Section 50: Capital Gain on Sale of Depreciable Assets
It is not that all business assets are treated equally under the Indian Income Tax Act in the calculation of capital gains on their sale. One of the most complicated territories of capital gains taxation is the one with the depreciable assets – those used in the course of business and which can be depreciated. This is where Section 50 of the Income Act 1961 stages in. Depreciable assets are capital assets, but Section 50 provides a special treatment in the case of their sale. Let us examine capital gain on sale of depreciable assets – what it involves, what impact it will have on the businesses, and how the tax implication should be calculated properly.
What is Section 50 of the Income Tax Act?
Section 50 is concerned with the capital gains from the sale of depreciable assets that comprise a “block of assets” from which depreciation has been allowed under Section 32. The primary provision of this section is that gains realised from the sale of such depreciable assets are always short-term capital gains (STCG) irrespective of the period for which the asset is held (more than 36 months).
What Are Depreciable Assets?
Depreciable assets are assets with wear and tear that are utilised in business but lose value over time. The Income Tax Act enables businesses to abate their taxable income by claiming depreciation of such assets every year.
Examples include:
- Plant and machinery
- Furniture and fixtures
- Office equipment
- Commercial vehicles
- Buildings used for business
Such assets are classified as blocks of assets, where all those assets that have similar rates of depreciation are clubbed together.
The Idea of Block of Assets
A block of assets is an aggregate of assets within a specific class and capable of the same rate of depreciation. For instance, all machinery which has a 15% depreciation rate falls into a single block.
Capital gains/losses under Section 50 are computed at a block level and not per asset. This makes depreciation and tax calculation easy, but complicates this task when assets are disposed of.
How Section 50 Works: Capital Gains Treatment
Section 50 changes the way capital gains are measured after depreciable assets are sold:
- Capital gains are recognised as short-term even if the asset concerned is held for more than 36 months.
- This is because depreciation has already given a tax advantage over the years, therefore, no additional benefit through long-term capital gain treatment (with indexation) is permitted.
There are two main scenarios:
Scenario 1: Block Continues to Exist
Imagine the business sells one or several pieces of equipment, but in the block, there is still something (or others were added in the same year). Let’s see how to compute capital gain:
STCG = Sale Value – (WDV + Cost of New Additions – Book Val. of New Additions)
In practice, however, the income tax department provides for a simplified calculation of the base:
If Sale Value > WDV of block, the STCG = Sale Value – WDV.
If Sale Value ≤ WDV, no capital gain arises. The block continues, and in the remainder, WDV depreciation can be charged.
Scenario 2: Block Ceases to Exist
This happens when:
- All assets in the block are sold out.
- Or the value of assets is exhausted because of the sale.
In a case like this, capital gain is computed as:
STCG = Sale value Consideration – WDV of the block
Once more, regardless of the length of the assets held, the gain is considered a short-term capital gain.
Example:
Let us assume a company’s block of machinery has:
WDV on 1st April = ₹10,00,000
During the year purchase of new machinery is nil.
A machine from the block is being sold for 12,00,000 RS
Since:
The block stops existent (assuming no other machinery present), and
Sale value > WDV
Then:
STCG = ₹12,00,000 – ₹10,00,000 = ₹2,00,000
Even under these provisions, this gain is taxed as STCG, and if the machine was held for 5 years.
Key Points to Remember
- Section 50 only applies to business assets on which depreciation has already been claimed.
- It is not applicable for personal-use assets, agricultural land, and non-depreciable capital assets.
- There are no indexation benefits because the gain is always short-term.
- In case the block becomes empty, but no sale occurs, there is no capital gain.
- Losses under this section are considered short-term capital losses.
Rate of Tax on Short-Term Capital Gain
For businesses:
- Applicable Slab Rates (for individuals, firms, LLPs) are then applied to the addition of STCG to Total Income.
- For companies, STCG is taxable at 30%, including surcharge and cess.
Why Is This Important for Businesses
- Tax Planning: Assists in preventing surprises at year-end when selling old machinery or office gear.
- Accurate Depreciation: Ensures correct block-level accounting.
- Compliance: Prevents tax notices because it is misclassified as capital gains.
- Cash Flow Management: Awareness of capital gain impact is useful in predicting tax outgo.
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Section 50 prevents double tax benefits enjoyed by taxpayers, first through depreciation and the other through long-term capital gains treatment. By considering all gains from depreciated assets as short-term, it conforms to the essence of fair tax.
It will facilitate improved financial planning, accurate tax filing, and easier audits. If you intend to sell a business asset, ensure your blocks of assets are in proper condition and you consult your tax advisor to determine the capital gain implications under section 50.
