No More Depreciation on Goodwill: What the Tax Rule Says

**Let’s Talk About Goodwill and Depreciation—Because the Tax Rules Have Changed Big Time

If you’ve ever bought a running business or been part of a merger or slump sale, chances are you’ve come across the term “goodwill.” And if you’ve filed taxes in India over the past decade, you probably also claimed depreciation on that goodwill. But here’s the thing—that game has officially changed.

Let’s break down what’s going on, what’s changed, and what you need to do next.

Where It All Began: The Old Law

Under Section 32(1)(ii) of the Income Tax Act, 1961, businesses were allowed to claim depreciation on intangible assets like:

Patents
Trademarks
Licenses
Knowhow
Franchises
And, importantly—any other commercial rights of similar nature

That last line? That’s where goodwill slid in, thanks to a major Supreme Court decision.

The Smifs Securities Case: A Turning Point

In 2012, the Supreme Court in Smifs Securities Ltd. vs. CIT made it loud and clear—goodwill, when bought as part of a business, counts as an intangible asset. That meant depreciation on goodwill was totally legit. This ruling gave tax professionals and businesses the confidence to claim depreciation on acquired goodwill, and for almost 10 years, that was the norm.

Finance Act, 2021: The Game-Changer

Then came 2021. And the Finance Act turned everything on its head. Here’s what changed:

Goodwill is now explicitly excluded from the definition of intangible assets for depreciation.
Section 2(11), which defines "block of assets," was amended to strike out goodwill.
Explanation 3 to Section 32(1) was also rewritten to say: even if goodwill is purchased, no depreciation can be claimed.

These changes kicked in from Assessment Year 2021–22 (that’s Financial Year 2020–21), so if you were planning to claim it this year—stop right there.

But What If You Already Claimed Depreciation Earlier?

Enter Rule 8AC.

The government didn’t forget about those who had been claiming depreciation on goodwill up until now. Rule 8AC provides a way to handle the transition:

You need to remove goodwill from your asset block.
If the written down value (WDV) of the block exceeds the remaining assets, the excess is treated as short-term capital gain.

So, no—you’re not in trouble for what you claimed earlier. But going forward, you’ve got to adjust.

Where Do Things Stand Now?

If you’re reading this post-2021 and still trying to claim depreciation on goodwill, just know—it’s not going to fly. From AY 2021-22 onward:

No one—not companies, not firms, not individuals—can claim depreciation on goodwill.
Even if the goodwill was legitimately purchased for consideration, it still doesn’t qualify.

What Does This Mean for You (Practically Speaking)?

If your company has been involved in a merger, acquisition, or slump sale before April 1, 2020, this definitely applies to you. Here’s what you should be doing:

Go back and review all past depreciation claims made on goodwill.
Adjust your block of assets to remove goodwill as required by Rule 8AC.
Figure out any short-term capital gains that might now arise due to that adjustment.

Final Thoughts

This change is more than just a tweak—it fundamentally shifts how businesses approach goodwill on their books. If you’ve been claiming depreciation on goodwill, it’s time to stop, realign your records, and maybe even have a word with your tax consultant.

And remember, what you did earlier was valid. But going forward? The law’s different now—play by the new rules. **