Amortisation has two meanings. In accounting it is the systematic write-off of an intangible asset's cost (software, a licence, a patent) over its useful life. In lending it is the repayment of a loan in instalments, where each EMI is split into interest and principal. The words are the same; the mechanics are not.
Facts checked: 10 October 2026. The AS 26 ten-year rebuttable presumption and annual recoverability test were checked against an ICAI Expert Advisory Committee opinion. The Ind AS 38 zero-residual-value presumption is not quoted in a source I could open; it follows IAS 38 and AASB 138 and should be confirmed in the Ind AS 38 text on mca.gov.in. The tax paragraph is general and does not rely on a section number; confirm the current provision and rates on the Income Tax Department's site.
Meaning 1: amortisation of intangible assets
An intangible asset is an identifiable non-monetary asset without physical substance: purchased software, a licence, a patent, a franchise. If it has a finite useful life, its depreciable amount is allocated over that life.
Under Ind AS 38:
- The amortisation period and method are reviewed at least at each financial year end.
- Straight-line is used unless another pattern of consumption is reliably determinable.
- Residual value is presumed to be nil unless a third party has committed to buy the asset or an active market exists (from my knowledge of the standard; see the note above).
- Some intangibles have an indefinite life. These are not amortised but are tested for impairment annually.
- Amortisation starts when the asset is available for use.
Under AS 26 (companies not on Ind AS) there is a rebuttable presumption that useful life does not exceed ten years. If you rebut it with persuasive evidence of a longer life, you must test the asset for impairment at least annually.
Worked example (illustrative)
A company buys accounting software for ₹12,00,000 with a five-year useful life and nil residual value. Annual amortisation is ₹2,40,000.
| Year end | Opening carrying amount (₹) | Amortisation (₹) | Closing carrying amount (₹) |
|---|---|---|---|
| Year 1 | 12,00,000 | 2,40,000 | 9,60,000 |
| Year 2 | 9,60,000 | 2,40,000 | 7,20,000 |
Suppose at the end of year 2 the recoverable amount falls to ₹5,00,000. An impairment loss of ₹2,20,000 is recognised, and the remaining ₹5,00,000 is amortised over the three years left, at ₹1,66,667 a year.
Meaning 2: loan amortisation
A loan is amortised when it is repaid through equal instalments (EMIs). Interest each month is charged on the outstanding balance, so early EMIs are mostly interest and later ones mostly principal.
Worked example (illustrative)
A loan of ₹10,00,000 at 12% a year (1% a month) over 12 months has an EMI of about ₹88,849.
| Month | Opening balance (₹) | Interest (₹) | Principal (₹) | Closing balance (₹) |
|---|---|---|---|---|
| 1 | 10,00,000 | 10,000 | 78,849 | 9,21,151 |
| 2 | 9,21,151 | 9,212 | 79,637 | 8,41,514 |
The borrower's books show interest as finance cost and principal as a reduction of the liability. Sanction letters and bank statements can differ slightly on rounding and on how the first period is charged, so reconcile to the lender's schedule.
Amortisation, depreciation and depletion
| Term | Applies to | Typical method | Example |
|---|---|---|---|
| Amortisation | Intangible assets; loan principal | Straight-line, or the pattern of benefit | Software licence |
| Depreciation | Tangible assets | Straight-line or written-down value | Machinery, vehicles |
| Depletion | Natural resources | Units extracted | Mine, oil well |
For tangible assets under the Companies Act, see depreciation as per Schedule II: useful life and methods and use the Schedule II depreciation calculator.
Tax treatment, with a flag
For income tax, intangibles such as know-how, patents, copyrights, trademarks, licences and franchises generally attract depreciation under the depreciation provisions of the Income-tax Act (renumbered under the Income-tax Act, 2025, so confirm the current section number on the Income Tax Department's site), not book-style amortisation. The rate and block treatment are set by the Act and rules and are not the same as the book charge. I could not verify the rate from the primary schedule, so confirm it before quoting a figure to a client.
Frequently asked questions
Is amortisation the same as depreciation?
The idea is the same: spreading cost over useful life. By convention amortisation is used for intangibles and depreciation for tangible assets.
Can goodwill be amortised under Ind AS?
Under Ind AS 103 goodwill from a business combination is not amortised; it is tested for impairment at least annually. Treatment under AS 14 and AS 26 differs.
Is software always an intangible asset?
Software that is an integral part of hardware is usually treated with the hardware. Standalone software is generally an intangible.
How do I test an intangible audit file?
See the Ind AS 38 intangibles testing framework.
Why does the first EMI have so much interest?
Interest is charged on the full opening balance, and the balance falls only as principal is repaid.
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