Muhammad AleemTax Depreciation and Amortization

The third schedule of income tax ordinance 2001 deals with the depreciation. It specifies the rate at which the depreciation is allow on the assets.

Depreciable asset is asset which meet the following conditions:

It is owned by the person whose taxable income is being determined.

It should be any:i. Tangible moveable property.

ii. Immoveable property other than land.

The property has useful life more than 1 year.

Depreciation Rates Building 10%

Other assets 15%

Computer and Aircrafts 30 %

Method The depreciation method used is “reducing balance method”.

Full depreciation is charge in the year of purchase.

No depreciation is charge in the year of disposal.

Initial depreciationOn the first year of purchase an initial depreciation allowance is allow as follows:

For building this allowance is 25% of cost of asset.

On all other assets it is 50% of cost.

EXAMPLEA building is purchased in 2012 cost Rs.20,00,000. Calculate depreciation on it.

SOLOUTION:

cost 20,00,000

initial depreciation (25% of 20,00,000) (500,000)

net 15,00,000

depreciation(10% of 15,00,000) (150,000)

Total depreciation = 500,000+150,000

=Rs.650,000

WDV= 20,00,000 – 650,000

=Rs.13,50,000

AMORTIZATION The method used for amortization is straight

line method.

It is assumed that the maximum useful life of the asset is 10 years.

It is calculated on the percentage of usage of asset.

EXAMPLE

Patents purchased for Rs. 100,000. useful life of them is 12 years. 50% used for business.Solution: