Rule 5: Depreciation for Business and Professional Assets

Rule 5: Depreciation under the Income-tax Rules, 1962

Rule 5 sets out how depreciation is calculated for specified business and professional assets under section 32 of the Income-tax Act, 1961. The rule refers to depreciation rates in Appendix I and Appendix IA, and contains special provisions concerning power-generating undertakings and qualifying machinery associated with research laboratories.

Depreciation is ordinarily calculated by applying the prescribed rate to the written-down value (WDV) of the relevant block of assets. The applicable rate depends on the classification of the asset, the assessment year and the statutory conditions. A rate appearing in a historical provision should not automatically be applied to a current tax return.

How depreciation is calculated

1. Identify the asset block: group eligible assets into the appropriate class and depreciation rate under Appendix I.
2. Determine written-down value: take the opening WDV and account for additions, disposals and other applicable adjustments under section 43(6).
3. Apply the relevant rate: calculate depreciation under Rule 5 and the applicable Appendix, subject to the requirements of section 32.
4. Check the period of use: under the section 32 proviso, where an asset is acquired and put to use for less than 180 days in the year, the allowance may be restricted to 50% of the normal depreciation for that year.
5. Review special cases: power generation, additional depreciation and any special restrictions require separate analysis.

Illustration: A block with eligible WDV of Rs. 10,00,000 and an applicable rate of 15% would ordinarily produce depreciation of Rs. 1,50,000 before adjustments or restrictions. This is an illustration, not a universal rate for all machinery.

Special treatment for power-generating undertakings

Sub-rule (1A) addresses depreciation for eligible assets of undertakings engaged in generation or generation and distribution of power under section 32(1)(i). It refers to the rates in Appendix IA, based on actual cost, and provides an option to use the written-down-value method under sub-rule (1) and Appendix I, subject to the timing and finality requirements specified in the rule.

The provision expressly distinguishes undertakings generating power before 1 April 1997 from undertakings beginning generation later. Its historical election deadlines must be read in their original context.

Machinery based on qualifying research and technology

Sub-rule (2), as reproduced in the source provision below, addresses machinery or plant used in manufacture or production using technology developed by certain government, public-sector or recognised research laboratories. The text specifies eligibility requirements, certification from the Department of Scientific and Industrial Research and exclusions connected with the Eleventh Schedule. The 40% rate mentioned there is a provision-specific historical rate, not a general present-day rate for plant and machinery.

Rule 5: Detailed provision reproduced from the Income-tax Rules, 1962

The following reproduces the substantive clauses from the original page, reorganised into readable paragraphs. Legislative amendments, superseded references and applicability for a particular assessment year should be checked against the official rules.

5. (1) Subject to the provisions of sub-rule (2), the allowance

under clause (ii) of sub-section (1) of section 32 in respect of

depreciation of any block of assets shall be calculated at the

percentages specified in the second column of the Table in

Appendix I to these rules 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 previous year.

(1A) The allowance under clause (i) of sub-section (1) of

section 32 of the Act in respect of depreciation of assets

acquired on or after 1st day of April, 1997 shall be calculated

at the percentage specified in the second column of the Table in

Appendix IA of these rules on the actual cost thereof to the

assessee as are used for the purposes of the business of the

assessee at any time during the previous year :

Provided that the aggregate depreciation allowed in respect of

any asset for different assessment years shall not exceed the

actual cost of the said asset :

Provided further that the undertaking specified in clause (i) of

sub-section (1) of section 32 of the Act may, instead of the

depreciation specified in Appendix IA, at its option, be allowed

depreciation under sub-rule (1) read with Appendix I, if such

option is exercised before the due date for furnishing the

return of income under sub-section (1) of section 139 of the

Act,

(a) for the assessment year 1998-99, in the case of an

undertaking which began to generate power prior to 1st day of

April, 1997; and

(b) for the assessment year relevant to the previous year in

which it begins to generate power, in case of any other

undertaking :

Provided also that any such option once exercised shall be final

and shall apply to all the subsequent assessment years.

(2) Where any new machinery or plant is installed during the

previous year relevant to the assessment year commencing on or

after the 1st day of April, 1988, for the purposes of business

of manufacture or production of any article or thing and such

article or thing-

(a) is manufactured or produced by using any technology

(including any process) or other know-how developed in, or

(b) is an article or thing invented in,

a laboratory owned or financed by the Government or a laboratory

owned by a public sector company or a University or an

institution recognised in this behalf by the Secretary,

Department of Scientific and Industrial Research, Government of

India,

such plant or machinery shall be treated as a part of block of

assets qualifying for depreciation at the rate of 40 per cent of

written down value, if the following conditions are fulfilled,

namely :-

(i) the right to use such technology (including any process) or

other know- how or to manufacture or produce such article or

thing has been acquired from the owner of such laboratory or any

person deriving title from such owner ;

(ii) the return furnished by the assessee for his income, or the

income of any other person in respect of which he is assessable,

for any previous year in which the said machinery or plant is

acquired, shall be accompanied by a 88certificate from the

Secretary, Department of Scientific and Industrial Research,

Government of India, to the effect that such article or thing is

manufactured or produced by using such technology (including any

process) or other know-how developed in such laboratory or is an

article or thing invented in such laboratory ; and

(iii) the machinery or plant is not used for the purpose of

business of manufacture or production of any article or thing

specified in the list in the Eleventh Schedule to the Act.

Explanation : For the purposes of this sub-rule,-

(a) "laboratory financed by the Government" means a laboratory

owned by any body [including a society registered under the

Societies Registration Act, 1860 (21 of 1860)], and financed

wholly or mainly by the Government ;

(b) "public sector company" means any corporation established by

or under any Central, State or Provincial Act or a Government

company89 as defined in section 617 of the Companies Act, 1956

(1 of 1956) ; and

(c) "University" means a University established or incorporated

by or under a Central, State or Provincial Act and includes an

institution declared under section 3 of the University Grants

Commission Act, 1956 (3 of 1956), to be a University for the

purposes of that Act.

Applicability and changes in income-tax law

The Income-tax Act, 2025 came into effect from 1 April 2026. For a particular tax year, determine whether the earlier Act and its rules or the new legislative framework and corresponding rules govern the computation. This page retains Rule 5 of the Income-tax Rules, 1962 as a reference to the earlier framework; it should not be treated as a complete statement of the new rules.

For authoritative text and updates, consult the Income Tax Department and the Gazette of India.

Frequently asked questions

What does Rule 5 cover?

It prescribes depreciation calculation under section 32 for specified classes of business assets, with references to Appendix I and Appendix IA.

Is depreciation the same as an immediate expense deduction?

No. Depreciation is generally a prescribed allowance for the use of eligible capital assets over time, subject to statutory conditions.

Can the historical 40% rate be applied to all machinery?

No. The 40% figure in the reproduced sub-rule concerns a defined category of qualifying machinery and its particular statutory conditions.