---
slug: book-depreciation-vs-tax-depreciation-nepal
title: "Book depreciation and tax depreciation are different numbers — and both are correct"
h1: "Why your depreciation figure changes between the accounts and the tax computation"
meta_description: "Your financial statements and your tax computation show different depreciation. That is not an error. Here is how pooling works, why the two never agree, and what deferred tax has to do with it."
focus_keyword: "depreciation Schedule 2 Nepal"
secondary_keywords: "pool depreciation, block of assets Nepal, deferred tax depreciation, NAS 16 vs tax"
category: accounting
status: draft
schema_type: Article
review_due_on: "annually"
---

A client looks at the audited accounts, sees depreciation of one amount, then looks at the tax computation attached to the same accounts and sees a different amount. The natural conclusion is that someone made a mistake.

Nobody made a mistake. These are two different systems with two different purposes, and they are supposed to disagree.

## The accounts are answering a different question

In the financial statements, depreciation exists to spread the cost of an asset over the period it is useful to the business. That is an accounting judgment: how long will this machine serve us, what will it be worth at the end, and does it wear out evenly or faster at the start? Two honest accountants can reach different answers for the same machine, and both can be right, because it is an estimate about the future.

In the tax computation, depreciation exists to give a deduction under a formula. There is no judgment involved and no estimate of useful life. Assets are sorted into pools, each pool carries a fixed rate, and the deduction falls out of the arithmetic.

One is an estimate. The other is a rule. They will not match.

## Pooling: the part that surprises people

The single biggest structural difference is that tax depreciation in Nepal does not track individual assets the way your fixed asset register does. Assets go into pools by category, and the pool — not the asset — is what gets depreciated.

This has consequences that catch people out:

**You cannot see one asset's tax depreciation.** Once a computer joins the pool, it stops having its own tax identity. Your register still tracks it; the tax computation does not.

**Selling an asset does not trigger a gain the way you expect.** Sale proceeds are deducted from the pool balance rather than compared to that asset's written-down value. If the pool still has a balance afterwards, no gain is recognised at all — the pool simply gets smaller and future depreciation reduces. A taxable gain arises when proceeds exceed what is left in the pool and drive the balance below zero.

**The date of purchase matters more than you would guess.** An asset bought early in the year and one bought in the final months do not both get a full year's depreciation. The proportion that enters the depreciation base depends on which part of the year the purchase fell in, measured on the Nepali calendar. Buying in the last third of the year gives you materially less deduction this year than buying in the first third — the rest carries forward.

That last point is a genuine planning lever. If a purchase decision is already made and the timing is flexible, the month it lands in changes this year's deduction.

## Repairs: the ceiling that turns expense into asset

Here is a rule that regularly reclassifies a client's expenses without them realising.

Repair and improvement expenditure on pooled assets is deductible only up to a ceiling calculated as a percentage of the pool's depreciation base. Spend more than the ceiling and the excess is not lost — but it is not a deduction this year either. It is added to the pool and recovered slowly through depreciation instead.

For a business that has just done a major overhaul of its plant, this can shift a large expense out of this year's profit and loss for tax purposes. It is worth modelling *before* the work is commissioned, not after the invoice arrives.

## Deferred tax is just bookkeeping for the gap

Because the two systems recover the same cost on different timetables, at any moment your asset has one carrying value in the accounts and a different one for tax. That difference will reverse eventually — over the asset's whole life both systems allow exactly the same total cost, just in a different order.

Deferred tax is the accounting entry that recognises the future consequence of that timing gap. It is not a tax you owe now, and it is not a tax anyone will ever send you a bill for. It is a note in the accounts saying: this difference exists, and here is what it will do to tax in future periods.

When tax depreciation runs ahead of book depreciation, a deferred tax liability builds up. As the asset ages and the position flips, it unwinds.

## What this means practically

- Keep a proper fixed asset register even though the tax computation pools everything. You need it for the accounts, for insurance, for the audit and for the day you sell something.
- Reconcile the register to the pool balances once a year. A drift between the two is usually the first sign that a disposal was recorded on one side only.
- Track the month of every addition on the Nepali calendar, not just the AD date. That is what drives the absorption.
- Watch the repair ceiling during the year, not at the year end when the money is already spent.

## Frequently asked

**Why is depreciation in the audit report different from the tax computation?** Because the accounts use estimated useful life and the tax computation uses pooled statutory rates. Both figures are correct for their own purpose.

**I sold a machine at a profit but the tax computation shows no gain. Is that right?** Very possibly. Proceeds reduce the pool balance rather than producing a standalone gain, so a gain only arises once the pool is exhausted.

**Can I choose the same rates in my books as the tax rates to avoid the difference?** Only if those rates genuinely reflect the assets' useful lives. Choosing them for convenience rather than substance is not a supportable accounting policy.

**Does deferred tax mean I owe extra tax?** No. It reflects the timing difference between the two systems and reverses over the life of the asset.

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*Pool rates, ceilings and thresholds are set by statute and change from time to time. Confirm the current figures before applying them.*
