Profits resulting from the sale or transfer of capital assets are considered as income under capital gains. However, as per the provisions of Section 48 of the Income Tax Act, 1961, the gain should be the actual (real) gain.

To calculate the real gain, Section 48 mandates that certain expenses and costs must be deducted from the gains. These expenses can be associated with the acquisition, repair, and maintenance of the capital asset.

Features of Section 48

Section 48 of the Income Tax Act outlines how to calculate the real capital gain upon selling capital assets. You can arrive at the real capital gain after subtracting the specified amounts from the returns received after the sale of a capital asset.


Given below are the kinds of expenses that are allowed under Section 48 of the Income Tax Act: 

  • Expenditure incurred wholly and exclusively in connection with such transfer

  • Cost of acquisition of the asset and related costs for its improvement

It is important to remember that there are multiple provisions in Section 48. These provisions outline how and when an entity should compute the capital gains. In total, there are 7 provisos in the section.

First Proviso

This proviso to Section 48 of the Income Tax Act applies to non-resident Indians only. It applies when an NRI buys an asset like a share in a foreign company, which is then converted into foreign currency. 


Once the shares have been transferred, the non-resident taxpayer receives the gains in INR. According to the First Proviso to Section 48, this amount will be reconverted into the original foreign currency. 


This provisio helps NRIs neutralise the exchange rate fluctuation and navigate the currency conversion rates while accounting for long term capital gains. Taxpayers can arrive at their final consideration value by following provisions of Rule 115A.

Second Proviso

The Second Proviso offers indexation benefits to taxpayers who have realised long-term capital gains upon the sale or transfer of any long-term capital asset (LTCA). Unlike the First Proviso, the Second Proviso does not apply to non-resident Indians. 


Resident individuals can calculate their total income that is taxable under the heading capital gains by accounting for the indexed cost of the improvement and indexed acquisition cost. The cost incurred while making improvements and modifications to the asset can be claimed as a deduction.

Third Proviso

This Proviso states that the First and Second Proviso will not be applicable when Rule 112A is being taken into account.

Fourth Proviso

According to this, the Second Proviso will not apply to the long-term capital gains from debentures or bonds when they are:

  • Capital-indexed bonds issued by the government 

  • SGBs issued by the RBI

Fifth Proviso

This Proviso of Section 48 applies to eligible non-resident assessees. It is applicable when the capital gains earned from INR-denominated bonds are due to the appreciation of INR against the foreign currency during redemption. According to this proviso, taxpayers can safely ignore these capital gains while calculating their total consideration value.

Sixth Proviso

This proviso comes into effect when the transfer of debentures and shares specified in Section 47(iii) happens as a gift. As a taxpayer, you can consider these assets’ market value on the date of the transfer as their total consideration value.

Seventh Proviso

According to this, if Securities Transaction Tax (STT) applies to any transactions, you cannot claim deductions under Section 48 of the Income Tax Act.

Frequently Asked Questions

What is Section 48?

Individuals can calculate the actual capital gains received from the sale of capital assets, under Section 48 of the Income Tax Act, 1961.

Can non-resident Indians take advantage of the indexation benefits?

Yes, indexation benefits are available to resident and non-resident Indians, provided that it is long-term capital gains.

What is the indexation of capital gains?

Indexation is a method by which investors can account for inflation in their long-term capital gains. This helps them calculate the true profit.

What do you mean by cost of acquisition?

An acquisition cost is the total cost an organisation recognises on its books of account for equipment and property. This cost is computed after adjusting incentives, discounts, closing costs and similar expenses before including sales tax.

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