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Section 48 of Income Tax Act: Compute Taxable Income Under Capital Gains
4 May 2022
Sale or transfer of capital assets and the resultant gains or profits from the same is allowable as income under the head of capital gains. Section 48 of the Income Tax Act is used to compute the taxable income under capital gains by making certain deductions.
Tax authorities compute the taxable income under this Section by deducting expenses incurred with regard to such sale or transfer and the cost of acquiring the capital asset from the full consideration value received or accrued. This Section helps taxpayers to compute the accurate taxable income under capital gains.
To know more about this Section, read on!
First Proviso of Section 48 of Income Tax Act along with Rule 115A
The first proviso of Section 48 of the Income Tax Act primarily deals with non-resident assessees. It comes into force when an assessee buys a financial asset, for example, a stock in a foreign currency that is converted into Indian currency.
Now, whenever the transfer of such shares takes place, individuals receive gains from such transfer in Indian currency. However, according to this proviso, the consideration should be reconverted back to the same foreign currency used initially to buy these financial securities.
This allows non-resident taxpayers to navigate the exchange rate fluctuations in the foreign exchange market while calculating their capital gains. Taxpayers can compute the final consideration value by following provisions of Rule 115A.
How to Calculate Benefits of First Proviso under Section 48 of IT Act?
One can compute the benefits of the first proviso under this Section by using Rule 115A:
The sale proceeds and corresponding expenses incurred in relation to the sale of such assets in Indian currency must be reconverted back into the foreign currency in which the initial investment was made. One can compute this conversion by averaging Telegraphic Transfer Buying Rate (TTSR) and Telegraphic Transfer Selling rate (TTBR) on the transfer date.
Individuals must convert the cost of acquiring the asset as well. They can use the average rate prevalent on the acquisition date.
In case the sale proceeds result in capital gains, then taxpayers can convert these gains into initial foreign currency by using Telegraphic Transfer Buying Rate on transfer dates.
Second Proviso of Section 48 of Income Tax Act
It deals with the indexation benefit of long term capital gains in case of sale or transfer of any long term capital asset (LTCA). This proviso is not applicable to non-resident Indians for long term gains arising from the sale or transfer of listed/unlisted LTC assets like shares or debentures of any Indian company.
In such a case, the individuals can compute income taxable under head capital gains by taking into account indexed acquisition cost and indexed cost of the improvement. Note that the cost of improvement incurred to modify the asset is allowable as a deduction.
The third proviso implies that the first and second proviso shall not be applicable whenever Rule 112A is under consideration.
Fourth Proviso of Section 48 of Income Tax Act
According to this, the second proviso will not be applicable if gains arise from sale or transfer of LTCA when such assets are bonds or debentures except:
Capital indexed bonds which the government issues
Sovereign Gold Bonds or SGB, which RBI issues under Sovereign Gold Scheme 2015
Fifth Proviso under Section 48 of IT Act
The proviso is applicable to any non-resident assessee. Whenever capital gains arise due to appreciation of Indian currency (or depreciation of foreign currency) against a foreign currency at the time of maturity of rupee denominated bonds, taxpayers ignore these capital gains while computing their full consideration value.
Sixth Proviso under Section 48 of Income Tax Act
When the transfer of shares and debentures mentioned in Section 47(iii) of IT Act happens as gift, this proviso comes into force. Taxpayers can consider the market value of these assets on the date of transfer as their full consideration value.
Seventh Proviso of Section 48 of Income Tax Act
One cannot claim deductions under Section 48 of Income Tax Act while computing taxable income under capital gains whenever STT is applicable on any transaction.
Section 48 of Income Tax Act allows taxpayers to calculate their taxable consideration under capital gains after incorporating certain deductions. However, assessees must make sure that the deductions adhere to provisions of this Section.
FAQs on Section 48 of Income Tax Act
Q1. What is Section 112 of IT Act?
Ans: According to this Section, assesses must pay tax at the rate of 10% before indexation and at the rate of 20% after indexation. This rate is applicable to long-term capital gains earned from capital assets mentioned in Section 2(29A) of the Income tax Act.
Q2. Can non-residents avail indexation benefits?
Ans: Non-residents, as well as residents, can claim indexation benefits. However, this benefit is available on long term capital gains only. No indexation benefit is allowed for short term capital gains.
Q3. What is the cost of improvement?
Ans: Any expenses of capital nature used by the assessee to make changes or improvements in their house or property will come under cost of improvement. It may also include renovation expenses for improvement of one’s property.
Q4. What is grandfathering of LTCG?
Ans: The Government of India, in Budget 2018, abolished the exemptions of long term capital gains taxation. However, as a one-time leeway, the government introduced grandfathering concept that allowed gains of up to January 31 2018 to not be taxable. Hence, only transactions after January 31 2018 will be subject to taxation.
Q5. What is indexation capital gains tax?
Ans: Indexation is a method by which one can prevent reduction of their returns. Taxpayers can use indexation to adjust the purchasing price of their investment as per prevailing inflation rates. It allows one to lower the tax liability as well.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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