Section 48 Of Income Tax Act

Capital gains earned from the sale or transfer of capital assets are subject to taxation. This is because it falls under the category of one’s income. Examples of capital assets include residential and commercial properties, vehicles, jewellery and mutual funds. Capital gains are the net profit that a person earns after selling off a capital asset. 

This blog will focus on Section 48 of the Income Tax Act (ITA), which provides the guidelines for computing taxable income which falls under the head of capital gains after considering certain deductions. 

What Is Section 48 Of Income Tax Act? 

Section 48 of the Income Tax Act (ITA) states that the income chargeable as “capital gains” must be calculated after deducting specified amounts from the returns one has received after selling off a capital asset. 

Deduction Under Section 48 Of Income Tax Act 

The following amounts that a person has received or accrued as a result of the sale or transfer of capital assets are considered for deduction: 

• Expenditure that has been incurred wholly & exclusively in connection with the transfer of capital assets.
• Cost of acquiring capital asset and expenses related to improving it thereafter

Proviso Under Section 48 

You need to keep in mind an important factor. The first provision of Section 48 of ITA only applies to Non-Resident Indians (NRIs).

This provision applies when a non-resident taxpayer earns capital gains from the transfer of shares or debentures of an Indian company. In such cases, the capital gains are calculated by converting the cost of acquisition, expenses incurred exclusively for the transfer, and the full value of the consideration received into the same foreign currency that was originally used to purchase the shares or debentures. The capital gains, once computed in that foreign currency, are then reconverted into Indian currency.

This method of computation will also apply to capital gains arising from any subsequent reinvestments and sales of shares or debentures of an Indian company.

It helps NRI taxpayers go through the exchange rate fluctuations in the foreign exchange market hassle-free while computing their capital gains. People can consider the provisions of Rule 115A and compute their final consideration value. 

First Proviso Under Section 48 

It's time to discuss how you can calculate the benefits mentioned in the first proviso under Section 48 of ITA using Rule 115A: 

• Proceedings of sale and other expenses related to the transaction of capital assets in Indian rupees have to be converted back to the foreign currency in which the original sale was initially made. You can calculate the conversion by averaging the Telegraphic Transfer Buying Rate (TTBR) and Telegraphic Transfer Selling Rate (TTSR). 
• You need to convert the acquiring cost of the asset. To do so, use the average rate, which is prevalent on the date of acquisition. 
• If proceeds of the sale give way to capital gains, then you must convert these capital gains to its original foreign currency by making use of the Telegraphic Transfer Buying Rate on transfer dates. 

Second Proviso Under Section 48 

The second proviso to Section 48 provides guidelines for dealing with indexation benefits of long-term capital gains with the sale or transfer of long-term capital assets. It's not applicable for NRIs who have earned long-term capital gains from the sale or transfer of long-term capital assets like the debentures and shares of an Indian company. 

If such is the situation, then you can calculate the income that is taxable under capital gains by considering the indexed acquisition cost and indexed improvement cost. You can consider the latter as a deduction. 

Third Proviso Under Section 48 

According to the third proviso of Section 48 of ITA, the first and second proviso will not apply whenever Section 112A is considered  i.e. the first and second proviso will not apply to the long-term capital gain arising from transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust referred to in section 112A.. 

Fourth Proviso Under Section 48 

The fourth proviso states that the second proviso will not be applicable even if long-term capital gains arising from the sale/transfer of a long-term capital asset, being a debentures and bonds other than the below: 

• capital indexed bonds issued by the Government; or
• sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme

Fifth Proviso Under Section 48 

The fifth proviso will apply to non-resident assessees. Suppose the Indian Rupee appreciates and rises with respect to a foreign currency, and as a result, you earn capital gains with respect to rupee-denominated bonds. As a taxpayer, you can ignore all of these capital gains when you calculate the value of consideration. 

Sixth Proviso To Section 48 

This proviso under Section 48 will be applicable if the transfer of debentures or warrants and shares mentioned in Section 47(iii) of ITA takes place as a ‘gift’ or an irrevocable trust. In such cases you can consider the market value of these assets on the date of transfer as their full consideration value. 

Seventh Proviso To Section 48 

You cannot claim deductions under Section 48 of the ITA when calculating income taxable as capital gains when STT (Securities Transaction Tax) is applicable to any transaction. 

Final Word 

To sum up, Section 48 of the Income Tax Act (ITA) provides certain provisions for calculating taxable income, which falls under the category of long-term capital gains. It also puts forward certain provisions for claiming deductions.