Capital Assets, Family Pension, Depreciation, HRA and Gratuity Explained

Posted on Oct 23, 2026 in Financial and Accounting Management

Capital Assets

Capital assets include:

  1. Shares and securities
  2. Jewellery
  3. Mutual fund units
  4. Goodwill
  5. Patents and trademarks
  6. Stock-in-trade – goods held for sale in the ordinary course of business

Assets Not Considered Capital Assets

The following are generally excluded from the definition of capital assets under the Act:

  1. Stock-in-trade – goods held for sale in the ordinary course of business
  2. Personal effects – movable property used for personal purposes, such as clothes and furniture, except specified items like jewellery and paintings
  3. Rural agricultural land in India – agricultural land meeting the prescribed rural-area conditions
  4. Certain specified bonds and certificates excluded under the Act

Types of Capital Assets

  1. Short-term capital asset: An asset held for a period not exceeding the applicable prescribed holding period.
  2. Long-term capital asset: An asset held for longer than the applicable prescribed holding period, including house property held as an investment.

Family Pension

A family pension is a monthly pension paid to eligible family members of a deceased employee or pensioner after their death. In India, the rules depend on whether the person worked for the Central or State Government, a private company, or was covered by EPFO.

1. Government Family Pension

Available to eligible family members of Central or State Government employees and pensioners. The amount and eligibility depend on the applicable pension rules.

2. EPFO / EPS Family Pension

Under the Employees’ Pension Scheme (EPS), eligible spouses and children may receive a survivor’s pension when a covered member or pensioner dies.

3. State Government or Other Pension Schemes

Rules vary by state and employer, including eligibility, pension amount, and the duration of benefits.

Depreciation Under Section 32 of the Income-tax Act, 1961

Section 32 of the Income-tax Act, 1961, provides a deduction for depreciation on eligible assets used for business or professional purposes. Depreciation allows a taxpayer to deduct the reduction in the value of qualifying assets over time when computing taxable business or professional income.

1. Assets Eligible for Depreciation

Depreciation is generally available on the following assets, when owned wholly or partly by the taxpayer and used for business or profession:

  • Tangible assets: Buildings, machinery, plant and furniture.
  • Intangible assets: Know-how, patents, copyrights, trademarks, licences, franchises and similar business or commercial rights, subject to statutory conditions.

Land itself is not depreciable.

2. Depreciation Rates Under the Income-tax Rules

Common depreciation rates under the prescribed block-of-assets system include the following.

How to Calculate Gross Annual Value (GAV)

GAV is the annual rental value of a property determined under Section 23 of the Income-tax Act, 1961. It is not necessarily the actual rent received.

Formula:

Expected Rent = max(Municipal Value, Fair Rent) (subject to the standard rent limit if rent control applies)

Generally:

GAV = max(Expected Rent, Actual Rent)

However, if the property is let and a genuine vacancy causes actual rent to be lower than expected rent, the vacancy rule may allow actual rent to be taken as GAV.

Remember the sequence: Determine expected rent → compare with actual rent → apply the relevant vacancy rule → arrive at GAV.

House Rent Allowance (HRA)

Definition: House Rent Allowance (HRA) is an allowance paid by an employer to an employee to meet the cost of renting residential accommodation.

In simple words, HRA is the amount given by an employer to help an employee pay house rent.

Features of HRA

  1. It is generally paid as part of an employee’s salary.
  2. It helps employees meet their rental housing expenses.
  3. It may be fully taxable or partly exempt from income tax, depending on the applicable tax regime and rules.
  4. Employees generally need rent payment details and supporting documents to claim an exemption where eligible.

Deemed Let-Out Property

Definition: A deemed let-out property is a house property that is not actually rented out but is treated as rented out for income tax purposes under the applicable provisions of the Income Tax Act.

In simple words, even if you do not receive any rent from a property, the tax law may treat it as if you have rented it out.

Computation Steps

  1. Expected rent: The reasonable annual rental value determined under the applicable rules.
  2. Less: Municipal taxes: Taxes actually paid by the owner during the relevant year, where deductible.
  3. Net annual value: The amount remaining after eligible municipal taxes.
  4. Less: Standard deduction: Generally 30% of the net annual value.
  5. Less: Eligible interest on borrowed capital: Subject to applicable conditions and restrictions.

Gratuity

Meaning: Gratuity is a lump-sum amount paid by an employer to an employee in recognition of the employee’s long-term service.

In simple words, gratuity is a benefit given to an employee for serving an organisation for a certain period.

Features of Gratuity

  1. It is a retirement or employment benefit.
  2. It is generally paid when an employee retires, resigns, or leaves employment after satisfying eligibility conditions.
  3. It is paid as a lump sum.
  4. It may be fully or partly exempt from income tax, depending on the applicable rules.