Which depreciation method Indian contractors actually use for owned plant and machinery, how it affects true hire-rate comparisons, and Income Tax Act rates.
Depreciation shows up in two different places for a contractor — in the tax return, where the Income Tax Act prescribes a specific method and rate, and in internal cost comparisons, where a contractor is trying to work out the true annual cost of owning a machine to compare against a hire rate. These two purposes do not always need to use the same method, and confusing them is a common source of a skewed owned-vs-hired comparison.
Under WDV, depreciation is calculated as a fixed percentage of the asset's written-down value (original cost minus depreciation already claimed) each year — so the rupee amount depreciated is highest in year one and progressively smaller each subsequent year. The Income Tax Act prescribes WDV as the method for computing depreciation for tax purposes on most block-of-assets categories, with general plant and machinery (which covers most construction equipment) typically at a 15% WDV rate, though specific categories can carry different rates. This is the method that determines the actual depreciation deduction available against taxable income.
Under SLM, the depreciable amount (cost minus estimated residual value) is spread equally across the asset's useful life — the same rupee amount is depreciated every year. SLM is commonly used for internal financial reporting and for Companies Act compliance (Schedule II specifies useful life by asset category, and a company can apply either SLM or WDV consistent with that useful life), but it is not the method prescribed for income tax computation on most plant and machinery.
A contractor comparing the annual cost of owning a machine against an annual hire cost needs a depreciation figure to include in the "true cost of ownership." Using WDV in year one produces a much higher depreciation charge than SLM would for the same asset — which can make an owned machine look more expensive than hiring in its first year, and comparatively cheaper in later years as the WDV charge tapers off. Using the two methods inconsistently across different years, or comparing a WDV-based owned cost against a hire rate without adjusting for the mismatch, is a common source of a misleading buy-vs-hire conclusion.
For genuine buy-vs-hire decision-making (as distinct from the tax return itself), many contractors find it more useful to average the expected depreciation cost over the machine's realistic useful life — effectively an SLM-style annualised figure — rather than using the front-loaded WDV figure from year one, since the decision usually needs to reflect the equipment's cost over its full working life, not just its first year. The actual tax filing should still use the Income Tax Act-prescribed WDV method and rate regardless of which figure is used for internal comparison.
Contractors with a clear owned-vs-hired decision process maintain two separate depreciation figures per major asset — the Income Tax Act WDV figure used for tax filing, and an averaged useful-life cost figure used for internal buy-vs-hire and hire-rate comparison — rather than using a single number for both purposes and risking a distorted comparison in either direction.
