Depreciation under Schedule II: useful lives, residual value, SLM vs WDV, with examples

The depreciation working on a small-company file often has one of three problems. The books carry income-tax rates with no Schedule II working behind them. New laptops are written off over five years because they sit in "Office Equipment", when Part C gives them three. Or someone moved from WDV to SLM to lift the year's profit and adjusted the opening balance. Each is a question about Schedule II and AS 10, and each changes profit, the PPE note and deferred tax. This guide works through the rules with calculations, for Division I (Accounting Standards) companies. Law as at 31 October 2026; figures are illustrative.

Section 123(2), Parts A, B and C, and the useful lives

Section 123(1)(a) allows dividend out of profits arrived at after providing for depreciation, and section 123(2) says that depreciation is provided under Schedule II. The Schedule has three parts:

• Part A defines depreciation, depreciable amount (cost or the amount substituted for cost, less residual value) and useful life (the period the asset is expected to be available for use by the entity, or the units expected from it). Paragraph 3(i) holds the Part C and 5% rules. Depreciation includes amortisation, and intangible assets follow the accounting standards, apart from a toll road option.
• Part B: a life or residual value notified for accounting purposes by a regulator under an Act of Parliament, or by the Central Government, applies whatever the Schedule says.
• Part C lists the lives and carries the notes: pro rata (note 2), disclosure (note 3), components (note 4), shifts (note 6), and continuous process plant (note 8).

Two points on authority. ICAI's Application Guide on Schedule II stands withdrawn; GN(A) 35, the Guidance Note on Accounting for Depreciation in Companies (February 2016), applies from 1 April 2016. That Guidance Note was written around AS 6 and the old AS 10. AS 6 is not in the Companies (Accounting Standards) Rules, 2021, and AS 10 (Revised) now covers depreciation, so where they differ, follow the notified standard. Schedule II sets no rates, so the percentages below are calculated, using a 5% residual value.

Three traps. "Factory buildings" excludes offices, godowns and staff quarters (note 1). Part C has special entries for particular industries, such as medical equipment, pharmaceuticals and civil construction, so check them before using the general 15 years. And land generally has an unlimited life and is not depreciated, while the building on it is (AS 10 para 60), so a land-and-building purchase needs a split.

Depreciation starts when the asset is available for use, that is, in the location and condition to operate as management intends (AS 10 para 57), and note 2 requires a pro rata charge from the date of addition to the date of sale. GN(A) 35 (para 59) lets a company group additions and disposals by 15 days, a month or a quarter, depending on materiality. It also allows a policy of fully depreciating low-value items in the year of purchase, on materiality and company size (para 58); Schedule II itself has no such rule.

Residual value and a different useful life

Paragraph 3(i) says a useful life shall not ordinarily differ from Part C and residual value shall not exceed 5% of original cost. Where either differs, the statements disclose the difference with a justification supported by technical advice. The Guidance Note treats both as indicative, and if the company's supported estimate differs, that estimate is the one to apply (paras 13 and 15; technical advice may be external or internal):

A one-line management opinion with no reasoning is weak support. Keep an engineer's note or an internal technical assessment covering expected usage, wear and tear, obsolescence and legal limits (AS 10 para 58). Residual value and useful life are reviewed at least at each year-end (AS 10 para 53). Sample wording:

Double shift, triple shift and continuous process plant

Part C lives assume single shift. Under note 6, unless the asset is marked NESD, depreciation increases by 50% for the period of double shift and is computed on the basis of 100% for the period of triple shift. Most classes are marked NESD, as the table shows, so in a typical company this mainly affects general plant and machinery.

Example. A machine costing ₹30,00,000, residual ₹1,50,000, 15 years, SLM: annual charge ₹28,50,000 ÷ 15 = ₹1,90,000. It ran double shift for 120 days in FY 2025-26. Extra charge = ₹1,90,000 × 120/365 × 50% = ₹31,233. Total charge ₹2,21,233. Keep shift logs or production records for those 120 days on file.

The Guidance Note (paras 25 and 26) separates sporadic use from regular use. If extra shifts are sporadic, keep the single-shift life and add the extra charge when it happens. If they will be regular, reassess the useful life with those shifts in mind. Once the life is estimated on a double or triple shift basis, no extra shift charge applies.

A continuous process plant is one required and designed to operate for 24 hours a day (note 8). Running round the clock does not make it one. GN(A) 35 (paras 17 to 19) looks at technical design: stopping it means significant shutdown or start-up costs, spoilage or damage. A blast furnace qualifies, even when shut for a while; a textile weaving mill and an automobile assembly plant do not. The general life is 25 years, NESD.

SLM vs WDV: formula and worked examples

AS 10 para 64 names straight-line, diminishing balance and units of production, and the method chosen should reflect how the benefits are consumed (para 62). Revenue-based methods are not appropriate (para 65). For a WDV rate, the Guidance Note (para 38) gives:

R = {1 − (s ÷ c)^1/n} × 100

Here s is the residual value, c the cost (or written down value) and n the remaining useful life in years. With a 5% residual and 5 years, (0.05)^1/5 = 0.5493, so R = 45.07%. The rate depends heavily on the residual: over 8 years, a 5% residual gives 31.23% and a 1% residual gives 43.77%. A nil residual makes the formula give 100%, so WDV needs a positive residual.

Example 1: a full life. Office equipment costing ₹2,00,000, put to use on 1 April, residual ₹10,000, 5 years. SLM charge = ₹1,90,000 ÷ 5 = ₹38,000 a year.

The last WDV figure is the balancing amount (₹18,208 × 45.07% = ₹8,206, plus ₹2 for rounding of the rate). Both methods charge the same total; only the timing differs.

