Private Limited Company Tax Rate: Latest PVT LTD Tax Rate Explained

Dec 31, 2024
Private Limited Company vs. Limited Liability Partnerships

Private limited companies in India are subject to various taxes, with the primary one being the corporate income tax. Understanding the tax rates and compliances is crucial for entrepreneurs and business owners to manage their finances effectively. In this article, we will delve into the intricacies of the private limited company tax rate, along with other key aspects of taxation for these entities.

Table of Contents

Budget 2024 Latest Update on Corporate Tax Rate

Finance Minister Nirmala Sitharaman has proposed a reduction in the corporate tax rate for foreign companies, bringing it down from 40% to 35% in the 2024 budget.

Subdivisions of Direct Taxes

Direct taxes in India are categorized as follows:

  1. Personal Income Tax
    • Paid by individual taxpayers based on their income.
    • Taxed according to predefined slabs at different rates.
  2. Corporate Income Tax (CIT)
    • Paid by domestic and foreign companies on their income earned in India.
    • The CIT is levied at rates specified by the Income Tax Act, subject to annual revisions in the Union Budget.

What is Pvt. Ltd. Tax Rate?

The Pvt. Ltd. tax rate refers to the corporate income tax rate applicable to private limited companies in India. Under the Income Tax Act, 1961, domestic companies are generally taxed at 30% on their total taxable income, with variations based on turnover and certain conditions.

For companies with a turnover of less than ₹400 crore, the tax rates are as follows:

  • Turnover up to ₹1 crore: Taxed at 25%.
  • Turnover between ₹1 crore and ₹10 crore: Taxed at 25% on profits exceeding ₹25 lakh, plus an additional ₹25 lakh.
  • Turnover above ₹10 crore: Taxed at 30%.

A 4% Health and Education Cess is levied on the total tax payable.

Companies may also opt for a reduced tax rate of 22% under Section 115BAA, provided they forgo certain exemptions and deductions. This option also includes the surcharge and 4% cess.

Additionally, new manufacturing companies incorporated after October 1, 2019, can avail a 15% tax rate (plus surcharge and cess) under Section 115BAB, subject to specific conditions.

Corporate Income Tax Rate for AY 2022-23

The Corporate Income Tax Rate for the Assessment Year 2022-23 varies based on the company's turnover and the applicability of surcharge and cess. Here's a table summarising the effective tax rates:

For Companies with Turnover Above ₹400 Crore

Income Slab Tax Rate
Up to ₹1 Crore 30%
Above ₹1 Crore but up to ₹10 Crore ₹3,00,000 + 30%
Above ₹10 Crore ₹3,00,00,000 + 30%

For Companies with Turnover Below ₹400 Crore

Net Income Slab (Gross Taxable Income – Deductions) Tax Rate Rebate u/s 87A (FY 2021-22)
Up to ₹1 Crore 25% Nil
Above ₹1 Crore but up to ₹10 Crore ₹25,00,000 + 25% Nil
Above ₹10 Crore ₹2,50,00,000 + 25% Nil

Key Budget 2022 Updates

1. No Changes in Tax Rates: The corporate tax structure remained unchanged.

2. Updated Surcharge Cap for Cooperatives: Surcharge capped at 7% for cooperatives with income between ₹1 crore and ₹10 crore.

3. Set-Off for Losses in Case of Start-ups: Extended incorporation date for start-ups to claim tax holiday under Section 80-IAC to 31 March 2023.

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Income Tax Rate for Domestic Manufacturing Companies for AY 2022-23

New manufacturing companies incorporated in India on or after October 1, 2019, and commencing production before March 31, 2023, can avail a concessional tax rate for private limited companies of 15% under Section 115BAB. However, this is subject to certain conditions, such as:

  • The company should be engaged in the business of manufacture or production of any article or thing
  • It should not be formed by splitting up or reconstruction of an existing business
  • It should not use any plant or machinery previously used in India (with certain exceptions)
  • The option to avail Section 115BAB must be exercised in the first year of operation

The applicable tax rates for domestic manufacturing companies for the assessment year 2022–23 are outlined below:

Category Conditions Tax Rate Surcharge Health and Education Cess
Certain Domestic Manufacturing Companies Opted for Section 115BA (effective from AY 2017-18) 25% Not Applicable Not Applicable
All Existing Domestic Companies Opted for Section 115BAA, regardless of incorporation date or activity type 22% 10% of taxable income if net income exceeds ₹1 crore 4% of Income Tax plus Surcharge
New Manufacturing Domestic Companies Opted for Section 115BAB 15% 10% of taxable income if net income exceeds ₹1 crore 4% of Income Tax plus Surcharge

Education Cess for Companies

Private limited companies are required to pay an education cess at the rate of 4% on the total income tax, including the applicable surcharge. Below is a detailed explanation of the corporate income tax rates for FY 2021–22 or AY 2022–23:

For companies with a turnover of up to ₹400 crore:

  • Income up to ₹1 crore is taxed at 25%.
  • Income exceeding ₹1 crore but up to ₹10 crore is taxed at 25% plus ₹25,00,000. A 7% surcharge applies.
  • Income above ₹10 crore is taxed at 25% plus ₹2,50,00,000, with a 12% surcharge.

For companies with a turnover exceeding ₹400 crore:

  • Income up to ₹1 crore is taxed at 30%.
  • Income exceeding ₹1 crore but up to ₹10 crore is taxed at 30% plus ₹3,00,000. A 7% surcharge applies.
  • Income above ₹10 crore is taxed at 30% plus ₹3,00,00,000, with a 12% surcharge.

The education cess of 4% is uniformly applicable to the total tax payable, including any surcharge, regardless of turnover.

Ready to incorporate your company? Start your journey with Private Limited Company Registration through Razorpay Rize today!

Income Tax Rate for Foreign Company

Foreign companies, i.e., those incorporated outside India but earning income from Indian sources, are taxed at a basic rate of 40% (plus applicable surcharge and cess). The surcharge is levied at 2% on income between ₹1 crore to ₹10 crores and 5% on income exceeding ₹10 crores.

It is important to note that foreign companies can avail beneficial provisions under the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence to minimize their tax liability.

Minimum Alternate Tax for Company

The Minimum Alternate Tax (MAT) provisions apply to companies whose tax payable under the normal provisions of the Income Tax Act is less than 15% of their book profits. In such cases, MAT is levied at 15% (plus applicable surcharge and cess) of the book profits.

However, MAT is not applicable to companies opting for the concessional tax regimes under Section 115BAA and Section 115BAB. Further, the credit for MAT paid is allowed to be carried forward for 15 years to be set off against future tax liabilities.

H2 - How to Calculate Total Income for a Company?

To arrive at the taxable income for a private limited company, the following steps are involved:

Steps Particulars
Step 1 Compute the net profit as per the profit and loss account
Step 2 Add income tax paid or provided
Step 3 Add depreciation charged in the books of accounts
Step 4 Add disallowed expenditures or expenses
Step 5 Subtract depreciation allowable under the Income Tax Act
Step 6 Subtract income exempt under the Income Tax Act
Step 7 Subtract deductions allowable under Chapter VI-A
Step 8 The result is the total taxable income

The Corporate Income Tax Rate is then applied to this taxable income to determine the tax liability of the private limited company.

