Tax on Capital Gains on Sale of Depreciable Assets: What Section 50 of Income Tax Act Says

Budget 2025 has shaken up the game by treating your ULIP gains as taxable under Section 50 of the Income Tax Act, 1961. It means your capital gains from ULIPs could now be deductible (and taxable) as part of capital assets.

Dive in to unpack exactly what Section 50 covers,  from depreciable assets and asset blocks to the nitty-gritty of capital-gains calculation, before you commit your money to any capital investment.

Key Highlights

• You can avail deductions on capital gains from the sale of depreciable assets under the Income Tax Act.
• Section 50 of Income Tax Act allows deductions on short-term capital gains.
• Capital gains from the sale of depreciable assets are considered short-term gains/losses.

What is Section 50 of Income Tax Act?

Section 50 of the Income Tax Act highlights taxation on capital gains from the sale of depreciable assets. This section is useful for business professionals, tax professionals, and investors who deal with substantial assets.

It additionally highlights rules to calculate capital gains from the sale of blocks of assets. Section 50 states that capital gains or losses from the sale of assets will be treated as short-term gains or losses regardless of whether they are held for short or long term.

Section 50 of Income Tax Act: Budget 2025 Update

Budget 2025 highlighted that capital gains from Unit Linked Insurance Plan (ULIPs) should be treated as equity mutual funds. Here are the changes that Budget 2025 highlighted:

• It has been proposed that Section 50 will include ULIP premiums above 10% of the sum assured and above ₹2.5 lakh per year.
• Budget 2025 further proposed that securities held by investment funds under Section 115UB will be considered as capital assets.

What are Depreciable Assets?

Depreciable assets are those that naturally lose value over time due to wear and tear, usage, or becoming outdated. Under Section 50 of the Income Tax Act, you can claim depreciation-related deductions on such an asset, helping you reduce your taxable income while accounting for its declining worth.

What is a Block of Assets?

Under Section 2(11) of the Income Tax Act, a block of assets is a part of a group of assets with the same depreciation rate. It can include both tangible and intangible assets of a particular asset class.

You can calculate depreciation on a block of assets based on their written-down value (WDV). WDV is the value of the block of assets after the completion of a financial year, after depreciation deduction. 

Calculation of Capital Gain: Block Assets Partially Transferred

You can get capital gains from block assets transferred partially by deducting the cost of assets acquired (if any) from the opening WDV. Notably, WDV can be NIL but not negative. In such a case, the income will be considered as a short-term capital gain. 

For instance, if the sale consideration is ₹12,000, opening WDV is ₹10,000, and the actual cost of the asset acquired during a financial year is ₹500, then the short-term capital gain will be ₹12,000 - ₹10,000 - ₹500 = ₹1,500.

If the WDV is not nil, there will be no capital gains on assets, indicating normal depreciation application. 

Calculation of Capital Gains: All Block Assets Transferred

If you sell the entire block of assets and the sale consideration is less than the opening WDV, it will be a short-term loss. As a result, no depreciation will apply to the cost. 

For instance, if the opening WDV is ₹50,000, the actual cost of assets acquired is ₹10,000, and the sale consideration is ₹40,000, then the short-term loss will be ₹50,000 + ₹10,000 - ₹20,000 = ₹40,000. As a result, no depreciation will apply to such a case.

On the other hand, if the sale consideration is more than the WDV, there will be a short-term gain. Here is an example to elaborate on the scenario:

For instance, if the sale consideration is ₹40,000, opening WDV is ₹25,000, and the actual cost of assets acquired is ₹5,000, then the short-term gain will be ₹40,000 - ₹25,000 - ₹5,000 = ₹10,000.

Final Words

Section 50 of the Income Tax Act allows you to claim deductions on capital gains from the sale of capital assets held for short-term or long-term. However, all capital gains/losses are treated as short-term capital gains or losses under this Section.