Section 48 of the Income Tax Act lays down provision for calculating Capital Gains for Non Resident Indians. Section 48 also specifies the manner of computation of the Capital Gain for NRI. Section 48 of the IT Act can also be viewed as a provision of benefit for the NRIs. You must note that the provision of Section 48 apply only when the Capital Asset is a Share or Debenture. The benefit of Section 48 cannot be availed if the Shares were bought in a foreign company. In this Post, we will cover the Scope of Section 48 of the Income Tax Act, Method of Computation and any relevant case laws issued under section 48.
Scope of Section 48 Income Tax Act
Section 48 of the Act provides that the income chargeable under the head ‘capital gains’ shall be computed by deducting from the full value of consideration received or accruing as a result of the transfer of the capital asset the f amount of expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the capital asset and the cost of any improvement thereto.
First proviso to section 48 is applicable only in the case of non-resident. Under this provision, capital gain is calculated in foreign currency in some cases.
Conditions for Section 48 Income Tax Act
To Avail to benefit of this provision, the following conditions should be satisfied –
Condition 1 : The taxpayer is non-resident (maybe an Indian or foreign citizen, or a corporate-assessee or a non-corporate assessee but not being an assessee covered by section 115AC and 115AD).
Condition 2 : He acquires shares in (or debentures of) and Indian company (may be public limited or private limited) by utilising foreign currency.
Condition 3 : The asset may be short-term or long-term
Rule of computation – Section 48 Income Tax Act
If the aforesaid conditions are satisfied, then the following procedure shall be adopted to determine capital gain (it maybe noted that the procedure given below is applicable without any exception whenever the above conditions are satisfied)-
Initial Currency – Section 48 Income Tax Act
Capital gain shall be computed in the same foreign currency which was initially utilised in acquiring shares or debentures.
Capital gain so calculated in the foreign currency shall be recovered into Indian currency.
The benefit of indexation shall not be available.
Further Conditions – Section 48 Income Tax Act
The aforesaid manner of computation of capital gain shall be applicable in respect of capital gain accruing or arising from every re-investment thereafter in (and sale of) shares in (or debentures of) an Indian Company
The aforesaid mode of computation is applicable only when the above-mentioned conditions are satisfied. In no other case, the above procedure is applicable.
Recent RBI News – Section 48 Income Tax Act
The Reserve Bank of India has recently permitted Indian corporates to issue rupee denominated bonds outside India as a measure to enable the Indian corporates to raise funds from outside India.
Accordingly, with a view to provide relief to non-resident investor who bears the risk of currency fluctuation, it is provided by amending section 48 of the Act that the capital gains, arising in case of appreciation of rupee between the date of issue and the date of redemption against the foreign currency in which the investment is made shall be exempt from tax on capital gains.
History of Section 48 Income Tax Act
The first proviso to Section 48 was amended by the Finance Act, 1992 with effect from the assessment year 1993-94. With the amendment all non-residents (instead of NRIs) are entitled to the protection from fluctuation of rupee value against foreign currency in respect of capital gains on shares in or debentures of Indian Companies.
Thus, for all non-residents, capital gains arising from the transfer of capital asset being shares in or debentures of an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or