Returns Applicable for Domestic Company for AY 2022-23

Private limited companies are required to file their income tax returns annually. For the assessment year 2022-23, the following returns are applicable:

1. ITR-6: This return is applicable for companies other than those claiming exemption under Section 11 (income from property held for charitable or religious purposes).

2. ITR-7: This return is applicable for companies claiming exemption under Section 11.

The due date for filing the return is 31st October of the assessment year. However, for companies required to furnish a report in Form No. 3CEB under Section 92E (relating to international transactions), the due date is 30th November of the assessment year. Companies must also ensure timely compliance with advance tax payments, TDS/TCS obligations, and tax audit requirements (if applicable) to avoid penal consequences.

Domestic Company Tax Slab for AY 2024-25

For the Assessment Year (AY) 2024–25, the income tax rates for domestic companies depend on their turnover or gross receipts during the financial year (FY) 2020–21, as well as the tax provisions they choose to apply under specific sections of the Income Tax Act. The applicable rates are as follows:

  • If the total turnover or gross receipts during FY 2020–21 do not exceed ₹400 crores:
    • Tax rate: 25%
  • If the company opts for Section 115BA:
    • Tax rate: 25%
  • If the company opts for Section 115BAA:
    • Tax rate: 22%
  • If the company opts for Section 115BAB:
    • Tax rate: 15%
  • For any other domestic company:
    • Tax rate: 30%

These rates are exclusive of surcharge and cess, which will be applied additionally based on the applicable income slabs.

Frequently Asked Questions

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Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

Frequently Asked Questions

How much tax does a private limited company pay?

The tax liability of a private limited company depends on various factors such as its residential status, income sources, turnover, etc. Domestic companies are taxed at a basic rate of 30% (with concessional rates of 25%, 22%, or 15% available subject to conditions) plus applicable surcharge and cess. Foreign companies are taxed at 40% (plus surcharge and cess) on their India-sourced income.

How can I avoid tax in a PVT Ltd company?

While tax planning is permissible, tax avoidance or evasion is illegal. Private limited companies can legitimately minimise their tax outgo by availing deductions, exemptions, and incentives provided under the Income Tax Act. For instance, companies can claim expenditures incurred wholly for business purposes, deductions for hiring new employees (Section 80JJAA), or for undertaking in-house R&D (Section 35(2AB)). Startups can avail a 100% tax holiday for three consecutive years out of their first ten years of operation.

What is 25% tax on a company?

Domestic companies with an annual turnover of up to ₹400 crores in the financial year 2021-22 are eligible for a concessional corporate tax rate of 25% (plus applicable surcharge and cess). This reduced rate aims to provide relief to smaller companies and promote their growth.

What are the tax benefits of Pvt Ltd?

Private limited companies can avail of several tax benefits under the Income Tax Act:

• Expenditure incurred wholly for business purposes is tax-deductible

• Deductions available for hiring new employees (Section 80JJAA), inter-corporate dividends (Section 80M), in-house R&D (Section 35(2AB)), etc.

• 100% profit-linked deductions for specified businesses like startups, affordable housing, agricultural extension, etc.

• Carry forward of business losses for eight years and unabsorbed depreciation indefinitely

• Deductions for CSR expenditure incurred on eligible activities

Sarthak Goyal

Sarthak Goyal is a Chartered Accountant with 10+ years of experience in business process consulting, internal audits, risk management, and Virtual CFO services. He cleared his CA at 21, began his career in a PSU, and went on to establish a successful ₹8 Cr+ e-commerce venture.

He has since advised ₹200–1000 Cr+ companies on streamlining operations, setting up audit frameworks, and financial monitoring. A community builder for finance professionals and an amateur writer, Sarthak blends deep finance expertise with an entrepreneurial spirit and a passion for continuous learning.

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Advantages of One Person Company: OPC Benefits Explained

Advantages of One Person Company: OPC Benefits Explained

An OPC is a unique business structure introduced by the Companies Act 2013 in India. It allows a single individual to form and operate a company, combining the benefits of both a sole proprietorship and a private limited company. OPC's meaning is straightforward - it is a company with only one member who is the sole shareholder and director. 

The primary objective behind introducing the OPC concept was to encourage solo entrepreneurship and facilitate the corporatisation of micro, small and medium enterprises (MSMEs) in India.

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What is the Nature of a One Person Company in India?

As per the definition provided in the Companies Act 2013, an OPC is a private limited company with only one member. The sole shareholder of the OPC holds 100% of the company's shares and is entitled to all the profits generated by the business. The full form of OPC is "One Person Company," emphasising its single-member structure.

The importance of OPC lies in its ability to provide a formal corporate structure to sole proprietors and small business owners. By registering as an OPC, entrepreneurs can enjoy the benefits of a separate legal entity while maintaining complete control over their business operations. This unique combination of sole ownership and corporate features makes OPC an attractive choice for many budding entrepreneurs in India.

Benefits of OPC Company

Next up, let us understand why an OPC company will be right for you:

1. Benefits of Being Small Scale Industries

One of the key advantages of a one person company is its eligibility to be registered as a Micro, Small or Medium Enterprise (MSME). By obtaining MSME registration, OPCs can avail various benefits provided by the government, such as:

  • Priority sector lending from banks
  • Collateral-free loans up to ₹10 lakhs
  • Subsidy on patent registration
  • Reimbursement of ISO certification expenses
  • Concession on electricity bills
  • Exemption from excise duties

These MSME benefits can significantly reduce the financial burden on small businesses and help them grow faster.

2. Single Owner

Unlike partnership firms or private limited companies, an OPC has only one owner who holds all the shares and has complete control over the company's decision-making process. This streamlined ownership structure offers several benefits for OPC company, such as:

  • Faster decision-making without the need for consensus among multiple partners or directors
  • Flexibility to adapt quickly to changing market conditions
  • Ability to maintain confidentiality of business strategies and plans
  • Elimination of potential conflicts among partners or shareholders

3. Credit Rating

OPCs find it easier to obtain loans and credit facilities from banks and financial institutions than sole proprietorships. This is because OPCs have a separate legal identity and their financial statements are available in the public domain, allowing lenders to assess their creditworthiness more accurately. A good credit rating can help OPCs secure funding at competitive interest rates, providing a significant advantage over unregistered businesses.

4. OPC Benefits under Income Tax Law

OPCs enjoy certain one person company tax benefits under the Income Tax Act, 1961. Some of these advantages include:

  • Lower corporate tax rate of 25% for OPCs with an annual turnover of up to ₹250 crores.
  • Exemption from Minimum Alternate Tax (MAT) for OPCs with an annual turnover of up to ₹5 crores.
  • Ability to carry forward and set off losses for up to 8 years.
  • Deduction of up to ₹1.5 lakhs under Section 80C for investments made by the OPC owner.

These tax benefits can help OPCs optimise their tax liabilities and retain more profits for reinvestment in the business.

