What Schedule II changed
Before the Companies Act 2013, depreciation for company accounts was driven by rates prescribed in Schedule XIV of the Companies Act 1956. A finance team looked up a rate, applied it, and moved on. Schedule II of the 2013 Act replaced that with a useful life approach, and it changed the nature of the work.
Under the current regime the company determines the depreciable amount, which is cost less residual value, and allocates it systematically over the useful life of the asset. Schedule II sets out indicative useful lives by asset class. A company may adopt a different life, but if it does, it must disclose that fact and justify it on a technical basis.
In other words the responsibility shifted from lookup to judgement, and judgement has to be documented. That is why the register itself became more important. A depreciation number is no longer defensible on its own; the useful life, the method, the residual value and the componentisation behind it all have to be visible.
Useful lives in practice
Schedule II is the authoritative source and should always be read directly, since it is amended from time to time. The lives below are the ones most commonly encountered in Indian company accounts and are given for orientation rather than as a substitute for the schedule.
| Asset class | Indicative useful life |
|---|---|
| Buildings with reinforced cement concrete frame structure | 60 years |
| Buildings other than reinforced cement concrete frame structure | 30 years |
| General plant and machinery | 15 years |
| Electrical installations and equipment | 10 years |
| Furniture and fittings, general | 10 years |
| Office equipment | 5 years |
| Servers and networks | 6 years |
| End user computing devices such as desktops and laptops | 3 years |
| Motor cars other than those used in a hiring business | 8 years |
Two practical consequences follow. First, an organisation with a large computing estate will see end user devices fully depreciate in three years while the asset itself continues in service, which makes the physical register, not the book value, the only reliable statement of what exists. Second, plant classes vary considerably by industry within Schedule II, so the mapping of your asset classes to schedule classes is a decision worth documenting once and applying consistently.
Residual value and the five per cent limit
The depreciable amount is cost less residual value. Schedule II provides that ordinarily the residual value of an asset shall not be more than five per cent of the original cost. A company using a higher residual value has to disclose and justify it.
This matters more than it appears. A residual value applied inconsistently across similar assets is one of the more common audit observations, and it is almost always a data problem rather than a policy problem. The policy exists; it simply was not applied the same way by the person who created each asset record. A system that enforces residual value at the asset class level removes the failure mode entirely.
Componentisation
Where a part of an asset has a cost that is significant in relation to the total cost of the asset, and a useful life that is materially different from the remaining asset, that part is required to be depreciated separately.
The classic examples are a refractory lining inside a furnace, an engine inside an aircraft, and lifts or air conditioning plant inside a building. The lining may need replacement every few years while the furnace itself runs for fifteen.
Componentisation is where spreadsheets fail fastest. Each component needs its own capitalisation date, its own useful life, its own depreciation schedule, and a relationship back to the parent asset so that disposal of the parent handles the components correctly. Doing that by hand across a plant is possible exactly once, and then it drifts.
Extra shift depreciation
For assets where Schedule II indicates that extra shift depreciation applies, the depreciation for the period is increased when the asset is used on a double or triple shift basis. The increase is applied for the portion of the period for which the asset was actually used on extra shifts, and it does not apply to asset classes marked as no extra shift depreciation.
The operational difficulty is not the arithmetic. It is knowing, per asset and per month, how many shifts it actually ran. That information usually lives in production records rather than in finance, which is why extra shift depreciation is often applied as a blanket assumption across a plant. Where the asset system captures shift usage against the asset, the computation stops being an estimate.
The Income Tax Act 1961 computation
Tax depreciation under the Income Tax Act 1961 works on entirely different mechanics, and it is a mistake to treat it as a variation of the Companies Act computation.
- Block of assets. Assets are grouped into blocks by class and by rate. Depreciation is computed on the written down value of the block, not asset by asset. Individual assets lose their separate identity inside the block.
- Written down value method. The prescribed rate is applied to the opening written down value of the block, adjusted for additions and deletions during the year.
- The one hundred and eighty day rule. An asset acquired and put to use for less than one hundred and eighty days in the previous year attracts half the normal rate in that year.
- Sale within the block. Proceeds on sale are reduced from the block rather than producing an asset level gain or loss, unless the block is emptied.
Prescribed rates and any additional depreciation available should always be confirmed against the current Income Tax Rules for the assessment year in question, since they are revised from time to time. What does not change is the structural point: this is a second, parallel computation that has to be maintained alongside the first.
Companies Act and Income Tax compared
| Aspect | Companies Act 2013, Schedule II | Income Tax Act 1961 |
|---|---|---|
| Basis | Useful life of the asset | Prescribed rate applied to a block of assets |
| Unit of computation | Individual asset, and components where applicable | Block of assets grouped by class and rate |
| Method | Straight line or written down value, as adopted | Written down value |
| Part year treatment | Pro rata from the date available for use | Half rate if put to use for less than one hundred and eighty days |
| Residual value | Ordinarily not more than five per cent of original cost | Not applicable in the same form |
| Componentisation | Required where a component is significant and has a different life | Not applicable |
| On disposal | Asset level gain or loss recognised | Proceeds reduced from the block |
The difference between the two produces timing differences, which flow into deferred tax. That is another reason both computations need to come from the same underlying asset data rather than from two separately maintained workbooks that gradually stop agreeing about which assets exist.
What software should automate
A fixed asset system earns its place if it removes the manual steps that introduce error. Specifically, it should:
- Hold useful life, method and residual value at the asset class level, and enforce them on every asset created in that class.
- Support componentisation with a parent and component relationship, so disposal and impairment handle the whole correctly.
- Compute depreciation pro rata from the date available for use, without anyone calculating part months.
- Maintain the Income Tax block of assets computation in parallel, including the one hundred and eighty day treatment for additions.
- Apply extra shift depreciation where the asset class allows it, driven by recorded usage rather than an assumption.
- Produce the working, not only the number: additions, deletions, transfers, depreciation charge and closing balance, per class and per period, in the form an auditor asks for.
MeltX FAM is built around these requirements, and it keeps the depreciation working attached to the same register that physical verification updates. That is the point: the number an auditor tests and the asset a verification team photographed should be the same record.
This article is general guidance on how the framework operates. It is not accounting or tax advice, and the applicable schedule, rules and rates should be confirmed with your auditor for the period concerned.