Section 39 of the Income-tax Act, 2025 — Computation of Actual Cost for Depreciation

In plain language

What Section 39 is about

Section 39 of the Income-tax Act, 2025 tells you how to work out the "actual cost" of a business asset — the base figure on which depreciation under Section 33 and written-down value (WDV) under Section 41 are calculated. In simple words, before you can claim depreciation on a machine, building, vehicle or plant, you must first fix its correct tax cost. Section 39 is the rulebook for that. It is the direct successor to Section 43(1) and its Explanations in the old Income-tax Act, 1961, re-drafted in cleaner, table-based language and effective from 1 April 2026.

Who it applies to

• Every taxpayer carrying on a business or profession who owns depreciable assets — proprietors, firms, LLPs, companies, and professionals.
• Anyone claiming depreciation, because depreciation always starts from "actual cost".
• Businesses that receive subsidies or grants, buy second-hand assets, receive assets by gift, will or inheritance, or acquire assets through amalgamation, demerger or business reorganisation.

The starting point: cost to the assessee, then reduce

Actual cost = the real price you paid (purchase price plus all expenses to bring the asset to working condition — freight, installation, testing, etc.), as reduced by the items below:

• Cost met by another person or authority — any portion of the cost directly or indirectly paid by someone else is deducted.
• GST input tax credit claimed and allowed — you cannot both take ITC and load that GST into cost.
• Excise / additional customs duty credit (CENVAT-type credit) that has been claimed and allowed.
• Subsidy, grant or reimbursement relatable to the asset — from Central Government, State Government, a statutory authority or any person.

Cash-payment disallowance — the ₹10,000 rule

A key modernisation: any payment (or aggregate of payments to a person in a day) exceeding ₹10,000 made for acquiring an asset otherwise than through a specified banking or online mode (account-payee cheque/draft, NEFT/RTGS, UPI, card, etc.) is excluded from actual cost. That excluded amount can never enter the depreciation base — so paying a supplier in cash directly reduces your depreciation forever.

Subsidy not tied to one asset — the apportionment formula

Where a subsidy or grant is not directly relatable to a single asset, the reduction for each asset is worked out as A × (B ÷ C), where A = total subsidy, B = cost of that particular asset, and C = cost of all assets to which the subsidy relates.

Deemed cost in special situations

Section 39 carries forward the well-known "Explanation" scenarios of old Section 43(1), specifying a deemed actual cost so that taxpayers cannot inflate cost to grab extra depreciation:

• Asset previously used for scientific research then brought into business — cost is reduced by the deduction already allowed under the research provisions (nil, in effect, if fully written off).
• Gift or inheritance — actual cost is the WDV in the previous owner's hands (reduced by depreciation actually or notionally allowed).
• Second-hand asset acquired to reduce tax — the Assessing Officer may fix the cost afresh, with prior approval of the Joint Commissioner.
• Building brought into business use after being owned personally — cost is original cost minus notional depreciation.
• Sale-and-lease-back / re-acquisition — cost restricted to the earlier WDV to prevent step-up.
• Amalgamation, demerger and business reorganisation — cost carries forward as if the transferor had continued to hold the asset.
• Capital asset converted into stock-in-trade and back, or acquired in specified transfers — fair market value or previous owner's cost rules apply.

How it interacts with other sections

• Section 33 (depreciation) applies the depreciation rate to the WDV built on this actual cost.
• Section 41 (WDV) uses actual cost as the opening figure for a new asset/block.
• Section 38 and related definitions supply block-of-assets and building/plant meaning.

Practical implications

• Always pay large asset invoices through banking channels — a single cash payment above ₹10,000 permanently kills depreciation on that amount.
• Net off ITC and subsidies in your fixed-asset register from day one; adding them later triggers scrutiny.
• Document second-hand and related-party purchases carefully, since the AO can re-fix cost with Joint Commissioner approval.