Income Tax And The Depreciation Of Motor-Vehicles

If you are carrying on a business or profession one of the major instruments of  reducing taxes is to claim depreciation on the purchase of your vehicle.

Any expenditure incurred for the purpose of the business is allowed as a deduction from your business profits; as such, expenditure incurred on a vehicle used in the business viz fuel expenses, repairs & maintenance expenditure, vehicle insurance are allowed as deductions. Besides, in computing income from business one of the most important items of allowances is the allowance for depreciation, provided by Section 32 of the Income Tax Act.

Depreciation is a non-cash expense which results from the reduction/diminution in the value of certain capital assets including vehicles etc. This deduction towards depreciation is very essential to arrive at the Income from Business/profession of the taxpayer and also to amortize the capital cost of the amount invested in business assets like factory building, machinery, plant, furniture, vehicles etc. The purpose of allowing depreciation is to provide in the course of time for replacement of the asset which is allowed to be depreciated over a period of time.

To claim depreciation on vehicles following conditions have to be fulfilled:

• You must be the owner of the vehicle.
• The vehicle must be actually used by you for the purpose of business or profession.
• The vehicle must be used during the financial year.

Therefore in case you want to claim depreciation on new vehicle before 31^st March 2014 you need to ensure that the invoice of the vehicle is in your name or the name of the entity in which you want to purchase the car, the vehicle needs to be registered with the concerned RTO office before 31^st March 2014, since you cannot put the vehicle on the road without registering with the RTO and you need to have sufficient proof in terms of petrol bills etc. in order to establish that the vehicle was used for your business or profession before 31^st March 2014. It is always advisable to maintain a log book for your vehicle to establish the extent of use of your vehicle for business purposes vis-à-vis for personal use. To the extent that the vehicle is used for personal purposes depreciation could be proportionately disallowed by tax authorities.

The rate of depreciation for a motor car is 15% while the rate of depreciation for motor buses, motor lorries and motor taxies used in the business of running them on hire is 30%.However if the vehicle is purchased during the financial year and is used for  Business or Profession for less than 180 days i.e. purchased after 2^nd October(3^rd Oct in case of  a leap year), depreciation is allowed at 50 percent of the allowable depreciation i.e. 1/2 of 15% i.e. 7.5%.However for the following financial year and thereafter the depreciation allowed will be 15% of the Written Down Value.

For eg: Motor car purchased on 1^st March 2014                           10,00,000

Less:   Depreciation for Financial Year 2013-14 is 7.5%

(1/2 of 15%) of  10 lacs                                                                             – 75,000

Written down value as on 31.3.14                                                         =9,25,000

Depreciation for FY 2014-15 (15% on ` 9,25,000/-)                          –1,38,750

WDV 31.03.15                                                                                               = 7,86,250

If the tax payer or tax entity is in the 30% tax bracket i.e.  partnership firms, companies and individuals whose annual taxable income exceeds 8 lacs , the saving in tax on account of depreciation in the above example would be as follows:

For FY 2013-14  Depreciation = 75,000/-    Tax saved = 22,500/-

For FY 2014-15  Depreciation =1,38,750/- Tax saved = 41,625/-

Furthermore, in case if one has taken a loan for purchase of the vehicle then the interest on the loan would be allowable as business expenditure.

If you have opted for the presumptive taxation scheme u/s 44AD of the Income Tax Act ,where you have the option of declaring your income at the rate of 8% of the gross receipts for turnover upto  60 lacs, then the benefit of depreciation on vehicles or other capital assets is presumed to have been claimed.

The benefit of depreciation of cars is only available in case you are carrying on a business or profession and not if you have only salary income.