Example 2: a part year. A packing machine costing ₹18,00,000, residual ₹90,000, 15 years, put to use on 6 October 2025: 177 days to 31 March 2026, counting the first day.

• SLM: ₹17,10,000 ÷ 15 = ₹1,14,000 a year; × 177/365 = ₹55,282. Carrying amount ₹17,44,718.
• WDV: ₹18,00,000 × 18.10% = ₹3,25,800 a year; × 177/365 = ₹1,57,991. Carrying amount ₹16,42,009.

Components, used assets and disposals

Components. Under note 4, where a part's cost is significant to the total and its life differs from the rest, its life is determined separately; this has been mandatory since financial years starting on or after 1 April 2015. AS 10 para 45 also requires each significant part to be depreciated separately, while para 47 lets parts with the same life and method be grouped. Set a threshold (GN(A) 35 para 49 makes it part of the assessment) and, as good practice, keep it in writing. If the books have no break-up, use, in this order: the vendor's break-up, a technical expert's break-up, fair values, then current replacement cost applied to historical cost (para 51).

The charge rises by ₹2,24,000 a year, and the replacement accounting changes too. A new lining at the end of year 3 costing ₹14,00,000 is capitalised if the recognition criteria are met, and the old lining's carrying amount of ₹3,00,000 is derecognised through profit or loss (AS 10 paras 13 and 79). It is not repairs expense.

Second-hand assets. Useful life is what the asset is expected to give the company that buys it (GN(A) 35 para 41), not the Part C life less the seller's years of use. A used machine costing ₹8,00,000 with an engineer's estimate of 6 years, residual ₹40,000, put to use on 1 July 2025: ₹7,60,000 ÷ 6 = ₹1,26,667 a year; × 274/365 = ₹95,087 for FY 2025-26. The Schedule has no separate rule for used assets, so where the life differs from Part C, keep the technical basis and disclose it.

Disposal. Depreciate up to the date of sale (note 2). A vehicle bought on 1 April 2022 for ₹6,00,000, residual ₹30,000, 8 years, SLM, charges ₹71,250 a year and is sold on 30 September 2025 for net proceeds of ₹3,80,000:

The gain goes to profit or loss and is not revenue (AS 10 paras 75 and 79). An idle asset keeps depreciating. Depreciation stops when the asset is retired from active use and held for disposal, or is derecognised (para 57); a held-for-disposal asset is then carried at the lower of carrying amount and net realisable value (para 73). The fixed asset register guide has the columns that carry these dates.

Changing the method or the life: a change in estimate

Old material, including GN(A) 35 para 34, which rests on AS 6, describes a change of method as a change in accounting policy with retrospective recalculation. AS 10 (Revised) para 63 differs: the method is reviewed at least each year-end, is changed only if the expected pattern of consumption has changed significantly, and the change is accounted for as a change in estimate under AS 5. Under AS 5 paras 23 and 24, the effect falls in the period of change and future periods. There is no catch-up entry and no restatement. The same applies to a revised life or residual value (AS 10 para 53).

Example. A vehicle costing ₹10,00,000, bought on 1 April 2022, on WDV at 31.23%:

Disclose the nature and amount if material now or later (AS 5 para 27, AS 10 para 84). A wish to show better profit is not a change in the consumption pattern, and that is the first thing a reviewer should ask. The effect stays in the depreciation line (AS 5 para 25); it is not a prior period item, as covered in exceptional, extraordinary and prior period items.

Income-tax depreciation and the deferred tax link

Tax depreciation is a separate computation by block on written down value. For FY 2025-26 it falls under the Income-tax Act, 1961: section 32, with half the rate for an asset acquired in the year and used for less than 180 days. From tax year 2026-27, section 33 of the Income-tax Act, 2025 keeps the block method and the same restriction (sub-sections (3) and (4)). Illustration I to AS 22 lists differing book and tax depreciation among its examples of timing differences, and para 11 uses higher tax depreciation as its example of a deferred tax liability.

The packing machine above, used for 177 days, gets half of the 15% rate: ₹18,00,000 × 7.5% = ₹1,35,000. Assuming it is the only addition in the year, a section 115BAA company (no additional depreciation) and a rate of 25.168%:

A deferred tax asset also has to pass the reasonable certainty test. Check the rate enacted for the years of reversal; the presentation and tests are in deferred tax under Schedule III. On sale, the proceeds reduce the tax block, so the book gain of ₹29,473 above is not simply the taxable figure.

Disclosures and a review checklist

Note 3 of Schedule II asks for the depreciation methods used and any useful lives different from the Schedule. AS 10 para 81 adds, for each class, the methods, the lives or rates used (with specific mention where they differ from the statute), gross carrying amount and accumulated depreciation, and a reconciliation. Para 83 adds the period's depreciation. The class-wise format is in PPE and CWIP ageing under Schedule III, and the policy wording in the significant accounting policies note.

Frequently asked questions

Sources

• Companies Act, 2013 — section 123 and Schedule II (Parts A, B and C, and notes) (India Code, amended text)
• Companies (Accounting Standards) Rules, 2021 — G.S.R. 432(E), 23 June 2021 (Gazette): AS 5 paras 20 to 27; AS 10 paras 13, 45 to 65, 73 to 84; AS 22 para 11 and Illustration I
• ICAI — AS 10 (Revised) Property, Plant and Equipment
• ICAI — Guidance Note on Accounting for Depreciation in Companies in the context of Schedule II to the Companies Act, 2013, GN(A) 35 (February 2016)
• ICAI — announcement on withdrawal of the Application Guide on the Provisions of Schedule II (7 October 2016)
• Income-tax Act, 2025 (Gazette, 21 August 2025) — section 33
• Income-tax Act, 1961 — section 32(1), and Income-tax Rules, 1962 — rule 5 and Appendix I

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