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The profit arising from the sale or transfer of any capital asset is known as capital gain. These capital gains form part of the individual’s income and are subject to taxation. Capital assets include vehicles, jewelry, and commercial and residential properties. However, the Income Tax Act allows certain deductions from the capital gains to calculate the real capital gain. These provisions were introduced with the objective of making Income Tax true and fair for individuals and charging tax only on the actual capital gain amount.
This blog covers all that you need to know about Section 48 of the Income Tax Act, which states various provisions for the taxability of capital gains.
Section 48 of the Income Tax Act helps individuals compute the real capital gain arising from the sale of capital assets. The real capital gain can be computed by adjusting the cost spent by the seller in acquiring the capital asset, the cost of making improvements in the asset, and sales consideration costs. This kind of expense is allowed under section 48 of the Income Tax Act. These costs can be deducted from the capital gain amount to arrive at the real capital gain.
The following types of expenditures are deductible from the capital gains under section 48 of the Income Tax Act -
There are different provisions under section 48 that govern the taxability and deductibility. Provision first of section 48 of the Income Tax Act. It is important to note that this section only applies to Non-resident Indians (NRIs). In other words, it is applicable when a non-resident Indian purchases a financial asset like stock in a foreign currency or an asset that gets converted into foreign currency.
As per section 48, the sale consideration received from the asset should be converted into the foreign currency in which the asset was originally bought, even if the assessee receives Indian currency at the time of transfer of capital asset.
This provision helps taxpayers navigate the exchange rate fluctuations in a smooth manner and also compute their capital gains at the same time. If you are an NRI taxpayer who wants help with taxation, you can reach out to our tax experts, who can help you maximize tax savings on NRI tax filing.
Here’s the procedure to calculate the benefits of the first proviso under Section 48 using Rule 115A -
The Second Provision to Section 48 of the Income Tax Act provides certain guidelines for dealing with the indexation benefits of long-term capital gains. Unlike the first provision, this is not applicable only to NRIs. Under this proviso, the taxable income can be calculated using the indexed cost of acquisition and the indexed cost of improvement.
As per the third proviso of section 48 of the Income Tax Act, the first and second proviso are not applicable if Rule 112A is taken into account.
Rule 112A states that any capital gain that arises from the transfer of a long-term capital asset, such as an equity share, unit of equity fund, or a business fund unit. Such capital gains should be taxed at 10% if the capital gains are more than Rs.1,00,000.
As per the fourth proviso, the second proviso will not apply even if the sale/transfer of debentures is in the cases where the government has issued capital-indexed bonds or sovereign gold bonds issued by the RBI.
This proviso applies to non-resident assessees. If the Indian rupee increases with respect to a foreign currency, and results in capital gains. Such capital gains can be ignored by the taxpayers while calculating the value of consideration.
The sixth proviso is applicable only if the transfer of shares and debentures mentioned in section 47(iii) takes place in the form of a gift. The market value of the said assets on the date of transfer can be taken as their full consideration value.
Deductions under section 48 of the ITA cannot be claimed while calculating the taxable capital gains income, in case STT (Securities transaction Tax) applies to any transaction.
Section 48 of the Income Tax Act allows taxpayers an opportunity to minimize their tax liability by accounting for various types of expenses based on certain provisions. But it is also notable that understanding these provisions and managing capital gain taxation comes with a lot of complexities.
If you are among those who find taxes complicated or need help computing your actual capital gain, tax2win’s tax experts are here to help. Our team of highly experienced chartered accountants navigates through 300+ provisions to find the most suitable tax-saving option for your needs.