Received Interest Rate on any Late Payment

Under the MSME Development Act, 2006, OPCs registered as MSMEs are entitled to receive interest on delayed payments from their buyers. If a buyer fails to make payment within 45 days of accepting the goods or services, the OPC can charge an interest rate of three times the bank rate notified by the Reserve Bank of India (RBI). This provision helps ensure timely payments and improves the cash flow situation for small businesses.

6. Increase in Trust and Status

By registering as an OPC, small businesses can enhance their credibility and reputation in the market. The formal corporate structure and public disclosure of financial statements instil greater trust among customers, suppliers and other stakeholders. This increased trust can lead to better business opportunities, higher customer loyalty and improved bargaining power in commercial transactions.

7. Easy Funding

Apart from institutional funding, OPCs can also raise capital from individual investors. The Companies Act allows OPCs to issue shares to up to 200 shareholders, providing an alternative route for raising funds. This option can be particularly useful for OPCs with high growth potential, as they can attract angel investors or venture capitalists to fund their expansion plans.

8. Limited Liability

One of the most significant benefits of OPC is the limited liability protection it offers to the owner. Unlike sole proprietorships, where the owner's personal assets are at risk in case of business liabilities, an OPC provides a corporate veil that separates the owner's personal assets from the company's obligations. In the event of any legal disputes or financial losses, the liability of the OPC owner is limited to the extent of their investment in the company.

9. One Person Company Tax Benefits

In addition to the income tax benefits mentioned earlier, OPCs also enjoy several other tax advantages. For instance, OPCs with an annual turnover of up to ₹2 crores can opt for the presumptive taxation scheme under Section 44AD of the Income Tax Act. Under this scheme, the OPC is required to pay tax on only 8% of its total turnover, reducing the compliance burden and tax liability significantly.

10. MSME Benefits

As discussed earlier, OPCs registered as MSMEs are eligible for various government schemes and subsidies. Some additional benefits include:

  • Preference for government tenders
  • Assistance in marketing and export promotion
  • Subsidies for participating in international trade fairs
  • Skill development and training programs for employees
  • Access to credit guarantee schemes

These benefits can provide a much-needed boost to small businesses, helping them compete with larger players in the market.

11. Ease of Management

Managing an OPC is relatively simpler compared to other business structures. With a single owner and no board of directors, decision-making is faster and less complicated. 

Additionally, OPCs have fewer compliance requirements under the Companies Act. For instance, OPCs are not required to hold annual general meetings or prepare cash flow statements. This reduced compliance burden allows OPC owners to focus more on their core business activities.

Eligibility Criteria for OPC

To register as an OPC, the following eligibility criteria must be met:

  • The OPC must have only one member who is an Indian citizen and resident. This ensures that the business is managed by someone who understands local regulations and market conditions.
  • The sole member must be a natural person, not a company or an institution. This stipulation reinforces the OPC's structure as a personal enterprise.
  • The member should not be a minor to ensure legal competency in business dealings.
  • The member should be of sound mind and not be declared insolvent by any court. This criterion ensures that the individual can manage the company's affairs effectively.
  • The member should not have been convicted of any offence related to company formation or management in the past five years, which helps maintain the integrity of business practices.
  • The member should not be a nominee or shareholder in any other OPC.

OPC Registration Process

The OPC registration process involves the following steps:

The registration process for an OPC is streamlined and can be completed online through the Ministry of Corporate Affairs - MCA portal. Here are the essential steps involved:

  1. Obtain a Digital Signature Certificate (DSC): The first step is to acquire a DSC for the sole member, which is necessary for signing electronic documents during the registration process.
  2. Apply for Director Identification Number (DIN): Following the DSC, the next step is to apply for a DIN, which is required for the proposed director of the OPC.
  3. Name Approval: The applicant must submit an application for name approval using Part A of the SPICe+ form on the MCA portal. It is advisable to propose at least two names to ensure one can be approved.
  4. Prepare Necessary Documents: Essential documents include: 
  • Memorandum of Association (MoA) and Articles of Association (AoA)
  • Proof of registered office address
  • Consent from the nominee
  • KYC documents for both the member and nominee
  1. File SPICe+ Form: Once all documents are prepared, submit Part B of the SPICe+ form along with all necessary attachments to complete the application for incorporation.
  2. Payment of Fees: Pay the requisite registration fees online, which may vary based on the company's nominal share capital.
  3. Certificate of Incorporation: If all details are accurate and compliant with regulations, the Registrar of Companies (ROC) will issue a Certificate of Incorporation, officially recognising the OPC as a legal entity.

This structured approach not only simplifies the registration process but also ensures that all legal requirements are met efficiently, making it easier for entrepreneurs to start their businesses as a One Person Company in India.

Conclusion

OPC offers a unique blend of sole ownership and corporate features, making them an attractive choice for solo entrepreneurs and small business owners in India. The benefits of an OPC company are numerous, ranging from limited liability protection and separate legal identity to tax advantages and easier access to credit. 

Additionally, the reduced compliance burden and simplified management structure make OPCs well-suited for individuals who want to focus on their core business activities without getting bogged down by excessive paperwork.

To register as an OPC, an individual must meet certain eligibility criteria and follow the prescribed registration process. Once incorporated, an OPC can enjoy various benefits available to MSMEs and small-scale industries, helping them compete effectively in the market.

In conclusion, the One Person Company is a progressive business structure that encourages solo entrepreneurship and facilitates the growth of small businesses in India. By providing a formal corporate framework with minimal compliance requirements, OPCs have opened up new avenues for aspiring entrepreneurs to turn their ideas into successful ventures.

Benefits of OPC - FAQs

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Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

Frequently Asked Questions

What is a one person company?

A one person company is a type of private limited company that has only one member who is the sole shareholder and director of the company. It was introduced in India by the Companies Act 2013, to encourage solo entrepreneurship and facilitate the corporatisation of small businesses.

What are OPC benefits in India?

Some of the key advantages of one person company in India include:

  • Limited liability protection for the owner
  • Separate legal identity from the owner
  • Easier access to credit and funding
  • Lower tax rates and tax benefits
  • Reduced compliance requirements
  • Simplified management structure
  • Eligibility for MSME benefits and schemes

However, OPCs also have certain limitations, such as restricted capital infusion and dependency on a single individual for decision-making. Together, these broadly sum up the advantages and disadvantages of a one person company. 

Who is eligible for OPC?

To be eligible for OPC registration, an individual must:

  • Be an Indian citizen and resident
  • Be a natural person, not a company or institution
  • Not be a minor or declared insolvent by any court
  • Not have been convicted of any offence related to company formation or management in the past five years
  • Not be a nominee or shareholder in any other OPC

What is the limit of OPC?

An OPC can have a maximum of one member and one director, who should be the same person. The paid-up share capital of an OPC is limited to ₹50 lakhs, and its average annual turnover should not exceed ₹2 crores in the immediately preceding three financial years. If an OPC crosses these thresholds, it must convert into a private or public limited company.

What is the importance of OPC?

The one person company concept is important because it provides a formal corporate structure to sole proprietors and small business owners, allowing them to enjoy the benefits of a separate legal entity while maintaining complete control over their business operations. OPCs help promote entrepreneurship, facilitate the growth of MSMEs and contribute to the country's overall economic development.

Mukesh Goyal

Mukesh Goyal is a startup enthusiast and problem-solver, currently leading the Rize Company Registration Charter at Razorpay, where he’s helping simplify the way early-stage founders start and scale their businesses. With a deep understanding of the regulatory and operational hurdles that startups face, Mukesh is at the forefront of building founder-first experiences within India’s growing startup ecosystem.

An alumnus of FMS Delhi, Mukesh cracked CAT 2016 with a perfect 100 percentile- a milestone that opened new doors and laid the foundation for a career rooted in impact, scale, and community.

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LLP Names Suggestion: Acceptable Name for Company or LLP

LLP Names Suggestion: Acceptable Name for Company or LLP

Choosing the right name for your Limited Liability Partnership (LLP) or company is a crucial step in business registration. Under the Companies Act 2013, your business name must comply with legal guidelines, ensuring it is unique, relevant, and free from restricted or misleading words. A well-chosen name enhances brand identity while meeting regulatory requirements.

The Registrar of Companies (ROC) approves names based on availability and adherence to naming rules. Hence, before finalising a company name, you must conduct a name availability check to avoid rejections.

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Rules for Selecting Company Name Under the Companies Act

When you select a company name, it must comply with the Companies Act to ensure uniqueness and legal approval. Here are the key rules to follow:

Avoid Similar or Identical Names

Your company name must not closely resemble an already registered business. The ROC conducts a company name check, and if the proposed name is found to be too similar to an existing one, it will be rejected. For example, if "GreenTech Solutions Pvt Ltd" is already registered, "GreenTech Solution Pvt Ltd" may be rejected due to similarity.

Restriction on Certain Words

You cannot use words that suggest a connection with the Central or State Government, local authorities, or government bodies, unless prior approval is obtained. For instance, names like "India National Bank Ltd" or "Government Infrastructure Pvt Ltd" require special permissions.

Prohibited Expressions

Some words and expressions are restricted under Rule 8B of the Incorporation Rules. You must seek approval from the Central Government before using them in your LLP or company name.

Mandatory Suffix for Entity Type

The company name must clearly indicate its legal structure.

A Brief About Acceptable Name for LLP

An acceptable LLP or company name in India consists of three key components. The Name Part that gives the business a unique identity, such as "Bright" in Bright Solutions LLP. The Object Part that reflects the company's activity, like "Solutions" indicating a service-based business. The Constitution Part that defines the legal structure, such as "LLP" in Bright Solutions LLP.

Name Part

The Name Part is the unique and distinguishable element of a company or LLP name. It must comply with the Companies Act 2013 or the LLP Act 2008 and should not be identical or deceptively similar to existing companies, LLPs, or registered trademarks within the same industry. The ROC verifies the name to ensure distinctiveness and prevent duplication.

For example, a name like Bluewave Technologies LLP is acceptable because it is unique and clearly identifiable. However, Bluewave Tech LLP may be rejected as it closely resembles an existing name. Similarly, GreenVista Textiles Private Limited is a valid name, but Green Vista Private Limited may be considered too similar to an existing business and could face rejection. Ensuring a distinct name that does not match or closely resemble an existing company improves the chances of approval.

Object Part

The Object Part in a company or LLP name defines its primary business activity. It must be clearly stated to indicate the company's purpose and ensure compliance with naming regulations.

If two companies have similar name parts but different object parts, both names may still be approved, as long as they belong to distinct industries. However, names without a clear object part or with generic words like "dash Private Limited" are too vague and may be rejected by the ROC because it does not specify what the company does.

Related Read: Difference Between LLP and Partnership

Examples of Common Object Parts in Company and LLP Names

Company Name Object Part Reason
AAA Trading Private Limited Trading Clearly defines that the business deals in trade
AAA Hospital Private Limited Hospital Indicates a healthcare-related business, different from “AAA Trading”
Bright Textiles LLP Textiles Specifies that the company operates in the textile sector
GreenVista Construction Pvt Ltd Construction Shows that the company deals with construction activities
Sun Pharma Ltd Pharmaceuticals Clearly states that the company is in the pharmaceutical industry

Constitution Part

The Constitution Part indicates the legal structure of the business. It must match the type of entity being registered, ensuring clarity in compliance and business operations. Here are the specific terms which are used for different entities:

  • Private Limited Company (Pvt Ltd) - For privately held businesses
  • One Person Company (OPC) - For single-owner companies
  • Limited Company (Ltd) - For publicly listed businesses
  • Limited Liability Partnership (LLP) - For partnership-based entities with limited liability

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Minimum Authorised Capital For Certain Words

When registering a company, using specific words in its name requires meeting minimum authorised capital requirements as per the Companies Act 2013. Words like "Corporation," "International," and "Industries" have higher capital requirements to ensure that only financially strong businesses use them. This helps maintain credibility and prevents misuse of these terms by companies with limited resources.

Before you apply to register a company name, verifying the capital requirements is essential to ensure compliance and avoid rejection. The table below outlines the required minimum authorised capital for specific words:

Word Minimum Authorised Capital Required
Corporation ₹5 Crore
International, Globe, Universal, Continental, Inter-Continental, Asiatic, Asia (as the first word) ₹1 Crore
Industries / Udyog ₹1 Crore
International, Globe, Universal, Continental, Inter-Continental, Asiatic, Asia (used within the name) ₹50 Lakhs
Hindustan, India, Bharat (as the first word) ₹50 Lakhs
Enterprises, Products, Business, Manufacturing ₹10 Lakhs
Hindustan, India, Bharat (used within the name) ₹5 Lakhs

When Will Companies House Refuse to Register a Company Name?

Companies House may reject a name if it does not comply with legal guidelines. Below are the key reasons why a company name may be refused:

  • Identical or Too Similar to an Existing Name: If the proposed name is the same or closely resembles an already registered company, it will be rejected.
  • Offensive or Illegal Names: Any name containing offensive, abusive, or illegal terms will not be approved.
  • Implying Government Affiliation: Names suggesting an association with the government, public authorities, or international organisations require special approval.
  • Use of Sensitive Words or Symbols: Certain words, such as "Royal," "Bank," or "Trust," require prior consent before use.
  • Misleading Use of Business Terms: Using terms like "Limited" (Ltd.), "Public Limited Company" (PLC), or "LLP" incorrectly or misleadingly can lead to rejection.

Objections to Company Names

Even after registration, objections to a LLP or company name may arise if it does not comply with legal requirements. Ensuring that the name is unique and non-misleading is crucial to avoiding disputes. Common reasons for objections include:

  • Too Similar to an Existing Business: If a company name closely resembles another registered entity, the affected business can file an objection.
  • Misleading Information During Registration: If false or inaccurate details were provided while registering the name, objections may be raised.
  • Failure to Meet Registration Conditions: A name that does not adhere to naming regulations or lacks necessary approvals may face challenges.
  • Opportunistic Registration: If a name is registered to take advantage of another company’s goodwill, it can be legally disputed.

Related Read: How much does an LLP cost in India?

