The Treasury Department has decided to modify the business depreciation provisions of its tax simplification plan in a way that would preserve the structure of the original proposal while treating most kinds of investment more generously, administration sources said yesterday.

Treasury Secretary James A. Baker III also has recommended to President Reagan that the revised plan tax the increase in the value of life insurance policies. That provision, called inside buildup, was in the original plan proposed last November but has been the subject of heavy lobbying by insurers.

Reagan still could change those and other provisions of the tax overhaul, which probably will be announced next week. A number of decisions, such as how to treat capital gains, have yet to be made, officials said. The original plan would have done away with the exclusion of 60 percent of the appreciation of a capital asset from taxation and taxed gains as ordinary income.

Officials have looked at ways of permitting a favorable capital gains differential only for start-up firms or for stock equities but have run into definitional trouble in both cases. However, they are looking seriously at permitting a top rate of about 20 percent, as in current law, and excluding only certain non-equity items, sources said.

Because the plan would reduce the top individual tax rate from 50 percent to 35 percent, that could be achieved by excluding 40 percent of income instead of 60 percent. Taxing the 60 percent of gains that would be left at 35 percent would yield the same effective tax rate -- about 20 percent -- as taxing 40 percent of gains at a 50 percent rate. No final decisions have been reached, officials said.

The depreciation provisions have been the focus of intense business attention and lobbying, much of it designed to restore elements of the current system of accelerated cost recovery. That permits companies to write off investments over a period of between three and 18 years, depending on the type of investment.

It was a system designed for periods of high inflation. When the rate of price increase slowed down, ACRS, in combination with the investment tax credit, became so generous that the tax rate on some kinds of investment was zero or less than zero. Last November, Treasury proposed scrapping that and replacing it with a system designed to more closely mirror the actual loss of an asset's value over its life. It would have permitted firms to index the value of assets for inflation so that companies could write off the real cost of the investment.

The proposal called for replacing the current five classes of property with seven and treating certain kinds of equipment and much real estate less kindly than under current law. The write-off would be made on a percentage basis ranging from 32 percent per year to 3 percent per year.

In the new plan, the department wants to keep those seven classes but speed up the percentage write-off rates. Officials remain determined to repeal the investment tax credit, which pays for up to 10 percent of the cost of investment in equipment. Business Week, which first reported the new depreciation plan, said Treasury officials will increase the degree to which write-offs would be accelerated in the early years.

Treasury also has compromised on life-insurance inside buildup. The new plan is expected to propose taxing the value increase only for new policies, not for more than 100 million existing policyholders.