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  7. Section 50 of Income Tax Act– Capital Gain on Sale of Depreciable Assets

Section 50 – Capital Gain on Sale of Depreciable Assets

Updated on: 10 Sep, 2024 12:16 PM

Budget 2024 Updates

Amendment to Finance Bill 2024
Earlier, the government removed the indexation benefit on the sale of immovable property. However, the amendment of Finance Bill 2024 introduced a rollback of this rule.
As per the latest amendment, for any immovable property acquired before 23rd July 2024, the taxpayers will have the option to choose between two LTCG computation methods -
  • 12.5% tax rate, without indexation
  • 20% tax rate with indexation benefit.
The taxpayers can compute their tax based on both these methods and select the one that reduces their tax burden.
In other words, now taxpayers will be able to claim the benefit of indexation if they choose to pay tax at 20%. They will also get the opportunity to save tax by choosing the method of computing taxes.
However, there are certain exceptions to this amendment -
  • Indexation benefit is only available on immovable property like land and buildings.
  • It is available only to individuals and HUFs and not to firms or companies.
  • It can be considered only for tax calculation and not for determining amount of investment or loss to claim exemption or carry forward.

Long-term capital gains

  • Exemption on LTCG has been increased from Rs.1 lakh to Rs.1.25 lakhs per annum.
  • LTCG rate on all financial as well as non-financial assets has been increased to 12.5%.

Short-term capital gains

  • STCG on specified financial assets will be charged at 20%.
  • STCG on other non-financial assets will be taxed at applicable slab rates.
  • Unlisted bonds and debentures, debt mutual funds, and market linked debentures, irrespective of holding period, however, will attract tax on capital gains at applicable rates.
  • To know more about it, contact our tax experts

Capital gains arising from the sale of depreciable assets hold significant implications for taxpayers, particularly under the provisions of Section 50 of the Income Tax Act 1961. This section provides a framework for calculating capital gains in scenarios involving the transfer of depreciable assets, both partially and entirely.

Contents

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 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.

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 computation of depreciation on block of assets is conducted on the block's written down value (WDV). The WDV is the cumulative value of each asset within the block at the conclusion of the financial year, adjusted for depreciation. It is crucial to note that the WDV of a block can never assume a negative value.

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!

FAQs on Section 50 of the Income Tax Act

Q- Is capital gain on sale of depreciable assets?

If an individual sells a capital asset included in a block of assets for which depreciation has been permitted in accordance with the provisions of the Income Tax Act, the proceeds from such a sale qualify as capital gain.

Q- Is Section 50C applicable on depreciable assets?

A transfer involves either land or a building or both, with the status of the building or land being classified as a capital asset. This asset is categorized as either a Long-Term Capital Asset or a Short-Term Capital Asset, and it may further be classified as depreciable or non-depreciable.

Q- What is the difference between 50C and 43CA?

Under section 50C, if the property is considered a capital asset, its valuation is determined for tax purposes. However, if the property is held as a business asset, it falls under the purview of business income taxation as per section 43CA. In cases where immovable property is acquired at a value lower than the stamp duty assessment, the variance is regarded as income for the purchaser.

Q- What is the capital gain under section 50?

According to Section 50, the capital gains or losses resulting from the sale of depreciable assets will exclusively be categorized as short-term gains or losses.

Q- How to calculate capital gain on sale of depreciable assets with example?

Section 50 stipulates the handling of the variance between the sale consideration and the written down value (WDV) of the depreciable asset, classifying it as short-term capital gains. The WDV is calculated as the asset's cost minus the depreciation on block of asset claimed up to the present.

Q- How are capital gains/losses calculated when selling the entire block?

Selling the entire block can lead to either short-term capital gains or losses:

  • Gain: You'll experience a short-term capital gain on sale of depreciable asset under the Income Tax Act if the sale price is higher than the Written Down Value (WDV).
  • Loss: You'll incur a short-term capital loss if the sale price is lower than the WDV.

However, depreciation cannot be charged once the entire block is sold.

Q- What are the major changes brought about in the taxation of capital gains by the Finance (No.2) Bill, 2024?

The taxation of capital gains is now simpler and more rational. This rationalization and simplification involve five main aspects:

  • Holding periods are now simplified to just one year and two years.
  • Rates are standardized for most assets.
  • Indexation is removed for easier calculation, and the rate is reduced from 20% to 12.5%.
  • Residents and non-residents are treated equally.
  • Roll over benefits remain unchanged.

The amendment to Finance Bill 2024 announced the restoration of indexation benefits on immovable property purchased before 23rd July 2024 for individuals and HUFs only for the purpose of computing tax. In other words, individuals can now choose between a 12.5% tax rate without an indexation benefit and a 20% tax rate with an indexation benefit.

Q- What is the date when the new taxation provisions come into force?

The new provisions for the taxation of capital gains come into effect on July 23, 2024, and apply to any transfers made on or after that date.

Q- How has the holding period been simplified?

Previously, there were three holding periods to consider an asset a long-term capital asset. Now, the holding period has been simplified to two periods: one year for listed securities and two years for all other assets.

Q- Please elaborate on the change in the rate structure for STT paid capital assets?

The rate for short-term STT paid listed equity, equity-oriented mutual funds, and units of business trusts (Section 111A) has increased from 15% to 20%. Similarly, the rate for these assets for the long-term (Section 112A) has increased from 10% to 12.5%.

Q- Who will benefit from the change in rate from 20% (with indexation) to 12.5% (without indexation)?

The reduction in the rate will benefit all categories of assets. In most cases, taxpayers will benefit significantly. However, where the gain is limited compared to inflation, the benefit may be minimal or absent in a few cases. Budget 2024 has Retained the indexation benefit for properties purchased before 1.4.2001. However, the indexation benefit has been removed for the properties purchased after 1.4.2001.

Q- Can the taxpayer continue to avail the rollover benefits on capital gains?

Yes, the rollover benefits remain unchanged. Taxpayers can still take advantage of these benefits under the IT Act. This means that taxpayers who want to save on long-term capital gains tax, even with the lower rates, can continue to use the rollover benefits if they meet the applicable conditions.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.