Section 48 Of The Income Tax Act

Any profit made from either the transfer or the sale of any capital asset is known as capital gains. Capital assets include jewelry, vehicles, residential, and commercial properties. However, the capital gains are part of an individual's income and are subject to taxes, but the Income Tax Act permits a deduction on these capital gains to calculate the real capital gains.

The government of India introduced these provisions to ensure income tax is accurate and fair for everyone, imposing the tax only on the actual capital gain amount.

In this blog, we will discuss key aspects that taxpayers with capital gains must be aware of, including section 48 of the IT Act, which outlines various provisions for capital gains taxability.

What is Section 48 of the Income Tax Act?

Section 48 of the Income Tax Act serves as a regulatory framework that enables taxpayers to compute their real capital gain accurately. These gains are then categorized into either short-term gains or long-term gains, depending on the duration for which the asset was held.

Section 48 allows certain deductions on these capital gains, such as the cost of improvement, the cost of acquisition, and expenses related to the sale. These costs can be deducted from the entire sum to determine the taxable capital gain.

This also ensures the entire process is fair. By adhering to these provisions, taxpayers can calculate their taxes accurately and comply with their tax duties.

Deduction Under Section 48 Of the IT Act

Under the Income Tax Act, there are specific expenses that should be deducted from the capital gains for tax purposes.

Cost of Improvement/Acquisition: Any improvements made in our case, the cost of the services is adjudged for inflation by utilizing the CII, which is the cost inflation index by the CBDT.

Sale Expenses: Costs such as a brokerage fee or any other cost that has been incurred during the process of asset selling are deductible from the sale price.

Transfer Expenses: Any charges or costs related to the transfer asset, such as registration fees and stamp duty value, can also be deducted from the sale price.

The Formula for Computing the Net Capital Gain as Per Section 48 of the Income Tax Act is:

Net Capital Gain: Sale Price - Cost of Acquisition - Sale Expenses - Transfer Expenses

Let us Understand it with an Example:

Mr. Aman bought a house for INR 20,00,000, and later it was sold for INR 45,00,000. He then incurred INR 10,000 as brokerage fees and INR 5,000 as legal fees. His overall capital gain that will be taxable is:

INR 45,00,000 - INR 20,00,000 - INR 10,000 - INR 5,000

Net Capital Gain Amount = INR 10,00,000.

Proviso Under Section 48 of the Income Tax Act

Section 48 of the Income Tax Act has various provisions under it that administer the deductibility and taxation of capital gains. The first provision of section 48 of the Income Tax Act applies to Non-Resident Indian (NRIs). It is applicable when an NRI purchases a financial asset in a foreign currency or an asset that is converted into a foreign currency.

According to section 48, any sale consideration received from the asset should be first converted into the currency in which the asset was bought, even if the assessee receives INR while transferring the capital asset.

This specific provision aids the concerned taxpayers in tracking the exchange rate fluctuations seamlessly while simultaneously calculating their capital gains.

First Proviso

The following process outlines how to compute the benefits of First provisa to Section 48 using Rule 115A.

• The sale proceeds in Indian rupees generated from the transfer of assets have to be converted to the foreign currency in which it was initially sold. Now, the conversion rate can be computed by finding two alternatives, which are the average of TTBR (Telegraphic transfer buying rate) and TTSR (Telegraphic transfer selling rate).
• After identifying the average rate of the acquisition date, convert it into the relevant foreign currency. The acquisition cost of the asset must be converted to come at the required amount.
• If any sale proceeds result in capital gains, then such gains should be converted into the original foreign currency by using the TTBR (Telegraphic transfer buying rate) prevailing on the transfer date.

Second Proviso

Section 48 Second Provision of the Income Tax Act (ITA) states specific guidelines to deal with the indexation benefits on long-term capital gains. This provision does not apply only to NRIs. Under this provision, the taxable income will be calculated using the indexed cost of improvement and the indexed cost of acquisition.

You can Calculate Indexation cost with our Capital Gain Indexation Calculator for easy, fast and accurate cost. 

Third Proviso

According to section 48, the third provision of the Income Tax Act, the first and second provisions are not applicable if Section 112A is taken into account.

This rule states that any gain earned from the transfer of a long-term capital asset, such as a unit of an equity fund, an equity share, or a business fund unit, is subject to this rule. Such gains are subject to being taxed at 10% if the capital gains exceed the threshold of Rs. 1,00,000.

Fourth Proviso

The fourth provision of Section 48 of the Income Tax Act (ITA) states that the second provision does not apply if the long-term capital gains are generated as a result of the sale of debentures and bonds that are:

• Capital indexed bonds issued by the Government of India.
• Sovereign gold bonds (SGB) are issued by the Reserve Bank of Indian (RBI).

Fifth Proviso

The fifth provision of Section 48 of the Income Tax Act applies to a non-resident assessee. It states that if the Indian currency increases or appreciates relative to the foreign currency. As a result, a taxpayer makes a capital gain in INR-denominated bonds, the provision allows one to ignore these gains while computing the consideration value.

Sixth Proviso

This provision for section 48 of the Income Tax Act (ITA) is only applicable if the transfer of debenture and shared method in section 47(iii) happens in the form of a gift. The market value of such assets at the transfer date can be taken as their full value of consideration.

Seventh Provision

The last provision of Section 48 states that the deductions under Section 48 cannot be claimed if the Securities Transaction Tax (STT) applies to any of the transactions.

Need Help With Capital Gains Taxation? Consult an NRI Expert

Section 48 of the Income Tax Act (ITA) states that fidderent or ordinary income is referred to as he component of taxable income from the capital gains. However, certain sections govern capital gains, and there are many nitty-gritty details to consider to avoid unnecessary tax obligations. This is why you need a tax expert specialized in the NRI taxation domain, as NRIs require tailored tax planning to avoid unnecessary tax obligations under Indian income tax laws.

Savetaxs has been helping NRIs for decades now with NRI tax consultancy and services, and the satisfied client base speaks for itself. Connect with us and get your capital gains sorted.