DMS/ QMS SOFTWARE CAPITALISATION RULE

Hi Nandu,

Regarding capitalization and depreciation of DMS/QMS software, here’s the general treatment under Indian accounting and tax laws:

Capitalization of Software (DMS/QMS):

1. Capitalization Criteria:

   • Software that is purchased for use (not for resale) and provides future economic benefits should be capitalized as an intangible asset.

   • Even if some modules are still under implementation, you can capitalize the costs related to the modules that are already live and in use.

   • Costs for modules still under development or implementation should ideally be capitalized only once those modules are ready for use.

   • Costs incurred during the development phase (like software development cost, customization, integration) can also be capitalized if they meet recognition criteria.

2. Accounting Standard:

   • As per Ind AS 38 (Intangible Assets) or AS 26, software qualifies as intangible asset if it is identifiable, controlled, and expected to provide future economic benefits.

   • Costs incurred to acquire software or to bring it to working condition should be capitalized.

Depreciation/Amortization:

• Software is generally considered an intangible asset, so you amortize it over its useful life.

• The useful life can be based on technical obsolescence or contract period, but generally companies use 3-5 years as a prudent estimate.

• Under the Income Tax Act (Section 32), depreciation on software is allowed at 40% on a written down value basis.

• You can claim depreciation only on the portion of the software that is capitalized and ready for use.

Summary for your case:

Practical Note:

• Maintain proper documentation for costs incurred on each module.

• Separate accounting for completed modules and work in progress is advisable.

• Once a module is ready for use, start charging depreciation.