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Demystifying Section 50 of The Income Tax Act – Capital Gain on Sale of Depreciable Assets

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  • Demystifying Section 50 of The Income Tax Act – Capital Gain on Sale of Depreciable Assets

Sale of a capital asset forming part of the block of assets on which depreciation has been allowed as per the Income Tax Act, the gain from such sales is called the capital gain.

Capital gain or loss arising on the sale of depreciable assets is divided into two categories:
1. Where some assets are sold from the block of assets.
2. Where all the assets of the block are transferred, and block ceases to exist.

Calculation of capital gain when part of the block is transferred:

Case I

When net sale consideration on such sale of asset is reduced from the written down value (opening WDV + Cost of Assets acquired, if any) of the block of assets and the written down value of the block becomes Nil. (Written down value can be Nil, but it can’t be negative), then the income from such transfer of capital asset shall be considered as short-term capital gain.
Computation of short-term capital gain:

Sale consideration xxx
Less: Opening WDV of the block xxx
Less: Actual cost of any asset acquired during the year xxx
Short-term capital gain xxx

Case II

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 and WDV of the block is not Nil, there is no capital gain on transfer of assets. Hence, normal depreciation will be allowed.

Calculation of capital gain when all the assets of the block are transferred:

Case III

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, then there is short-term capital loss on sale of block of asset and no depreciation shall be allowed from such block of assets.

Computation of Short-Term Capital Loss:
Opening WDV of the block xxx
Add: Actual cost of the asset acquired xxx
Less: Sale consideration xxx
Short-Term Capital Loss xxx

Case IV

If the 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, then income from such sale of block of asset is short-term capital gain.

Computation of Short-Term Capital Gain:

Sale consideration xxx
Less: Opening WDV of the block xxx
Less: Actual cost of the asset acquired xxx
Short-Term Capital Gain xxx

Kindly Note that Capital gain or loss arising from transfer of depreciable assets is always treated as short-term capital gain or loss.