Assets can be classified as ‘short term capital assets’ and ‘long term capital assets’ based on their holding period. In India, many people own capital assets and pay appropriate taxes for them.
Knowing the intricate details of Section 50 of the Income Tax Act is important for capital asset-owners because it deals with calculating capital gains and losses.
Read on to know more details.
Section 50 of the Income Tax Act provides the legal framework for calculation of capital gains for depreciable assets. It was amended by the Finance Act, 2022.
The provisions of Section 50 of the Income Tax Act are read in sync with the Income Tax rules of 1962.
The amended provisions will be effective from the assessment year 2022-2023 against this financial year 2022-2023.
Suppose a taxpayer owns a capital asset which is a part of a block of assets upon which the Income Tax department allows depreciation.
As per Income Tax rules, if the taxpayer sells this capital asset, the income will be treated as a capital gain.
Computation of capital gain or loss caused by the sale of a depreciable asset is divided into two categories:
When a taxpayer transfers a part of a block of asset, the income will be seen as a short term capital gain provided it meets the following criteria:
The net sale consideration of any sale of such a capital asset is reduced from the Written Down Value (opening WDV + Cost of assets acquired) of the block of assets, and if it becomes nil.
Please note that Written Down Value can be nil but not negative.
When a taxpayer transfers a part of a block of assets, normal depreciation will be applicable, and no capital gain on the transfer of assets will take place if it meets the following criteria:
Net sale consideration of the sale of such a capital asset is reduced from the Written Down Value (opening WDV + Cost of assets acquired) of the block of assets, and it is not nil.
The table below shows how to insert the amount to calculate short term capital gain:
|Sale Consideration||Insert the Amount|
|Less||Opening Written Down Value of block of assets||Insert the Amount|
|Less||Actual Cost of an asset procured during the financial year||Insert the Amount|
|Short Term Capital Gain||Amount|
When a taxpayer sells the entire block of assets, there will be a short term capital loss, and no depreciation will be applicable, provided it meets the following criteria:
If the entire block of assets is sold and sale consideration is less than the written down value (opening WDV + cost of the acquired assets).
When a taxpayer sells a block of assets, the IT department will treat it as a short term capital gain provided it meets the following criteria:
If the sale consideration is more than the written down value (opening written down value + cost of acquired assets)
The table below shows how to insert the amounts and calculate short term capital loss:
|Opening Written Down Value of the Block of Assets||Amount|
|Add||Actual Cost of the acquired asset||Insert the Amount|
|Less||Sale Consideration||Insert the Amount|
|Short Term Capital Loss||Amount|
Given below is the table showing how to insert the amounts and calculate short term capital gain:
|Less||Opening Written Down Value of the block of Assets||Insert the Amount|
|Less||Actual Cost of the acquired asset||Insert the Amount|
|Short Term Capital Gain||Amount|
To sum up, Section 50 of the Income Tax Act enables people to calculate gains or losses for depreciable assets as per authorized guidelines. This blog provides the applicable conditions and tables that one can use for accurate calculations.
No, you cannot consider the goodwill of your business as a depreciable asset anymore. Finance Act 2021 introduced an amendment stating that goodwill of a business cannot be considered as a depreciable asset. It has been removed from the list of intangible assets from the financial year 2020-2021.
Yes, if you sell your fixed capital asset, the profit earned or loss incurred is taxable. If it’s a depreciated asset, the profit/loss is taxable as a short-term capital gain/loss. If it’s not a depreciated asset, then the profit/loss will be taxable as either long term or short term capital gain based on the asset’s holding period.
Capital assets in India include building, land, house property, vehicles, leasehold rights, patents, trademarks, jewellery and machinery. Furthermore, as per law, capital assets also include rights in a domestic company, rights of management and any other legal rights.
If the holding period of a capital asset exceeds 36 months, then it will be referred to as a long term capital asset. If movable assets like debt mutual funds and jewellery are held for more than 36 months, they will be classified as long term capital assets.
If the holding period of a capital asset is less than 36 months, it is a short term capital asset. However, if one sells immovable assets like houses, land, and buildings after 24 months, then it will be considered a long-term capital gain.
Before you go…
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.