Capital Gain on Depreciable Assets

Capital Gain on 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 Section 50, which provides for the computation of capital gains in the case of depreciable assets.

There are two categories for calculating the capital gain or loss on the sale of depreciable assets:

• where a portion of the asset blocks are sold.
• where the block of assets vanishes and all of its assets are transferred.

What are depreciable assets?

Depreciable assets are those that steadily lose value over time as a result of usage, obsolescence, or wear and tear. According to the Income Tax Act, the value reduction is known as depreciation and can be claimed as a deduction.

Updates on Budget 2024

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

• There are only two holding periods for assets that are classified as long-term and short-term: 12 months and 24 months. There is no longer a 36-month holding period.
• All listed securities have a 12-month holding term. All mentioned securities are regarded as long-term if they are held for more than a year. All other assets are held for 24 months.
• Depreciable assets are thus regarded as long-term if they are held for more than a year. Short-term depreciable assets will still be subject to tax at slab rates.
• With effect from July 23, 2024, the tax on long-term capital gains on depreciable assets is lowered from 20% to 12.5%. However, the indexation benefit that was formerly offered on the sale of long-term assets has been removed. On the other hand, the government has offered taxpayers the choice to calculate taxes at 12.5% without indexation or 20% with indexation for real estate transactions made before July 23, 2024.

What is a block of assets?

A “block of assets” is defined by Section 2(11) of the Act as a collection of assets within a class that include both tangible and intangible assets and are all subject to the same specified depreciation rate. A block of assets is merely an asset class with an identical depreciation rate. Blocks of depreciable assets are arranged according to their characteristics, rates of utilization, and depreciation. Buildings, equipment, plants, furnishings, intangible assets, and other items are some examples.

The write-down value (WDV) of the asset block is used to compute the depreciation on it. After deducting the year’s depreciation, the Written Down Value (WDV) shows the entire value of all the assets in the block after the fiscal year.

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

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Capital Gains Calculation in Cases of Transfers of a Part of the Asset Block 

Situation I

• when the write-down value of the block of assets (opening WDV + acquisition costs, if any) is subtracted from the net sale consideration upon the sale of that asset.
• The asset’s written-down value drops to Nil (Note: The written-down value cannot be negative, only Nil).
• The proceeds from the sale of such capital assets will thereafter be regarded as a short-term capital gain.

Computation of short-term capital gain:

Situation II

• when the write-down value of the block of assets (opening WDV + acquisition costs, if any) is subtracted from the net sale consideration upon the sale of that asset.
• Furthermore, the asset block’s written-down value is not zero.
• A capital gain does not result from the transfer of assets.
• Normal depreciation will therefore be permitted.