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First Proviso to Section 48 | Finserv MARKETS

What is the First Proviso to Section 48 of the Income Tax Act?

29 Oct 2021
86 Views

 Section 48 of Income Tax Act, 1961 talks about the way in which the chargeable income computation under Capital Gains is done. Expenditure and cost of acquisition are taken into consideration in Section 48. Let’s look at what Section 48 of the Income Tax Act is and its first proviso.

What is Section 48 of the Income Tax Act?

As mentioned above, Section 48 of the Income Tax Act is about the manner of computation of income that is chargeable under Capital Gains. As per the section, the chargeable income under the head ‘Capital gains’ shall be computed by deducting from the entire value of the consideration that is received or accruing as a result of the transfer of the capital asset of the following amounts:

 

  • Expenditure incurred wholly and exclusively in connection with such transfer

  • The cost of acquisition of the asset and the cost of any improvement

Applicability of the First Proviso to Section 48

The first proviso to Section 48 of the Income Tax Act is valid only for the limited purpose of non-residents. Section 48 of the Income Tax Act becomes applicable when a non-resident buys an asset like a share or debenture with foreign currency, converted into the Indian rupee. The proviso stipulates that on the transfer of the said share or debenture, the consideration received in Indian currency should be reconverted into the same foreign currency. Thus, the first proviso to Section 48 of Income Tax Act enables a non-resident to neutralise the exchange rate fluctuation while computing long term capital gains. The way of computation of sales consideration, cost of acquisition and improvements should be dealt with as per Rule 115A.

How are the Benefits of 1st Proviso to Section 48 Calculated?

The benefits of the first proviso to Section 48 of the Income Tax Act are calculated by using Rule 115A as follows:

 

  • The consideration of sales and expenses in connection with the transfer in the Indian rupee should be converted into the currencies that were first used at the time of starting the investment. This should be done by taking the average of TTBR and TTSR rates on the date of transfer.

  • Similarly, the cost of acquisition should also be converted using the average rate on the day of acquisition

  • If there are any resultant capital gains, they should be converted using the TTBR rate on the date of transfer

FAQs

  • ✔️What is the first proviso to Section 48 of income tax?

     Section 48 states that on the transfer of an asset like a share or debenture bought with foreign currency, the consideration received in the Indian rupee should be reconverted into the same foreign currency. The first proviso to Section 48 of Income Tax Act helps a non-resident to neutralise the exchange rate fluctuation while computing long term capital gains.

  • ✔️Is indexation benefit available to non-residents?

     Yes, the indexation benefit is available to both residents and non-residents. However, the benefit is restricted to only the long term capital gains and not the short term capital gains.

  • ✔️What is Section 112 of Income Tax Act?

     Section 112 of Income Tax Act states that an assessee is required to pay tax at 20% or 10% after and before indexation respectively on the gained capital on long term capital assets that are defined under Section 2 (29A) of the IT Act, 1961.

  • ✔️Is the first proviso to Section 48 applicable on units of mutual funds?

     No, the first proviso of Section 48 is applicable only on the shares and debentures of the Indian companies and not the units of mutual funds and business trusts.

  • ✔️Is the first proviso to Section 48 mandatory?

     Yes, it is mandatory for all non-residents provided the individual is eligible for the first proviso to Section 48.