How to Check Company Name Availability Online?

Before registering a company, you must check whether the proposed name is available to avoid rejection. The Ministry of Corporate Affairs (MCA) portal provides an online tool to verify company name availability. Here’s a step-by-step guide to checking a company name online:

  1. Visit the MCA Website: Go to www.mca.gov.in.
  2. Access the Name Availability Tool: Under the ‘MCA Services’ section, select ‘For Services’ from the drop-down menu and then select ‘Check Company/LLP Name’.
  3. Enter the Proposed Name: Type the desired company name in the search box and click on the ‘Search’ button.
  4. Review the Results: The portal will indicate whether the name is available or already registered.

Additional Checks for Better Approval Chances

  • Trademark Search: Use the Razorpay Rize Name Search Tool to check for potential trademark conflicts.
  • Alternative Name Options: Verify multiple name options to avoid rejection and ensure compliance with naming rules.

Conclusion

Choosing the right company or LLP name is crucial for legal compliance and brand identity. Ensure the name is unique, relevant, and adheres to MCA guidelines to avoid objections. Conduct a thorough name availability check on the MCA portal and verify potential trademark conflicts before finalising a name. A well-chosen name not only simplifies registration but also builds a strong brand identity while ensuring long-term legal compliance.

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Frequently Asked Questions

What are good names for a company?

A good company name is unique, relevant to your business, and easy to remember. It should comply with MCA guidelines and avoid restricted words.

How can I name my company?

To name your company, ensure it is distinctive, reflects your business activity, and follows MCA regulations. Use the MCA name availability tool to check if the name is already registered. Additionally, verify trademark availability to avoid conflicts.

Which name is the best for my company?

The best name for your company is one that aligns with your brand identity, business operations, and legal requirements. It should be simple, professional, and free from misleading or offensive words.

What should a company name be?

A company name should be unique, legally compliant, and descriptive of the business. It must include an appropriate suffix, such as Private Limited (Pvt. Ltd.) or Limited Liability Partnership (LLP), based on the entity type.

Mukesh Goyal

Mukesh Goyal is a startup enthusiast and problem-solver, currently leading the Rize Company Registration Charter at Razorpay, where he’s helping simplify the way early-stage founders start and scale their businesses. With a deep understanding of the regulatory and operational hurdles that startups face, Mukesh is at the forefront of building founder-first experiences within India’s growing startup ecosystem.

An alumnus of FMS Delhi, Mukesh cracked CAT 2016 with a perfect 100 percentile- a milestone that opened new doors and laid the foundation for a career rooted in impact, scale, and community.

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Depreciation Rates under Companies & Income Tax Act

Depreciation Rates under Companies & Income Tax Act

Depreciation stands as a fundamental accounting concept that allocates an asset's cost over its useful life. It represents a non-cash expense reflecting the gradual value reduction of business assets due to wear and tear, technological obsolescence, or simply the passage of time.

When businesses invest in long-term assets, they don't expense the entire cost immediately. Instead, they distribute this expenditure across multiple accounting periods through depreciation. This approach aligns with the "matching principle" - a core accounting concept that ensures expenses appear in the same period as the revenue they help generate.

Table of Contents

What is Depreciation?

Depreciation is the systematic allocation of an asset's cost throughout its productive lifespan. It acknowledges that assets contribute to revenue generation over multiple periods and should be expensed accordingly. Without depreciation, businesses would show dramatic profit fluctuations - significant losses when purchasing assets followed by artificially inflated profits in subsequent years.

The Indian regulatory framework recognizes two distinct approaches to depreciation. The Companies Act 2013 employs a useful life methodology for financial reporting, while the Income Tax Act prescribes specific rates for tax calculation purposes.

From an accounting perspective, depreciation appears as an expense in the Profit & Loss Account, reducing reported profit. Simultaneously, accumulated depreciation diminishes the asset's book value on the Balance Sheet, reflecting its decreasing value over time.

Several factors influence depreciation calculations, including the asset's original cost, estimated useful life, and expected residual value. Different methods may be applied based on regulatory requirements and business preferences.

Understanding depreciation is critical for businesses as it significantly impacts financial statements, tax liabilities, and strategic decision-making. The varying approaches between the Companies Act 2013 and Income Tax Act create temporary differences that require reconciliation during tax calculations.

The Purpose of Depreciation

Depreciation goes beyond tracking asset wear and tear, it aligns asset costs with the revenue they help generate, ensuring accurate financial reporting through the matching principle.

Without it, businesses would expense the full asset cost upfront, causing erratic profit figures, losses during purchase years and inflated gains afterward.

Key purposes of depreciation:

  • Cost Allocation: Spreads asset cost over its useful life
  • Profit Measurement: Matches expenses with related income
  • Tax Efficiency: Enables tax deductions under the Income Tax Act
  • Asset Replacement: Aids in planning for future replacements
  • Financial Stability: Smooths profit reporting over time

In India, depreciation is a non-cash expense. Companies Act rates differ from Income Tax Act rates, leading to temporary timing differences reconciled through deferred tax accounting. Both systems aim to fairly allocate asset costs over time.

Importance of Depreciation

Depreciation serves as a cornerstone of sound financial management, with implications reaching far beyond routine accounting entries. The strategic implementation of depreciation practices significantly impacts business operations across multiple dimensions.

Why is depreciation so critical for businesses?

Financial statements without proper depreciation would present a severely distorted view of company performance. Consider purchasing a ₹50 lakh manufacturing machine—expensing this entire amount immediately would dramatically reduce that period's profit. Subsequently, future periods would show artificially inflated profits as the machine generates revenue without corresponding expenses. This creates misleading financial trends that can confuse investors and stakeholders about the company's true financial health.

The depreciation methodology varies substantially between regulatory frameworks. A company typically uses straight-line depreciation following Schedule II of the Companies Act for financial reporting, while simultaneously applying the Written Down Value method at Income Tax Act rates for tax purposes. This dual approach helps optimize both financial reporting accuracy and tax efficiency.

Depreciation impacts businesses in five critical ways:

  1. Financial Stability - Prevents dramatic profit fluctuations by distributing asset costs over multiple periods
  2. Resource Planning - Helps accumulate funds for eventual asset replacement
  3. Investor Confidence - Provides more realistic performance metrics for investment decisions
  4. Tax Planning - Creates opportunities for tax-efficient asset management
  5. Business Valuation - Affects key metrics used in determining company worth

For Indian businesses, understanding depreciation rates under both regulatory frameworks is essential. The Income Tax Act allows depreciation as a deduction when calculating income under "Income from Business and Profession," directly affecting taxable income. Meanwhile, the Companies Act 2013 focuses on representing the true economic consumption of asset value.

Without proper depreciation accounting, businesses would struggle to present an accurate representation of their financial reality. The systematic allocation of asset costs ensures financial statements reflect a company's true economic position, providing stakeholders with reliable information for decision-making.

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Types of Depreciable Assets

Identifying qualified assets is the essential first step for businesses looking to claim depreciation benefits. Under both the Companies Act and Income Tax Act, depreciable assets fall into two primary categories that form the foundation of depreciation calculations.

