21 July 2024
In general accounting and tax practices, depreciation is not applicable to land because land is considered to have an indefinite useful life and does not depreciate. Therefore, when it comes to assets like a shed or any other structure built on land, the depreciation is applicable only to the construction or building part, not the land itself.
Here’s how it typically works:
1. **Bifurcation of Cost**: - When you purchase or construct a shed (or any building) on land, you should bifurcate the total cost into the cost of the building (shed) and the cost of the land. - Land is recorded separately as a non-depreciable asset in the books because its value does not diminish over time.
2. **Depreciation on Building (Shed)**: - The depreciation is applied only to the cost of the building or shed, not to the land. - For example, if the total cost of constructing the shed is Rs. 10,00,000 and the value of the land (which is non-depreciable) is Rs. 5,00,000, you would calculate depreciation on the Rs. 10,00,000 (building cost) at the applicable rate.
3. **Rate of Depreciation**: - According to the Income Tax Act in India, sheds or buildings are generally classified under "Factory Buildings" or "Buildings used in the Business of Generation or Distribution of Electricity" for the purpose of depreciation. - The depreciation rate for such buildings typically falls under the category of "Buildings used in a business of manufacturing or production of any article or thing" which has a depreciation rate of 10% under the Income Tax Act, assuming it qualifies under such category.
4. **Accounting Treatment**: - In your accounting records, you would book the shed under the fixed assets category, noting the bifurcated cost between the building and the land. - Depreciation would then be calculated annually at the applicable rate (10% in this case) on the cost of the shed.
5. **Land Component**: - The cost of the land should be disclosed separately in your financial statements but is not subject to depreciation.
6. **Documentation and Compliance**: - Ensure that you maintain proper documentation to support the bifurcation of costs between land and building/shed. - Comply with applicable accounting standards (such as Indian Accounting Standards, if applicable) and Income Tax Act provisions regarding depreciation.
To summarize, yes, you can claim depreciation on a shed or building constructed on land, but depreciation applies only to the building or construction cost, not to the land itself. Bifurcating the cost between land and building/shed is essential for accurate financial reporting and compliance with depreciation rules.
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