Depreciation is more than just an accounting entry. For small and medium enterprises (SMEs), it plays a critical role in financial planning, tax computation, and fixed asset management. As we move through the financial year 2025–26, businesses are advised to not treat depreciation as a year-end adjustment but to understand its strategic value throughout the year.
In simple terms, depreciation refers to the gradual reduction in the value of tangible assets due to wear and tear, passage of time, or obsolescence. Whether it’s machinery, office equipment, vehicles, or furniture, assets used for business purposes depreciate over time. Under the Income Tax Act, depreciation is allowed as a deduction from business income, reducing taxable profits. This makes it not just a compliance requirement but also a tax-saving tool when planned correctly.
Small businesses often invest in assets such as computers, factory tools, or office infrastructure without aligning them to depreciation schedules. This lack of planning can lead to missed benefits. For instance, if a machine is purchased in the second half of the financial year and put to use for less than 180 days, only half the eligible depreciation can be claimed in that year. Such nuances matter in tax planning and cash flow forecasting. Businesses should ideally time their capital investments based on when the assets will become operational, to ensure maximum benefit in the same financial year.
Another important concept is the block of assets system. Under income tax law, depreciation is claimed on blocks of similar assets at specified rates. For example, computers have a different depreciation rate than plant and machinery. Mixing or misclassifying assets can lead to complications during tax scrutiny or while reconciling with financial statements. A well-maintained fixed asset register, updated with dates of purchase, cost, installation, and usage, helps avoid such discrepancies and makes audit or tax assessments smoother.
The Companies Act, 2013 follows a different approach for depreciation, using the useful life of assets rather than fixed percentage rates. This creates a gap between accounting depreciation and tax depreciation, which may lead to deferred tax calculations. Small businesses must understand that while both systems are legally valid, they serve different purposes. Financial statements reflect accounting depreciation, which impacts reported profits, while tax returns reflect depreciation under the Income Tax Act, which impacts taxable income. With increasing digitization and matching of data by authorities, proper reconciliation of both is essential.
Another area where businesses falter is in the treatment of disposed assets. When an asset is sold, scrapped, or written off, the effect on the depreciation claim and block value must be properly accounted. Simply removing the item from books without adjusting the block or considering the sale value can distort both tax computation and balance sheet accuracy. Chartered Accountants can assist in ensuring that asset disposals, impairments, and write-downs are managed as per applicable rules and disclosures.
As tax compliance grows more data-driven, authorities now cross-check depreciation claims through AIS, GSTR filings, and audit reports. Incorrect claims or inflated asset values can invite scrutiny. Businesses must also be cautious while claiming depreciation on assets financed through loans or subsidies, ensuring that the capitalized value reflects only the business’s actual ownership cost. CAs can advise on correct capitalization and help prepare proper audit trails.
In 2025, as many businesses invest in technology tools, renewable energy systems, and electric vehicles, awareness of updated depreciation rates becomes important. The government periodically revises rates for assets to align with national goals, such as promoting sustainable energy. Claiming correct depreciation not only improves financial health but also ensures businesses stay eligible for other tax benefits.
In conclusion, depreciation planning is not merely a compliance task but a strategic financial tool. When managed properly, it supports better decision-making, enhances tax efficiency, and improves reporting accuracy. Chartered Accountants can guide businesses in navigating both statutory frameworks and practical application of depreciation. For small enterprises aiming for growth in a competitive environment, such disciplined financial planning makes a meaningful difference.