Tangible Assets

These physical assets constitute the backbone of most business operations and include:

  • Buildings: This category includes residential structures with a 5% depreciation rate, hotels and boarding houses at 10%, and temporary wooden structures at a higher 40% rate
  • Furniture and Fittings: All furniture including electrical installations qualify for a 10% depreciation rate
  • Plant and Machinery: This diverse category encompasses motor vehicles (15% rate), while computers and software receive an accelerated 40% rate
  • Vehicles: Commercial vehicles like taxis, buses, and lorries used in hire businesses attract a 30% depreciation rate
  • Books: Professional annual publications qualify for 100% depreciation, while non-annual publications receive 60%

Intangible Assets

Though lacking physical form, these assets hold significant business value and generally receive a uniform 25% depreciation rate:

  • Franchises
  • Trademarks
  • Patents
  • Licenses
  • Copyrights
  • Know-how
  • Other similar business or commercial rights

The Block of Assets Concept

The Income Tax Act introduces a unique "Block of Assets" approach, where assets with similar characteristics are grouped together. Initially, tangible assets are categorized as building, machinery, plant, or furniture. For assets to form a block, they must attract identical depreciation rates.

Once assets are grouped into a block, they lose their individual identity for depreciation purposes. This approach significantly simplifies tax compliance by eliminating the need to track numerous individual assets.

Qualification Requirements

For assets to qualify for depreciation claims, they must meet two essential conditions:

  1. Ownership: The assets must be owned by the assessee, either wholly or partly
  2. Business Usage: The assets must be used for business or professional purposes

Year-round usage isn't mandatory—even seasonal utilization qualifies for appropriate depreciation benefits. This provision acknowledges the reality of businesses with cyclical operations.

Companies typically classify their assets based on nature, useful life, and applicable depreciation rates as prescribed in the respective acts, ensuring proper accounting and taxation treatment.

What is Written Down Value or WDV Asset?

Written Down Value (WDV) serves as the foundation for depreciation calculations under the Income Tax Act. Rather than using the original cost, depreciation is computed on the remaining value of an asset or block of assets after deducting previous depreciation claims.

How is WDV Calculated?

WDV essentially represents an asset's cost minus all accumulated depreciation claimed until date. For tax purposes, this calculation becomes particularly important since depreciation applies to the WDV of entire asset blocks rather than individual items.

The formula for determining WDV can be expressed as:

Opening WDV of block + Cost of new assets purchased during the year - Money received from assets sold = Closing value of block before depreciation

After determining this value, you apply the applicable depreciation rate to arrive at the final WDV. Consider this practical example:

A machinery block with 15% depreciation rate has an opening value of ₹5,00,000. New equipment worth ₹40,000 was purchased and used for less than 180 days. The depreciation calculation would be:

(₹5,00,000 × 15%) + (₹40,000 × 15% × 1/2) = ₹75,000 + ₹3,000 = ₹78,000

The closing WDV after depreciation would therefore be ₹4,62,000.

Once assets are grouped into a block, they lose their individual identity for depreciation purposes. This unified approach significantly simplifies tax compliance for businesses.

WDV vs. Straight-Line Method

The WDV method typically results in higher depreciation charges during earlier years, which gradually decrease over time. This contrasts with the Straight-Line Method where depreciation remains constant throughout an asset's lifetime.

While the Income Tax Act mandates the WDV method for most assets (with exceptions for power generating units), the Companies Act 2013 offers businesses flexibility to choose between Straight-Line, WDV, or Unit of Production methods based on asset types and business requirements.

The WDV approach better reflects economic reality, as assets generally lose more value during their initial years of use and experience diminishing depreciation as they age.

What are the Conditions for Claiming Depreciation

The Income Tax Act establishes specific conditions that businesses must satisfy before claiming depreciation benefits. These requirements ensure proper tax treatment while preventing misuse of depreciation provisions.

Ownership Requirement

Ownership stands as the fundamental condition for claiming depreciation. The assessee must own the asset, either wholly or partly, to qualify for depreciation benefits. However, several notable exceptions exist:

  • When an assessee constructs a building on leased land, depreciation can be claimed on the structure despite not owning the land
  • In mortgage situations where assets are built on mortgaged property, depreciation remains available
  • For finance lease arrangements, lessees can claim depreciation despite not being legal owners

Conversely, in short-term hire-purchase arrangements, depreciation claims aren't permitted as ownership hasn't effectively transferred.

Business Purpose Utilization

Assets must be employed for business or professional purposes to qualify for depreciation. This doesn't mean the asset requires year-round usage - even seasonal factories with limited operational periods qualify for full depreciation benefits.

When assets serve dual purposes (both business and personal), depreciation is allowed proportionately based on business usage. For example, if a vehicle is used 70% for business and 30% for personal purposes, depreciation can be claimed on 70% of its value.

Additional Key Conditions

  • Asset Sale Restriction: If an asset is sold, discarded, or damaged in the same year it was purchased, the assessee cannot claim depreciation on it
  • Co-ownership Provisions: When multiple parties co-own an asset, each co-owner may claim depreciation based on their ownership share
  • Mandatory Application: Depreciation is compulsory under the Income Tax Act - from Assessment Year 2002-03, it's deemed allowed even if not explicitly claimed in financial statements

Keep in mind that for taxpayers using presumptive taxation schemes, the deemed profit is considered to already include depreciation. The prescribed rates under the Income Tax Act must be followed regardless of different rates used in financial statements under the Companies Act.

The Written Down Value must be carried forward after reducing the depreciation amount, ensuring proper asset valuation in subsequent years.

Different Methods of Depreciation Calculation

Businesses employ several methodologies to calculate depreciation on assets, with approaches varying based on regulatory requirements. The Companies Act and Income Tax Act prescribe different methods, each serving distinct financial and tax objectives.

What are the Key Depreciation Methods under Companies Act?

The depreciation landscape in India is shaped by specific methods allowed under different regulatory frameworks:

Under Companies Act 1956 (Based on Specified Rates):

  • Straight Line Method
  • Written Down Value Method

Under Companies Act 2013 (Based on Useful Life):

  • Straight Line Method
  • Written Down Value Method
  • Unit of Production Method

Under Income Tax Act 1961 (Based on Specified Rates):

  • Written Down Value Method (Block-wise) - Primary method
  • Straight Line Method (exclusively for Power Generating Units)

How Do These Methods Work?

Straight Line Method (SLM) distributes depreciation equally throughout an asset's useful life. This straightforward approach uses the formula:

Rate of Depreciation = [(Original Cost – Residual Value) / Useful Life] × 100

The annual depreciation amount equals: Depreciation = Original Cost × Rate of Depreciation

Written Down Value Method (WDV) calculates depreciation on the reducing balance of an asset. This method applies a fixed percentage to the asset's remaining value after previous depreciation. Unlike SLM, WDV results in higher depreciation in earlier years, gradually decreasing over time.

Unit of Production Method, introduced in Companies Act 2013, links depreciation to actual usage rather than time. This method proves particularly beneficial for assets whose value diminishes based on production output rather than mere passage of time.

