed.
- The Asset must be used for the production of income.
- The Asset Should be a Fixed Asset.
Pool wise Classification of Depreciable Assets:
Income Tax Act 2058 does not identify individual assets as Depreciable Assets. Rather it classifies all the assets into various groups also called “Pools”. Pools are the categories of various depreciable assets. Once the asset is added into the pool, the asset loses its individual nature identity and is recognized as per pool identity. Depreciation is calculated on the value of pool asset not on the basis of individual assets.
ABC Pvt Ltd recently purchased 3 truck/vehicles @ 30 lakhs each for transporation of finished goods produced in the company. It also had an old truck with current value of Rs 7 lakhs. For tax purposes, ABC can not depreciate individual assets with differrent depreciation rates, rather all similar assets are bundled up under a pool ( pool types below) and a flat rate depreciation is claimed on the sum of all assets ( i.e. 30 lakhs+ 7 lakhs= 37 lakhs & depreciation on 37 lakhs).
Types of Pool for Depreciation
Income Tax Act 2058 has categorized the pools under 5 headings as follows:-
|Pool Group||Assets added to the pool|
|Pool A||Buildings, structures and other permanent structure including road, tunnel, dam, swimming pool, power house, godown/ storage hall, tower, irrigation channel, bridge, parking stall|
|Pool B||Furniture & Fixture, Office equipment, computer|
|Pool C||Automobiles, bus & minibus|
|Pool D||Earthmoving equipment, plant and machineries, industry specific assets, machinery, electricity generator, turbine, telecom equipment, ATM of bank, tripper and similar vehicles used by construction business, aircraft.|
|Pool E||Intangible Asset.|
How is asset maintained in the individual pool?
Under each Pool of asset, a separate block of assets is created. Assets are then categorized under each block of asset. For example, when a computer and a furniture set is purchased, each asset is added to their corresponding block ie computer is added in the Block ” Office Equipment” & Furniture set is added in the block ” Furniture & fixture” of pool B. This can be summarized by the table below.
Example 2 Asset classification & presentation within a Pool
|A||Furniture & Fixture :|
|A||Sofa Sets||Rs 10 laks|
|A||Table||Rs 3 lakhs|
|A||Rack||Rs 2 lakhs|
|A||Bed||Rs 2.5 lakhs|
|A||Computer||Rs 6 lakhs|
|A||Printer||Rs 3 lakhs|
|A||Server||Rs 2 lakhs|
What is Depreciable Base? Concept
Depreciable base is the amount on which the depreciation for that Fiscal Year is calculated. It is the value on which the rate of depreciation is applied to calculate net depreciation for the year.
Calculation of Depreciable Base.
It is calculated as follows:
Opening Depreciation base for the Fiscal Year + Absorbed Additions – Disposals during the year.
Calculation of Absorbed Additions.
New asset additions are absorbed on the depreciable base as per follows:-
- Asset purchased within Poush End :- 100% of the purchase cost
- Asset purchased after Poush but within Chaitra End :- 2/3 of the total purchase cost.
- Asset purchased after Chaitra end:- 1/3 of total purchase cost.
All the unabsorbed additions are added to the opening depreciation base for the next year.
NOTE:- Disallowed/ excess research & Development costs, Disallowed/ excess pollution control cost, and any other asset which does not fall under any Pool of assets are also added within the Pool D. Disallowed repair & maintenance expense (<7% of Total NCA) are included in the opening depreciation base of individual asset pool
Rate of Depreciation as per Income Tax Act 2058 and the method applied.
Depreciation Rate in Nepal. Normal Rate.
The normal rate of Depreciation for assets of Pool A to D are as follows
|Pool||Rate of Depreciation|
Asset belonging to the Pool E are depreciated on a equated basis as per their useful life or tenure period.
Accelerated Rate of Depreciation.
This rate of Depreciation is calculated by adding 1/3 of its own rate to individual pool of assets.
Summarized accelerated rate of depreciation are as follows:
|Pool||Accelerated Rate of Depreciation|
Who are eligible to claim accelerated rate of depreciation: –
Following parties are eligible to accelerated rate of depreciation
- Cooperatives Registered as per Cooperative act 2074
- Entity Constructing and operating Projects under BOT (Build Operate Transfer: projects ultimately handed over to government after completion)
- Construction of powerhouse, production & transmission of electricity.
Special Case of Depreciation:
- Purchase of Power Generating Asset: – Entity purchasing a power generating asset for its own business purpose during the income year may deduct 50% of the cost of the asset in the year when the asset is capitalized.
- Purchase of Invoicing Printing Machine: – Entity purchasing electronic Invoicing printing machine can deduct 100% of the purchase cost as depreciation in the year of purchase.
Disposal of Depreciable Assets (IT directive clarification)
As per Income Tax Directive 2073, there is a difference in calculation of depreciation in case there is a disposal of a single asset in a pool or a disposal of whole assets of a pool. Let us understand the guidelines provided as per IT Directive.
- Disposal of a partial or few assets present within the pool.
- If the disposal value ie Incomings of the disposal of single asset of the pool is less than the total depreciable base, the resulting value after deducting disposal proceeds becomes the depreciable base for the year.
- If the disposal value if Incomings of the disposal of single asset of the pool is greater than the total value of the pool, the resulting figure is added in the Business Income as a balancing charge.
- Disposal of all assets of a Pool
- In disposal of all assets of a pool, the total disposal proceeds if is greater than depreciable base then the resulting value is included in the business Income as a balancing charge.
- In disposal of all assets of a pool, if the total disposal proceeds is less than the depreciable base, the resulting amount is included as Depreciation for that Pool of asset in the Fiscal Year.
This means that the balancing figure of assets on each pool is directly allowed to be claimed as depreciation for the income year. Terminal Depreciation occurs on the following cases:-
- When the opening Depreciation base for the next year is less than Rs 2000.
- When there is loss of disposal of whose assets of a pool.
- When there is transfer of plants, equipments or machineries to the GON.