Residual Value
Also called: salvage value, scrap value
What is Residual Value?
Residual value is the amount a business expects to recover from an asset at the end of its useful life, whether by resale or as scrap. It is subtracted from cost to give the depreciable amount, so it directly reduces the depreciation charged each year.
Why the estimate matters
An oven costing ₹3,00,000 with a residual value of ₹30,000 over a seven-year life depreciates at about ₹38,571 a year. Set the residual value to zero out of caution and the charge rises to about ₹42,857 — roughly 11% more expense every year, against an asset that will still be worth something. The estimate is a judgement, not a fact, and it should be revisited if market conditions change materially.
Being conservative in one direction only
The common pattern in an equipment decision is a residual value set to zero for prudence alongside optimistic volume assumptions. Prudence applied to one input and optimism to another produces a number that is neither cautious nor realistic. Pick one posture and hold it across the whole calculation.
It does not apply to the tax computation
Under the Indian Income Tax Act, depreciation is computed on the written down value of a block of assets at prescribed rates, not on a cost-less-residual-value basis. Residual value belongs to your own books; the block rate governs the return. Confirm the treatment with your CA.
Frequently asked questions
In everyday use, yes — along with scrap value. All three describe what an asset is expected to be worth once the business has finished using it.