Throughout the depreciation lifecycle, businesses must reconcile differences between accounting and tax treatments. A company might simultaneously apply SLM for financial reporting (Companies Act) and WDV for tax purposes (Income Tax Act), creating temporary differences that require deferred tax adjustments.

These methodological differences lead to varied depreciation amounts and significantly impact financial ratios, tax liabilities, and overall business valuation. The selection of depreciation method therefore represents a strategic financial decision rather than merely an accounting choice.

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Impact of Depreciation Method

The selection of depreciation methods significantly influences a business's financial statements and tax obligations. The difference between methods prescribed under the Companies Act versus the Income Tax Act creates varying depreciation amounts for identical assets.

When businesses apply the Straight-Line Method under Companies Act for financial reporting while simultaneously using the Written Down Value Method for tax calculations, timing differences naturally emerge. These differences necessitate deferred tax accounting to ensure financial statements accurately reflect future tax implications.

Here's a practical example demonstrating depreciation calculation under the Income Tax Act:

Asset Block Asset Type Opening Value Purchases (≥180 days) Purchases (<180 days) Depreciation Calculation Amount Closing WDV
Block 1 Machine (15%) 0 5,00,000 40,000 (5,00,000×15%)+(40,000×15%×1/2) 78,000 4,62,000
Block 2 Furniture (10%) 0 20,000 0 20,000×10% 2,000 18,000
Block 3 Car (15%) 0 0 3,00,000 3,00,000×15%×1/2 22,500 2,77,500

This calculation affects financial reporting significantly. Under Accounting Standard-22 (AS-22) or IND AS 12, companies must account for temporary differences between accounting and tax depreciation. Consider an asset costing ₹150 with a carrying amount of ₹100 but a tax base of ₹60 (after ₹90 in tax depreciation). This creates a temporary difference of ₹40.

With a 25% tax rate, the company must recognize a deferred tax liability of ₹10 (₹40×25%) in financial statements, representing future taxes payable when recovering the asset's carrying amount.

Businesses must carefully evaluate which depreciation method to adopt, as it impacts:

  • Reported profits in financial statements
  • Timing of tax payments
  • Cash flow planning
  • Financial ratios used for performance evaluation

The differences in depreciation calculation extend beyond mere accounting technicalities—they have substantial financial implications requiring strategic consideration by business management.

Depreciation Rates under Companies & Income Tax Act

Amount of Depreciation Allowed

The Income Tax Act establishes specific parameters for calculating permissible depreciation amounts. The framework includes clearly defined methods and rates that businesses must follow when preparing tax returns. The Written Down Value (WDV) method serves as the mandated approach for most businesses, with precise rates outlined in Appendix 1 of the Act.

Special Provisions for Power Generation Businesses

Power generation businesses enjoy unique flexibility within the tax framework. These undertakings can select either the WDV method or the Straight-Line method when claiming depreciation. This choice offers valuable tax planning opportunities but must be exercised before the tax return's due date.

Corporate Restructuring Scenarios

When businesses undergo amalgamation or demerger, depreciation calculations require special attention. The total depreciation allowance is distributed between the participating companies based on a specific formula. This calculation follows an interesting approach - it assumes the restructuring never occurred, with the amount apportioned according to the number of days each entity utilized the assets.

Finance Lease Considerations

Finance lease arrangements present another notable exception to standard ownership requirements. When a lessee capitalizes assets in accordance with Accounting Standard-19 on Leases, they can claim depreciation despite not being the legal owner. This provision recognizes the economic reality that lessees effectively exercise ownership rights in such arrangements.

Impact of Acquisition Timing

The timing of asset purchases significantly affects allowable depreciation. Assets used for fewer than 180 days in a financial year qualify for only half the applicable rate, as shown below:

Asset Type Purchase Value Usage Period Calculation Depreciation
Machine (15%) ₹40,000 <180 days ₹40,000×15%×½ ₹3,000
Car (15%) ₹3,00,000 <180 days ₹3,00,000×15%×½ ₹22,500

Dual Calculation Approaches

Companies typically maintain separate depreciation calculations for financial reporting versus tax purposes. This dual approach stems from the differing objectives between regulatory frameworks. The Companies Act focuses on representing the true economic consumption of asset value, providing an accurate financial picture. In contrast, the Income Tax Act aims to standardize tax deductions across businesses, creating a uniform system for taxation purposes.

Understanding these provisions helps businesses maximize legitimate tax benefits while maintaining compliance with regulatory requirements.

Depreciation Rates for FY 2025-26 for Most Commonly Used Assets

The Income Tax Act provides a structured framework of depreciation rates for FY 2025-26 that businesses must apply when calculating their tax liabilities. These rates serve as a critical reference point for financial planning and tax compliance.

The depreciation rate chart is organized into two main sections: Part A for Tangible Assets and Part B for Intangible Assets. Each asset category has been assigned specific rates based on their nature, expected useful life, and wear and tear patterns.

Buildings fall into several sub-categories with varying rates:

  • Residential structures - 5% depreciation rate
  • Commercial buildings and hotels - 10% depreciation rate
  • Temporary wooden structures - 40% depreciation rate (reflecting their shorter lifespan)

Furniture and fittings including electrical fixtures attract a standard 10% depreciation rate across all types and usage patterns.

Plant and machinery encompasses a diverse range of assets with differentiated rates:

  • Standard machinery - 15% depreciation rate
  • Computers and software - 40% depreciation rate
  • Motor vehicles for business use - 15% depreciation rate
  • Commercial vehicles used in hiring businesses - 30% depreciation rate

Books owned by professionals receive specialized treatment under the tax code:

  • Annual publications - 100% write-off
  • Non-annual professional books - 60% depreciation rate
  • Lending library books - 100% depreciation rate

Intangible assets such as franchises, trademarks, patents, licenses, and copyrights uniformly qualify for a 25% depreciation rate.

The timing of asset acquisition plays a significant role in depreciation calculations. Assets used for less than 180 days in a financial year qualify for only half the applicable rate. For example, a car worth ₹3,00,000 purchased in the latter half of the fiscal year would receive depreciation of ₹22,500 (calculated as ₹3,00,000 × 15% × ½).

Businesses must carefully apply these prescribed rates based on accurate asset classification and usage period. Proper implementation ensures both tax compliance and optimization of legitimate deductions, ultimately affecting the company's financial position and tax liability.

Depreciation Rates as Per the Income Tax Act

The Income Tax Act establishes a structured classification system for depreciable assets with specific rates assigned to each category. These prescribed rates serve as the foundation for tax calculations across businesses in India and fall into two distinct sections.

Part A: Tangible Assets This section covers physical assets used in business operations:

Asset Class Key Examples Rate
Buildings Residential structures 5%
Buildings Commercial spaces, hotels 10%
Buildings Water treatment systems (acquired after Sept 1, 2002) 40%
Furniture All fittings including electrical 10%
Plant & Machinery Standard machinery 15%
Plant & Machinery Computers and software 40%
Vehicles Personal-use cars 15%
Vehicles Commercial taxis/busses 30%
Books Professional annual publications 100%

Part B: Intangible Assets For intellectual property and similar business rights, the Income Tax Act maintains a consistent approach:

Intangible assets including franchises, trademarks, patents, licenses, and copyrights all qualify for a uniform 25% depreciation rate.

