What is Written Down Value Method of Depreciation?
Depreciation of fixed assets is important and is done through either the straight-line method or the written down value method of depreciation. Depreciation of property is a 'loss of value' which is caused due to the wear and tear of a property on the original cost of the property. If you are interested to know more about the written down value method of depreciation, then continue reading.
What Is the Written Down Value of a Property?
The written-down value method of depreciation means a method which is used to determine the current worth of a previously purchased asset. To calculate it, one needs to subtract accumulated depreciation from the original value of the asset.
Due to the wear and tear of an asset, the value of an asset might reduce over time. Section 32 of the Income Tax Act of 1961 deals with the depreciation value of an asset. One can calculate for tax purposes, and the act allows calculation for both intangible and tangible assets.
What Does the WDV Method of Depreciation Mean?
Individuals must know that if an asset is used for over 180 days in a year, 50% depreciation will be allowed. Calculating WDV depreciation helps because it helps in providing some tax benefits. Companies need to calculate WDV appreciation as well to get certain about the profits and losses of the company. If not, the companies might not understand their profits and then suffer due to wrong calculations.
How Is Property Depreciation Calculated?
To consider the property depreciation value, one has to consider these two following factors- the total useful age of the structure on the land and the number of years after construction.
To calculate it, one needs to use this formula-
Property depreciation value = Number of years after construction/total useful age of the structure
After that, to get the current price of the building, one needs to deduct the result derived from the selling price of the house/building. However, that too does not constitute its total price. The other factor that is important is the land price.
Let’s explain this better with an example.
Suppose an individual plans to sell his/her 15-year-old property whose whose details are mentioned below in the table:
| Particulars | Amount |
|---|---|
| Land value at the time of purchase | ₹ 45lakh |
| Construction cost | ₹ 25 lakh |
| Appreciated land value | ₹ 50 lakh |
| Total useful age | 60 years |
| Age of the structure/number of years after construction | 15 years |
| Depreciation on house property - Number of years after construction/total useful age of the structure (15/60) | 1/4 |
Now, to derive the market value of the property, one has to deduct depreciation from the construction cost of the property and add the appreciated land value.
| Particulars | Amount |
|---|---|
| Depreciated building price (₹ 2500000 *(1/4) = ₹ 6.25lakh Now, (₹ 25 lakh- ₹ 6.25 lakh) | ₹ 18.75 lakh |
| Add the land appreciation value (₹ 50 lakh + ₹ 18.75 lakh) | ₹ 68.75 |
Assets and the Standard Rate of Depreciation Applicable
Here are the assets and standard rate of depreciation for the year FY 2020-21 according to the Income Tax Act 1962.
Asset Class |
Asset Type |
Rate of Depreciation |
Building |
Residential building which does not include boarding houses and hotels |
5% |
Temporary constructions such as wooden structures |
100% |
|
Hotels and boarding houses |
10% |
|
Plant and machinery |
Computer software and computers |
60% |
Motor cars which do not include cars used in business of running them on hire |
15% |
|
Books owned by assessee carrying on a profession being annual publications |
100% |
|
Books owned by assessee carrying on a profession not being annual publication |
60% |
|
Books which are owned by assessee carrying on business in running lending libraries |
100% |
|
Lorries/motor buses/taxis used in a business of running them on hire |
30% |
|
Furniture |
Any furniture and including electrical fittings |
10% |
Intangible assets |
Patents, trademark, copyright, franchise, know-how, or any other business or commercial rights of similar nature |
25% |
Benefits of Using Written Down Value Method of Depreciation
Following are the benefits of a written down value method of depreciation.
- It is suitable for assets that have high maintenance costs and high repair costs.
- It is accepted by the Income Tax Authorities.
- It has a logical assumption that since an asset is used more in the early years, more cost should be charged in earlier years in depreciation form.
- Since more depreciation is charged for the early years, it reduces the loss of assets due to the obsolescence of technology.
- It is a known fact that an asset requires less maintenance during its early years, and after a few years of use, the repair costs start to increase. Since the WDV method of depreciation tends to be higher during the initial years, the expenses for both repairs and depreciation remain the same throughout the life of an asset.
Frequently Asked Questions
Name two disadvantages of the written down value of depreciation.
Two disadvantages of the written down value of depreciation are as follows -
- While calculating rate of depreciation, one’s actual use of assets is not taken into account.
- The rate of depreciation is not calculated properly.
What is the difference between a written down value and a straight line?
In the written down value method, there is a fixed rate of depreciation that is applicable to the opening balance of every year's asset. Whereas, in the straight line method, the depreciation is calculated with an equal amount every year.