The classification of electric vehicles (EVs) for depreciation under Section 32 of the Income Tax Act, 1961, is a critical consideration for businesses and tax practitioners. While conventional motor vehicles attract 15% depreciation, pure EVs enjoy an enhanced 40% rate, reflecting India’s clean energy policy. Correct classification, documentation, and compliance are essential to optimize tax benefits and avoid disputes.
Legal Framework and Depreciation Rates
Section 32: Depreciation is computed on the Written Down Value (WDV) basis.
Appendix I, Income Tax Rules: Specifies depreciation rates:
| Asset Category | Depreciation Rate | Applicability Notes |
|---|---|---|
| Conventional Motor Cars (IC Engine) | 15% | Business use; post 01.04.1990; excludes hire vehicles |
| Electric Vehicles (EVs) | 40% | Classified as renewable energy devices (Entry 8(xiii)) |
| Renewable Energy Devices | 40% | Includes solar systems, wind energy devices, other clean technologies |
Key Insight: EVs fall under “renewable energy devices” due to policy, environmental benefits, and technological characteristics.
CBDT Circular Clarifications
CBDT Circular No. 04/2022 (15th March 2022)
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Defines EV as:
“A vehicle which is powered exclusively by an electric motor whose traction energy is supplied exclusively by a traction battery installed in the vehicle.”
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Confirms 40% depreciation for EVs used for business purposes.
CBDT Circular No. 10/2022 (07th December 2022)
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Reinforces Circular 04/2022, ensuring consistent classification for depreciation, business-use determination, and compliance.
Implication: Only pure EVs meet the criteria for enhanced depreciation; hybrids or mixed-fuel vehicles are excluded unless clarified.
Vehicle Classification & Depreciation Logic
| Vehicle Type | Depreciation Rate | Classification Criteria |
|---|---|---|
| Pure Electric Vehicles | 40% | Exclusively electric motor; battery traction only |
| Conventional Hybrids | 15% | Combines IC engine + electric motor; fails “exclusively electric” test |
| Plug-in Hybrid EVs (PHEVs) | 15% (conservative) | Partial fossil fuel usage; not fully electric |
| IC Engine Vehicles | 15% | Standard business motor cars |
Analytical Insight: Classification hinges on energy source exclusivity and intended business use, aligning with CBDT circulars.
Mixed-Use Vehicles: Apportionment Principles
Depreciation & running expenses apply only to the business-use proportion:
| Parameter | Guidance |
|---|---|
| Business vs Personal Use | Maintain logbooks or electronic mileage records |
| Running Expenses | Electricity, maintenance, insurance claimable in proportion to business use (Sec. 37(1)) |
| Documentation | Purchase invoices, battery specifications, registration, and business justification must be preserved |
| Thresholds | No monetary threshold, but records must substantiate exact percentage of business use |
Example: If an EV is used 70% business / 30% personal:
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Depreciation = 40% × 70% WDV
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Electricity/maintenance = total × 70%
Additional Depreciation for Manufacturing Units (Section 32(1)(iia))
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Manufacturing businesses can claim additional 20% depreciation on plant/machinery including EVs used exclusively for business.
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Timing: Vehicle must be put to use within 180 days of acquisition.
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Impact: First-year effective depreciation for pure EVs = 40% + 20% = 60%.
Analytical Insight: Strategic deployment can maximize tax benefit in the acquisition year.
Compliance & Documentation Requirements
| Requirement | Detail |
|---|---|
| Exclusive Electric Nature | Must meet CBDT Circular 04/2022 definition |
| Business Use | Only vehicles used exclusively for business qualify for 40% rate |
| Mixed Use | Apportion depreciation & expenses proportionally; maintain logs |
| Documentation | Keep invoices, registration, battery specs, loan papers, usage justification |
| Audit & Tax Filing | Depreciation must align with books of accounts; verify for tax audit (Sec. 44AB) compliance |
| 180-Day Rule | Vehicle must be put to use within 180 days to claim first-year depreciation |
Caution Points to Avoid Defaults
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Misclassification: Avoid claiming 40% for hybrids or partial-fuel vehicles.
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Insufficient Documentation: Ensure logbooks, invoices, battery specs, and trip records are maintained.
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Improper Apportionment: Mixed-use vehicles without documented business use may be disallowed.
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Non-compliance with 180-Day Rule: Accelerated depreciation requires vehicle deployment within the first 180 days of purchase.
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Overclaiming Running Expenses: Electricity, maintenance, insurance should reflect only business-use proportion.
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Ignoring CBDT Circulars: Follow 04/2022 and 10/2022 for authoritative guidance.
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Loan Interest Deduction: For personal/business EV loans, Section 80EEB allows ₹1.5 lakh deduction, but only if conditions are satisfied.
Decision-Making Flow: Analytical Logic for Depreciation
Step 1: Is the vehicle exclusively electric?
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✅ Yes → 40% depreciation
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❌ No → 15% (standard motor car rate)
Step 2: Is the vehicle used for business purposes?
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✅ Yes → Claim proportion of depreciation & expenses
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❌ No → No depreciation; personal use only
Step 3: Is the vehicle used in manufacturing business?
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✅ Yes → Additional 20% under Section 32(1)(iia)
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❌ No → Only 40% applicable
Step 4: Is it mixed-use?
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✅ Yes → Apportion depreciation/expenses according to logs
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❌ No → Full depreciation for business use
Step 5: Compliance Check
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CBDT Circulars 04/2022 & 10/2022
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180-day deployment rule
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Logbooks, invoices, battery specs
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Section 37 running expenses documentation
Practical Recommendations
Businesses:
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Deploy pure EVs exclusively for business → claim 40% depreciation
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Maintain detailed logbooks for mixed-use EVs
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Plan first-year deployment to leverage 180-day rule
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Manufacturing units → leverage additional 20% depreciation
Individual Taxpayers:
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Business-use EVs → depreciation applies
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Personal-use EVs → Section 80EEB interest deduction (max ₹1.5 lakh)
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Mixed-use → maintain apportionment logs
Key Takeaways
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40% depreciation is available only for pure EVs.
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Hybrids or PHEVs → 15% (conservative treatment)
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Mixed-use vehicles require meticulous apportionment and documentation.
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CBDT Circulars 04/2022 and 10/2022 provide legal clarity.
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Section 32(1)(iia) + Section 37 compliance allows optimization of depreciation and running expenses.
Conclusion:
The Income Tax framework, reinforced by CBDT Circulars, incentivizes electric mobility through accelerated depreciation, aligning taxation with India’s environmental and energy objectives. Businesses and taxpayers must adopt a strategic, well-documented approach to maximize benefits and remain fully compliant. Pure EVs used for business are clearly eligible for 40% depreciation, with additional allowances for manufacturing units, while hybrids and mixed-use vehicles must be treated conservatively to avoid defaults.