Businesses must classify their assets according to this framework when calculating taxable income. The structure creates standardization across industries while acknowledging the varying lifespans of different asset types.

Timing plays a crucial role in depreciation calculations under the Income Tax Act. Assets used for less than 180 days in a financial year receive only half the applicable rate. This provision ensures tax treatment reflects actual asset utilization periods.

While the Companies Act 2013 focuses on the useful life approach for depreciation, the Income Tax Act provides these fixed rates to create uniformity in tax treatment. This fundamental difference often results in separate depreciation amounts between financial reporting and tax calculations, requiring businesses to maintain dual record systems.

The block-of-assets concept further simplifies tax depreciation by grouping similar assets together and treating them as a single entity. This approach streamlines compliance while providing standardized treatment across industries.

Rate of Depreciation under the Companies Act 2013

The Companies Act 2013 represents a significant paradigm shift in how businesses approach depreciation for financial reporting. Unlike its predecessor, this Act adopts a useful life approach rather than relying on fixed percentage rates. This fundamental change focuses on reflecting the true economic consumption of asset value over time, creating a more accurate financial representation.

How does Schedule II impact depreciation calculations?

Schedule II of the Companies Act 2013 provides a comprehensive reference chart detailing useful lives for various asset categories. This schedule serves as a guideline for determining appropriate depreciation periods, representing a significant departure from the percentage-based approach of the 1956 Act.

The formula for calculating depreciation typically follows: Rate of Depreciation = [(Original Cost – Residual Value) / Useful Life] × 100

What are the financial reporting implications?

The useful life approach often yields different depreciation amounts compared to tax calculations under the Income Tax Act. These variations create temporary differences that require deferred tax accounting treatments. Consequently, most businesses maintain separate depreciation records, one for financial reporting compliance and another for tax purposes.

Companies must disclose their chosen depreciation methods, useful life assumptions, and reconciliation of differences between tax and accounting depreciation in the notes to financial statements. This transparency helps stakeholders assess the true economic value of company assets and understand management's capital allocation decisions.

Business leaders should carefully evaluate their asset portfolios to determine appropriate useful lives and select depreciation methods that best represent economic reality while complying with statutory requirements. This thoughtful approach ensures financial statements accurately reflect the company's financial position and performance.

Frequently Asked Questions

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  • Service-based businesses
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One Person Company
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1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
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Private Limited Company
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BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
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1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

Frequently Asked Questions

What is the depreciation rate of a company?

The depreciation rate varies based on asset class and applicable law. Under the Companies Act 2013, rates are determined by the asset's useful life rather than fixed percentages. In contrast, the Income Tax Act specifies fixed rates: buildings (5-40%), furniture (10%), plant and machinery (15-40%), and intangible assets (25%). First and foremost, companies must identify which regulatory framework applies to their specific reporting purpose.

How do companies calculate depreciation?

Companies typically use three methods. The Straight Line Method divides cost evenly across the asset's life using the formula: [(Original Cost – Residual Value) / Useful Life] × 100. Alternatively, the Written Down Value Method applies a fixed percentage to the remaining asset value after previous depreciation. Finally, the Unit of Production Method links depreciation to actual usage. Fundamentally, the choice depends on both regulatory requirements and business objectives.

Which depreciation method is better?

No single method is universally superior. SLM provides consistent expenses ideal for financial planning but may not reflect true asset value decline. Correspondingly, WDV better represents actual value deterioration with higher initial depreciation. In relation to tax benefits, WDV often provides greater immediate tax advantages while SLM offers simpler calculations and predictability.

Who decides depreciation rates?

For financial reporting, the Ministry of Corporate Affairs determines useful life guidelines through Schedule II of Companies Act 2013. By and large, for taxation purposes, the Income Tax Department establishes rates specified in the Income Tax Act.

What is depreciation allowance under Income Tax Act?

Depreciation allowance is a tax deduction permitted on business assets as per Section 32 of the Income Tax Act. This mandatory allowance follows the WDV method (except for power generation units) and is deemed granted even if not explicitly claimed in financial statements.

Mukesh Goyal

Mukesh Goyal is a startup enthusiast and problem-solver, currently leading the Rize Company Registration Charter at Razorpay, where he’s helping simplify the way early-stage founders start and scale their businesses. With a deep understanding of the regulatory and operational hurdles that startups face, Mukesh is at the forefront of building founder-first experiences within India’s growing startup ecosystem.

An alumnus of FMS Delhi, Mukesh cracked CAT 2016 with a perfect 100 percentile- a milestone that opened new doors and laid the foundation for a career rooted in impact, scale, and community.

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Smooth onboarding, seamless incorporation and a wonderful community. Thanks to the #razorpayrize team! #rizeincorporation
Dhaval Trivedi
Basanth Verma
shopeg.in
Exciting news! Incorporation of our company, FoxSell, with Razorpay Rize was extremely smooth and straightforward. We highly recommend them. Thank you Razorpay Rize for making it easy to set up our business in India.
@foxsellapp
#razorpayrize #rizeincorporation
Dhaval Trivedi
Prakhar Shrivastava
foxsell.app
We would recommend Razorpay Rize incorporation services to any founder without a second doubt. The process was beyond efficient and show's razorpay founder's commitment and vision to truly help entrepreneur's and early stage startups to get them incorporated with ease. If you wanna get incorporated, pick them. Thanks for the help Razorpay.

#entrepreneur #tbsmagazine #rize #razorpay #feedback
Dhaval Trivedi
TBS Magazine
Hey, Guys!
We just got incorporated yesterday.
Thanks to Rize team for all the Support.
It was a wonderful experience.
CHEERS 🥂
#entrepreneur #tbsmagazine #rize #razorpay #feedback
Dhaval Trivedi
Nayan Mishra
https://zillout.com/
Smooth onboarding, seamless incorporation and a wonderful community. Thanks to the #razorpayrize team! #rizeincorporation
Dhaval Trivedi
Basanth Verma
shopeg.in
Exciting news! Incorporation of our company, FoxSell, with Razorpay Rize was extremely smooth and straightforward. We highly recommend them. Thank you Razorpay Rize for making it easy to set up our business in India.
@foxsellapp
#razorpayrize #rizeincorporation
Dhaval Trivedi
Prakhar Shrivastava
foxsell.app
We would recommend Razorpay Rize incorporation services to any founder without a second doubt. The process was beyond efficient and show's razorpay founder's commitment and vision to truly help entrepreneur's and early stage startups to get them incorporated with ease. If you wanna get incorporated, pick them. Thanks for the help Razorpay.

#entrepreneur #tbsmagazine #rize #razorpay #feedback
Dhaval Trivedi
TBS Magazine
Hey, Guys!
We just got incorporated yesterday.
Thanks to Rize team for all the Support.
It was a wonderful experience.
CHEERS 🥂
#entrepreneur #tbsmagazine #rize #razorpay #feedback
Dhaval Trivedi
Nayan Mishra
https://zillout.com/