Section 50 – Capital Gain on Sale of Depreciable Assets

If the person sells a capital asset that forms part of the block of assets on which depreciation has been allowed as per the provisions of the Income Tax Act, the income from such sales is a capital gain. In this article, we will discuss about the Section 50 which provides for the computation of capital gains in case of depreciable assets.

The calculation of capital gain or loss arising on the sale of depreciable assets can be divided into two categories:

• Where some assets are sold from the blocks of assets.
• Where all assets of the block are transferred and the block of assets ceases to exist.

Budget 2024 Updates

Budget 2024 has proposed the following amendments effective from FY 2024-25 - 

• For classifying assets into long-term and short-term, there will only be two holding periods: 12 months and 24 months. The 36-month holding period has been removed.
• The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months. 
• Thus, depreciable assets held for more than 12 months is considered long term. Depreciable assets which are held for short term shall continue to attract the tax at slab rates.
• The tax on long-term capital gains on depreciable assets is reduced from 20% to 12.5%. with effect from 23rd July 2024. On the other hand, the indexation benefit that previously was available on the sale of long-term assets has now been eliminated. However, the Government has given taxpayers an option to compute taxes on real estate transactions purchased before 23rd July 2024 either at 12.5% without indexation or at 20% with indexation. 

What are Depreciable Assets?

The assets which gradually lose value over time due to wear and tear, usage, or obsolescence are called as depreciable assets. The decrease in value is called as depreciation and is claimed as deduction under the Income Tax Act. 

What is a Block of Assets?

According to Section 2(11) of the Act, a 'block of assets' refers to a group of assets within a class that includes both tangible and intangible assets, all subjected to the same prescribed depreciation rate. Block of assets simply means same class of assets with same rate of depreciation. Depreciable assets are organized into blocks based on their attributes, usage, and depreciation rates. Example: buildings, machinery, plants, furniture, intangible assets, and others.

The depreciation is calculated on the block of assets on the written down value (WDV) of the block of assets. The Written Down Value (WDV) represents the total value of each asset within the block at the end of the financial year, after deducting the depreciation for the year. 

Note: WDV of block of assets can never be negative.

Calculation of Capital Gain Where Part of the Block of Assets is Transferred 

Situation I

1. When net sale consideration on such asset’s sale is reduced from the written down value (opening WDV + cost of assets acquired if any) of the block of the assets. 
2. And the written down value of the block of the asset becomes Nil (Note: The written down value can be Nil but not negative).
3. Then the income from such transfer of capital asset shall be considered to be a short-term capital gain.

Computation of short-term capital gain:

Situation II

1. When net sale consideration on such asset’s sale is reduced from the written down value (opening WDV + cost of assets acquired if any) of the block of the assets. 
2. And the written down value of the block of asset is not Nil.
3. There is no capital gain on transfer of assets.
4. Hence, normal depreciation will be allowed.

Calculation of Capital Gain Where All the Assets of the Block are Transferred: 

Situation III

1. If the whole of the block of asset is sold and the sale consideration is less than the written down value (opening WDV + cost of assets acquired if any) of the block of assets. 
2. Then there is short-term capital loss on sale of block of asset.
3. And no depreciation shall be allowed from such block of assets.

Computation of short-term capital loss:

Situation IV

1. If whole of the block of assets is sold and the sale consideration is more than the written down value (opening WDV + cost of assets acquired if any) of the block of assets. 
2. Then income from such sale of block of asset is short-term capital gain.

Computation of short-term capital gain:

Note: Capital gain or loss on the transfer of depreciable assets is always treated as short-term capital gain or loss.

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