Section 50 – Capital Gain on Sale of Depreciable Assets

What are Depreciable Assets?

Depreciable assets refer to assets that experience a drop in value over time due to wear and tear, discontinuance, or other affiliated causes. The concept of depreciation allows taxpayers to claim deductions for the reduction in the actual value of these assets. The decrease in value is called as depreciation and is claimed as deduction under the Income Tax Act.

Depreciation Rates

Learn more here:-https://incometaxindia.gov.in/charts%20%20tables/depreciation%20rates.htm

Utilizing the Income Tax Act to claim depreciation

Assets categorize

To claim depreciation under income tax, the owner of the asset must be an assessee, and the asset should be used for business or professional purposes. Assets can be classified as tangible, such as buildings, equipment, factories, or furniture, and intangible, like patents, copyrights, trademarks, licenses, or franchises acquired on or after April 1, 1998. Depreciation is allowed only on the building structure and not on the land it is built on, as land does not undergo wear and tear. This ensures a fair assessment of asset value for tax purposes.

Lease Vs Ownership

An assessee can claim depreciation only on capital assets that they own. To benefit from the depreciation allowance on a property, the assessee must typically be the owner of the property. However, ownership of the property is not always mandatory. If an assessee constructs a house on a property owned by someone else, they are still eligible to claim depreciation on the house.

Used for Professions or Business

To qualify for depreciation, the asset must have been used for business or professional purposes. However, it is not mandatory for the assessee to use the asset for the entire fiscal year to claim depreciation. Even if the asset is used for a short period within the accounting year, the assessee can claim depreciation, as seen in cases like seasonal factories.

Depreciation On Assets Sold

Depreciation cannot be claimed on assets that are sold, removed, or damaged within the same year of purchase. In such cases, the assessee is not eligible for a depreciation deduction.

Co-ownership

If an asset has a co-owner, the depreciation should be reported by the the co-owner as well.

What is Section 50 of the Income Tax Act 1961?

Section 50 of the Income Tax Act specifies the taxation for capital gains on the sale of depreciable assets. In other words, it establishes the tax rules for capital gains arising for those assets on which depreciation has been charged.

What are Block of Assets?

These depreciable assets are systematically categorized into blocks based on their characteristics, utilization, and depreciation rates. A block of assets constitutes a grouping of assets belonging to the same category and subject to identical depreciation rates. Notable examples of distinct blocks of assets include buildings, machinery, plants, furniture, intangible assets, and others.

The determination of capital gain on depreciable assets or loss arising from the sale of depreciable assets hinges on several aspects. This includes whether all or only some assets within the block are transferred and whether the sale consideration exceeds or falls short of the WDV of the block. Any loss or capital gain arising from the transfer of depreciable assets is invariably treated as a short-term capital gain or loss.

How to Calculate Capital Gain on Depreciable Assets for Partial Block of Asset Transfer

Calculating capital gain on depreciable assets for a partial transfer of assets within a block involves specific rules under Section 50 of the Income Tax Act 1961. Here's how it works:

Scenarios:

Sale consideration reduces block's WDV to zero:

If the net sale proceeds (consideration minus expenses) from the transferred asset, when subtracted from the block's opening Written Down Value (WDV) plus any acquired asset costs, brings the WDV to zero, the entire proceeds are considered short-term capital gain.

Sale consideration doesn't reduce block's WDV to zero:

No capital gain or loss arises in this case. Depreciation continues on the remaining block value.

How to Calculate Capital Gain on Depreciable Assets for Complete Block of Asset Transfer

Calculating capital gain when all assets within a block are transferred falls under Section 50 of the Income Tax Act of 1961, but there are specific rules:

Scenarios:

Sale consideration exceeds block's WDV:

If the net sale proceeds (consideration minus expenses) from transferring all assets exceed the block's opening Written Down Value (WDV) plus any acquired asset costs, the difference is considered short-term capital gain.

Sale consideration falls short of block's WDV:

In this case, there is no capital gain or loss, and no further depreciation on block of assets is allowed on the block.

It is mandatory to file an ITR whether you have a capital gain or a capital loss during the year. If you have a capital gain on the sale of depreciable assets and you are seeking expert help to save taxes, you can reach out to our experts. Hire an online CA now!