Start with the block that actually received tax depreciation
For tax year 2026–27 under the Income-tax Act, 2025, section 74 applies to a capital asset in a block on which depreciation has been allowed under the relevant enactment. It modifies the sections 72 and 73 computation. For an ordinary taxable disposal, compare total consideration for transfers within the block with opening tax written down value, actual cost of same-block acquisitions and qualifying transfer expenditure. An excess is deemed short-term capital gain under section 74(2), even if the sold asset has been held for years. This is not an AY 2026–27 computation under the 1961 Act. Checked on 5 November 2026.
Read the applicable text: Income-tax Act, 2025 as amended: sections 41, 72 and 74.
Separate continuing blocks from completed exits
A continuing block can absorb disposal proceeds without producing a current capital loss merely because the assets sold fetched less than the block balance. If all assets in the block are transferred, section 74(3) uses opening WDV plus same-block acquisition cost as the block’s acquisition cost. In conjunction with the section 72 computation, a net shortfall on that complete exit gives a short-term capital loss in the ordinary facts illustrated. Check the actual presence of remaining assets, including same-year acquisitions; selling every opening asset is not necessarily selling the entire block.
Maintain two linked calculations
Section 41(1)(c) uses moneys payable and applicable scrap value, subject to its reduction cap, for the business WDV roll-forward. The section 74 gain test expressly includes qualifying transfer expenditure. Do not reduce the gross disposal figure in the ordinary WDV roll-forward by sale costs simply because those costs enter the capital-gain calculation. A block’s monetary balance can be exhausted while an asset remains. Show the physical existence test and the monetary exhaustion test separately. The examples assume ordinary sales, no scrap value, no slump sale and supported opening WDV net of applicable previous depreciation.
Bridge the book entry without copying it into tax
Keep sale invoices, asset IDs and the book disposal journal together, but calculate the tax result using the appropriate block. Remove the book disposal effect from business profit to the extent required in the tax reconciliation, then show the independent capital-gain result and depreciation computation. An individual asset’s net book value does not determine its section 74 acquisition basis. Compare gross and net proceeds by block; one asset’s gain in the fixed-asset register is not necessarily the amount taxable under the capital-gains head.
Resolve exceptions before applying the simple model
Verify whether the transfer is taxable, whether consideration is deemed under another applicable provision and whether an amount belongs to the relevant block. Reorganisations, slump sales, destruction/insurance receipts and special deductions need separate analysis. The examples use accepted actual consideration and supported transfer expenditure incurred wholly and exclusively in connection with the sale. They exclude rates, set-off, surcharge, cess and separate depreciation eligibility issues. Do not treat the pre-depreciation WDV shown as an independently established depreciation deduction.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Sale while the block continues
Opening WDV ₹40 lakh, same-block additions ₹10 lakh and gross proceeds ₹18 lakh. Other assets remain and there are no transfer costs. Section 74 produces no excess; pre-depreciation block WDV is ₹32 lakh. There is no ₹32 lakh current capital loss.
Illustrative example 2: Proceeds exceed the block base
Opening WDV ₹24 lakh plus additions ₹6 lakh gives ₹30 lakh. Proceeds ₹42 lakh less qualifying transfer expenditure ₹2 lakh gives ₹40 lakh. Deemed STCG is ₹10 lakh even though another asset remains. The ordinary WDV reduction is capped at ₹30 lakh, leaving nil pre-depreciation balance.
Illustrative example 3: Complete exit at a loss
Opening WDV ₹32 lakh, no additions, all assets sold for ₹22 lakh, and qualifying expense ₹1 lakh. Net proceeds ₹21 lakh less block cost ₹32 lakh yields ₹11 lakh short-term capital loss. The block has ceased; do not carry the arithmetic balance as depreciable assets.
Illustrative example 4: Same-year replacement remains
Opening WDV ₹20 lakh, new same-block machine ₹12 lakh, old machines all sold for ₹17 lakh without costs. The new machine remains. There is no excess and the ordinary pre-depreciation WDV is ₹15 lakh, not a ₹15 lakh complete-exit loss.
Illustrative example 5: Complete exit with several sale invoices
Opening WDV ₹15 lakh plus same-block acquisition ₹5 lakh; every asset in the block is sold. Consideration ₹12 lakh plus ₹13 lakh totals ₹25 lakh. Deduct ₹1 lakh qualifying transfer costs and ₹20 lakh block cost. Deemed STCG is ₹4 lakh.
Illustrative example 6: No excess after costs but WDV exhausted
Opening WDV ₹20 lakh and no additions; another asset remains. Gross proceeds ₹21 lakh and qualifying transfer costs ₹1 lakh produce ₹20 lakh net. Section 74(2) has no excess. Section 41’s capped WDV reduction still leaves zero. Neither a surviving asset nor a nil WDV alone proves a complete-exit loss.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix the tax period | Use the enactment governing the actual tax year. |
| 2 | Confirm eligible block | Record asset IDs, rates and history of allowed depreciation. |
| 3 | Reconcile opening WDV | Tie the tax opening amount to the previous computation and orders. |
| 4 | Map acquisitions | Establish actual cost and same-block classification. |
| 5 | Compile transfers | Reconcile all invoices and consideration by block. |
| 6 | Test special rules | Check deeming, exemption and non-ordinary disposal provisions. |
| 7 | Support transfer costs | Keep evidence of qualifying connection to the sale. |
| 8 | Check remaining assets | Confirm whether any original or newly acquired item remains. |
| 9 | Calculate both results | Keep section 74 gain/loss and section 41 WDV separate. |
| 10 | Reconcile book profit | Cross-check the book removal, capital-gain working and remaining depreciation base. |
Sixteen practitioner FAQs
1. Which law applies to the example year?
The 2025 Act for tax year 2026–27.
2. Can I use section 74 in an AY 2026–27 return for FY 2025–26?
Do not transplant the new section number; that return belongs to the earlier regime.
3. What is the section’s population?
Capital assets in a block on which depreciation has been allowed under a specified enactment.
4. Is the individual asset’s book NBV the tax comparator?
No. Compute on the applicable tax block.
5. Does long ownership necessarily produce long-term gain?
No. Section 74 deems the relevant gain short-term.
6. Do same-block additions matter?
Yes. Include supported actual cost of acquisitions in the tax year.
7. Can a new machine prevent cessation?
Yes, if it remains in that block.
8. Do several sales need to be combined?
Yes, use the block-wise transfer total.
9. Does a continuing block produce a loss merely because proceeds are low?
No. The residual generally remains in the block computation, subject to its rules.
10. When can a full-exit loss arise?
When all block assets are transferred and the ordinary net computation is negative.
11. Can a block have assets but no WDV?
Yes. Physical survival and monetary balance are distinct tests.
12. Are all selling costs deductible?
Only expenses meeting the applicable statutory test enter the capital-gain calculation.
13. Do selling costs automatically reduce section 41 moneys payable?
No. Keep the statutory WDV computation separate.
14. Is deemed consideration irrelevant to this calculation?
No. Check any independently applicable deeming provision before using actual proceeds.
15. Is slump sale covered by the simple examples?
No. It has separate statutory treatment.
16. What is the key review control?
Reconcile sale amounts, cost base and surviving asset IDs independently before booking either gain or depreciation.