Infrastructure funds under the AIF regime invest in a wide range of infrastructure assets, including roads, power plants, ports, airports, and telecommunications infrastructure. These assets are eligible for depreciation under the Direct Tax Code (DTC) 2025. Understanding the depreciation rules is essential for AIF infrastructure funds to optimise tax outcomes and ensure compliance. This guide analyses the depreciation framework and its application to AIF infrastructure portfolio assets.
The Depreciation Framework Under Section 33
Section 33 — Deduction for Depreciation
Section 33 provides for deduction in respect of depreciation of:
- Tangible Assets: Buildings, machinery, plant or furniture
- Intangible Assets: Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature (acquired on or after 1st April, 1998)
Method of Depreciation
Depreciation is calculated on the Written Down Value (WDV) method for block of assets, except for certain specified assets where depreciation is calculated on actual cost.
Section 33(7) — Option to Claim Depreciation
The provisions of Section 33 shall apply whether or not the assessee has claimed deduction for depreciation in computing his total income.
Depreciation Rates for Infrastructure Assets
Buildings
| Type of Building | Depreciation Rate |
|---|---|
| Buildings used mainly for residential purposes (except hotels and boarding houses) | 5% |
| Buildings other than those used mainly for residential purposes | 10% |
| Buildings for installing machinery and plant forming part of water supply project or water treatment system (infrastructure facility) | 40% |
| Purely temporary erections such as wooden structures | 40% |
Plant and Machinery
| Type of Asset | Depreciation Rate |
|---|---|
| General plant and machinery | 15% |
| Motor cars (used in business) | 15% |
| Motor buses, motor lorries, and motor taxis used in a business of running them on hire | 30% |
| Computers (including computer software) | 40% |
| Air pollution control equipment | 40% |
| Water pollution control equipment | 40% |
| Solid waste control equipment | 40% |
| Energy saving devices | 40% |
| Renewable energy devices | 40% |
Section 33(2) — Power Generation Assets
For assets of an undertaking engaged in generation or generation and distribution of power, the deduction in respect of depreciation shall be such percentage of its actual cost to the assessee, as may be prescribed.
Appendix II — Depreciation on Actual Cost
Rule 25(3) provides that the allowance under Section 33(2) in respect of depreciation of assets acquired on or after 1st April, 1977 specified in Appendix II shall be calculated at the percentage specified in the said Appendix on the actual cost to the assessee.
Special Depreciation Provisions
Section 33(8) — Additional Depreciation
Additional depreciation is allowed for new machinery or plant acquired and installed by an assessee engaged in the business of:
- Manufacture or production of any article or thing
- Generation, transmission or distribution of power
Rate of additional depreciation:
- 20% of the actual cost in the tax year when acquired and put to use
- 10% if acquired and put to use for less than 180 days
Section 33(4) — Less than 180 Days
If an asset is acquired during the tax year and put to use for less than 180 days, the deduction shall be restricted to 50% of the prescribed rate.
Section 33(10) — Deficiency on Sale
Where a tangible asset in respect of which depreciation is claimed is sold, discarded, demolished or destroyed, and the moneys payable (including scrap value) is less than its written down value, the deficiency shall be allowed as a deduction.
Application to AIF Infrastructure Fund Portfolio Assets
1. Identifying Eligible Assets
AIF infrastructure funds invest in various types of assets, each with different depreciation rates:
- Buildings: 5%, 10%, or 40% depending on use
- Plant and Machinery: 15% generally, 40% for specialised equipment
- Power Generation Assets: Special rates under Section 33(2)
- Infrastructure Facilities: 40% for water supply and treatment systems
2. Block of Assets
Assets are grouped into blocks for depreciation purposes. The depreciation rate applies to the block, not individual assets.
3. Written Down Value
Depreciation is calculated on the written down value of the block of assets:
WDV = (A - D) + B - C - E
Where:
- A = WDV of the block in the immediately preceding tax year
- D = Depreciation actually allowed in respect of the block
- B = Actual cost of any asset falling within that block acquired during the tax year
- C = Moneys payable for any asset sold, transferred, demolished, destroyed or discarded
- E = In the case of a slump sale, the actual cost of the asset falling within that block
4. Infrastructure Facility Status
The rate of depreciation may vary depending on whether the asset qualifies as an "infrastructure facility" under Section 32(e) or Section 80-IA of the Income-tax Act, 1961 (as it existed prior to its repeal).
Practical Compliance for AIF Infrastructure Funds
1. Identify the Block of Assets
- Identify the block of assets for each portfolio company
- Apply the correct depreciation rate
2. Calculate Depreciation
- Calculate depreciation on WDV
- Apply additional depreciation if applicable
- Apply the 50% rule if applicable
3. Maintain Records
- Maintain records of assets
- Maintain records of depreciation calculations
- Maintain records of acquisitions and disposals
4. Claim Depreciation
- Claim depreciation in the tax return of the portfolio company
- For Category III AIFs, claim depreciation in the fund's tax return
Tax Implications for AIF Investors
Pass-Through Taxation
For Category I and II AIFs, the depreciation claimed by the portfolio company reduces the income passed through to the investors.
Category III AIFs
For Category III AIFs, the depreciation claimed by the portfolio company is reflected in the fund's income, which is taxed at the fund level.
Consequences of Non-Compliance
Disallowance of Depreciation
If the depreciation is incorrectly claimed:
- The deduction may be disallowed
- Income may be recomputed
- Interest and penalty may be levied
Penalty
Non-compliance may result in:
- Penalty under Section 439 for under-reporting of income
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on depreciation for AIF infrastructure fund portfolio assets. Our direct tax experts help AIF managers understand the depreciation rules, calculate depreciation correctly, and navigate the regulatory framework. We assist in depreciation computation, compliance review, and representation before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on depreciation or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex depreciation framework for AIF infrastructure fund portfolio assets requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- Depreciation Computation: Assistance with accurate depreciation calculation
- Asset Classification: Guidance on block of assets classification
- Compliance Review: Review of depreciation compliance
- Representation: Representation before income-tax authorities
Contact us for expert legal guidance on your depreciation matters.