Section 50 – Capital Gain on Sale of Depreciable Assets

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.

Interesting Fact
Section 50 of the Income Tax Act states that if the depreciable assets are sold or the entire block of assets is sold, then the capital gain on depreciable assets is termed short-term capital gain or short-term capital loss, regardless of the period for which the asset has been held.

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 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.

Capital Gain Calculation 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!