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How To Calculate Mutual Fund Returns?
By Bajaj Broking Team
December 28, 2024
1 mins read
Mutual Funds
Synopsis:
Mutual fund returns show how much an investment has grown over time and are calculated using different methods based on investment type and duration. Learn more about how returns work, key calculation methods like absolute return, CAGR, and XIRR, and their suitability for different investments. It also highlights the importance of tracking returns to evaluate performance, compare funds, and plan financial goals effectively.
Depreciation under the Income Tax Act allows taxpayers to reduce taxable income by claiming wear and tear on assets. It applies to assets used for business or professional purposes over time.
The Act permits depreciation on assets like buildings, machinery, furniture, and vehicles. Instead of claiming full cost in one year, the expense is spread across the useful life of the asset.
Depreciation rates are fixed by tax rules and applied using the Written Down Value method. This ensures uniform calculation and helps maintain clarity and consistency in tax reporting.
Claiming depreciation lowers taxable income legally. It supports businesses by reflecting asset usage accurately and helps manage tax liability in a structured and compliant manner.
Asset Categories
Assets under the Income Tax Act are grouped to apply depreciation correctly. Each category has a fixed rate, helping businesses calculate tax deductions in a clear and standard way.
- Building – Used for business or professional purposes
- Furniture and fittings – Includes office furniture and fixtures
- Plant and machinery – Covers tools, equipment, and machines
- Computers and software – Includes desktops, laptops, and systems
- Vehicles – Used for business transport activities
Additional Read: What Is Tax Avoidance
Depreciation Rates
Depreciation rates are defined under the Income Tax Act for different asset categories. These rates help businesses calculate deductions accurately and ensure consistency in tax reporting using prescribed methods.
Asset Category | Depreciation Rate |
Building (non-residential) | 10% |
Furniture and fittings | 10% |
Plant and machinery | 15% |
Computers and software | 40% |
Motor vehicles (business use) | 15% |
These rates are applied using the written down value method as prescribed under the Income Tax Act.
How to Claim Depreciation under the Income Tax Act?
Claiming depreciation requires following specific steps and rules set by tax authorities. Understanding the correct process helps taxpayers reduce taxable income while staying compliant with legal requirements.
- Asset must be owned and used
The taxpayer must own the asset and use it for business or professional purposes during the financial year to be eligible for depreciation. - Correct asset classification
Assets should be grouped under the correct category, as depreciation rates differ for buildings, machinery, furniture, and computers. - Apply prescribed depreciation rate
Use the rates notified under the Income Tax Act and calculate depreciation using the written down value method. - Claim in income tax return
The calculated depreciation amount should be claimed while filing the income tax return for the relevant financial year.
Conditions for Claiming Depreciation
Certain conditions must be met before claiming depreciation on assets. These rules ensure that only eligible assets used for business purposes are considered for tax benefits.
- Ownership of the asset
The taxpayer must be the legal owner of the asset. Depreciation cannot be claimed on assets taken on rent or lease without ownership rights. - Use for business or profession
The asset must be used for business or professional activities during the financial year. Personal-use assets are not eligible for depreciation benefits. - Asset should be operational
The asset must be ready for use or actually used during the year. Even partial use qualifies for depreciation under tax rules. - Correct asset classification
Assets must be placed in the correct block. Wrong classification can lead to incorrect depreciation claims and possible tax adjustments.
Various Methods for Calculating Depreciation
Depreciation can be calculated using different methods based on tax rules and asset types. Understanding these methods helps businesses apply the correct approach and manage tax deductions effectively.
- Written Down Value method
Under the Income Tax Act, depreciation is generally calculated using the Written Down Value (WDV) method. Depreciation is charged each year on the reduced value of assets grouped under the same block, at prescribed rates. - Straight line method
The Straight Line Method (SLM) is permitted under the Income Tax Act only for undertakings engaged in power generation or power distribution, provided they exercise this option as per tax rules.
Requirements for Claiming Depreciation
To claim depreciation under the Income Tax Act, certain conditions must be met:
Ownership of Asset: The taxpayer must be the asset's owner, either fully or partially. Co-owners can also claim depreciation based on their share.
Business or Professional Use: The asset must be used for business or professional purposes to qualify for depreciation. If used for personal reasons, only the proportionate business-use period can be claimed.
Exclusion of Land and Goodwill: Depreciation cannot be claimed on land, as it does not depreciate. Similarly, goodwill is excluded since it doesn't experience wear and tear.
Non-Sale of Asset: Depreciation is not allowed to be claimed on assets that are sold, discarded, or destroyed within the same financial year. This rule ensures that deductions are only applicable to assets that remain in active use throughout the year, preventing claims for assets that are no longer in service or have been disposed of.
Mandatory Depreciation: Since fiscal year 2002-03, depreciation is mandatory. Even if not explicitly claimed in the profit and loss account, it must be presumed as a deduction.
Co-ownership: Co-owners can claim depreciation on their respective portion of the asset.
Asset Classification: The asset must belong to an eligible category, such as tangible assets (machinery, vehicles) or intangible assets (patents, trademarks).
Benefits of Tax Depreciation
Tax depreciation offers several advantages for businesses and individuals:
Reduces Taxable Income: Depreciation lowers taxable income, leading to reduced tax liabilities and increased cash flow, which helps businesses grow.
Encourages Investment: Depreciation incentives businesses to invest in new assets, promoting growth and modernization of operations and efficiency.
Improves Cash Flow: As a non-cash expense, depreciation does not affect actual cash flow, allowing for reinvestment in operations, leading to expansion.
Simplifies Compliance: Grouping assets into blocks for depreciation simplifies tax calculations and reduces administrative complexity, ensuring accurate reporting.
Provides Long-Term Financial Relief: Depreciation spreads tax benefits over an asset's useful life, ensuring consistent financial relief and stability for businesses.
Disclaimer :
Investments in securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
The information on this website is provided on "AS IS" basis. Bajaj Broking (BFSL) does not warrant the accuracy of the information given herein, either expressly or impliedly, for any particular purpose and expressly disclaims any warranties of merchantability or suitability for any particular purpose. While BFSL strives to ensure accuracy, it does not guarantee the completeness, reliability, or timeliness of the information. Users are advised to independently verify details and stay updated with any changes. The securities are quoted as an example and not as a recommendation. Past performance is not necessarily a guide to future performance.
The information provided on this website is for general informational purposes only and is subject to change without prior notice. BFSL shall not be responsible for any consequences arising from reliance on the information provided herein and shall not be held responsible for all or any actions that may subsequently result in any loss, damage and/or liability. Interest rates, fees, and charges etc., are revised from time to time, for the latest details please refer to our Pricing page.
Neither the information, nor any opinion contained in this website constitutes a solicitation or offer by BFSL or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.
BFSL is acting as distributor for non-broking products/ services such as IPO, Mutual Fund, Insurance, PMS, and NPS. These are not Exchange Traded Products. For more details on risk factors, terms and conditions please read the sales brochure carefully before investing.
Content Partner - Dalal Street Investment Journal Wealth Advisory Private Limited
This article is for educational purposes only and should not be considered investment advice. Market investments are subject to risks. DSIJ Wealth Advisory Private Limited is a SEBI-registered Research Analyst (Reg. No: INH000006396) and Investment Adviser (Reg. No: INA000001142). Please consult your financial adviser before investing.
For more disclaimer, check here : https://www.bajajbroking.in/disclaimer
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Publish Date:
28 Dec 2024
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