Computation of capital gains on transfer of goodwill
Introduction
The capital gains on transfer of goodwill shall be computed in accordance with the normal provisions. However, if the depreciation has been claimed on goodwill, the cost of acquisition of the goodwill shall be reduced by the amount of depreciation obtained by the assessee up to tax year 2019-20.
1. About
Goodwill of a business or profession was considered a depreciable asset under the Income-tax Act, 1961, up to Assessment Year 2020-21 (Financial Year 2019-20). However, with effect from Assessment Year 2021-22 (Financial Year 2020-21), goodwill was explicitly excluded from the definition of "block of assets", and thus ceased to be a depreciable asset.
Section 90(4) of the Income-tax Act, 2025, addresses the scenario where depreciation was claimed on purchased goodwill under the Income-tax Act, 1961. It states that if the capital asset is goodwill of a business or profession, and the assessee obtained a deduction on account of depreciation under Section 32(1) of the Income-tax Act, 1961, in a Tax Year preceding the Tax Year commencing on 1st April, 2020, then the total amount of depreciation obtained before the Tax Year commencing on 1st April, 2020, shall be reduced from the amount of purchase price for determining the cost of acquisition.
This provision ensures that the benefit of depreciation previously claimed is accounted for when computing capital gains, preventing a double benefit.
Further, it is to be noted that since the goodwill is no longer a depreciable asset, the "deemed short-term" fiction of Section 74 does not apply to the sale of the goodwill itself. Instead, the nature of the capital gain is determined by the period of holding.
Thus, the method for computation of capital gains on transfer of goodwill can be categorized on the basis of the following:
(a) If depreciation has not been claimed on goodwill; and
(b) If depreciation has been claimed on goodwill.
2. Capital gains (if depreciation is not claimed on goodwill)
If depreciation is not claimed on goodwill, the capital gain shall be computed in the following manner:
| Particulars | Amount |
Full Value of Consideration Less: (a) Expenses incurred wholly and exclusively in connection with transfer (b) Cost of Acquisition (c) Capital gains taxable under Section 67(10), which is attributable to the capital asset remaining with the firm, AOP or BOI after reconstitution |
xxx (xxx) (xxx) (xxx) |
| Short-term or Long-term Capital Gains | Xxx |
If the depreciation has been claimed on goodwill, the capital gain shall be computed in the same manner as explained above after one modification. The cost of acquisition of the goodwill is to be reduced by the amount of depreciation obtained by the assessee up to tax year 2019-20 in the following manner:
| Particulars | Amount |
Actual cost of acquisition of goodwill Less: Total amount of depreciation obtained by the assessee up to tax year 2019-20. |
Xxx (xxx) |
| Cost of acquisition of goodwill for computation of capital gains | Xxx |
Such reduction of depreciation from the actual cost of goodwill shall be done assuming that goodwill was the only asset in the block of intangible asset.
As per Section 90, if goodwill of a business or a profession has been acquired/purchased by the assessee, the consideration paid would be regarded as cost of acquisition in the hands of the purchaser. In any other case, the cost of acquisition of goodwill shall be nil.
3. Capital gains (If depreciation is claimed on goodwill)
Example, on 10-4-2018, ABC Ltd. acquired the following intangible assets:
(a) Goodwill: Rs. 100 crores;
(b) Trademarks: Rs. 50 crores; and
(c) Licenses agreement: Rs. 50 crores.
In April 2026, ABC Ltd. sold the trademarks for Rs. 80 crores. In April 2026, it purchased patents worth Rs. 10 crores and sold goodwill for Rs. 90 crores.
| Short term capital gains on goodwill | ||
| Sales consideration [A] | 90.00 | |
| Cost of Goodwill | 100 | |
| Less: Depreciation for tax year 2018-19 [100 * 25%] | -25 | |
| Less: Depreciation for tax year 2019-20 [(100-25) * 25%] | -18.75 | |
| Cost of goodwill after depreciation [B] | 56.25 | |
| Long-term capital gains [C = A – B] | 33.75 |
This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.