Section 48: Capital Gains in case of Non-Residents

Capital Gains in case of Non-Residents can be Computed under two proviso of Section 48

Section 48 Computation of Capital Gains of Non-ResidentsFirst Proviso to Section 48

In case of an assessee who is a non-resident, the capital gains arising from the transfer of shares or debentures in an Indian Company, shall be computed by converting:

  • the cost of acquisition of asset
  • the expenditure incurred wholly and exclusively in connection with such transfer and
  • sale consideration received or accruing as a result of transfer of Capital Asset

into the same foreign currency as was initially utilized in the purchase of such shares or debentures. The capital gains so computed in the foreign currency shall be reconverted into Indian Currency.

The above said manner of computation of capital gains shall apply to capital gains arising from every reinvestment thereafter in and the sale of, shares or debentures in India Company.

Analysis of First Provision of Section 48:

1. Non-Residents include a foreign currency.

2. For the applicability of the first proviso, the shares or debentures should be purchased in the foreign currency or it should be a case of reinvestment.

3. Debentures include bonds.

4. The shares, debentures and bonds of a Government company are also covered by the first proviso. However, the bonds of Central Government, State Government and RBI are not covered.

5. The First Proviso shall not apply to units of UTI and Mutual Funds.

6. The First Proviso shall apply to listed as well as non-listed shares and debentures.

7. Assessee should be a non-resident in the previous year in which shares or debentures were sold.

8. The First Proviso to Section 48 is mandatory. A non-resident cannot opt for the second proviso to section 48 if his case falls in the first proviso of section 48.

9. Second proviso to section 48 will not apply, i.e. no indexation where First Proviso applies.

10. This proviso is applicable for computing short term capital gains as well as long term capital gains.

Rule 115A: Method of Conversion

a) The cost of acquisition shall be converted at the average of the telegraphic transfer buying rate (TTBR) and the telegraphic transfer selling rate (TTSR) (of the foreign currency initially utilized for the purchase of share/debentures) as on the date of acquisition of shares/debentures.

b) The expenditure in connection with the transfer shall be converted at the average of TTBR and TTSR (of the foreign currency initially utilized for the purchase of share/debentures) as on the date of transfer of shares/debentures.

c) The sale consideration shall be converted at the average of TTBR and TTSR (of the foreign currency initially utilized for the purchase of share/debentures) as on the date of transfer of shares/debentures.

d) The Capital Gains computed in the foreign currency shall be converted into Indian Currency by applying TTBR as on the date of transfer of shares/debentures.

Second Proviso to Section 48

1) The proviso is not applicable where the first proviso applies.

2) Where the capital gains arises from the transfer of the long term capital asset, then for the purposes of computing capital gains:

a) “Indexed Cost of Acquisition” shall be taken instead of “Cost of Acquisition” and

b) “Indexed Cost of Improvements” shall be taken instead of “Cost of Improvements”.

Points to be noted:

1) Indexed Cost of Acquisition means

Cost of Acquisition X (Cost Inflation Index for the year in which asset is transferred/Cost Inflation Index for the first year in which asset was held by the assessee or for the year beginning on 1-4-81, whichever is later)

2. Indexed Cost of Improvement means

Cost of Improvement X (Cost Inflation Index for the year in which asset is transferred/Cost Inflation Index for the first year in which Improvement to the asset took place)

Rates of Taxes on Capital Gains

Short Term Capital Gains

Taxes on STCG is divided into two parts

  1. Section 111A: STCG in Certain Cases
  2. Other than Section 111A

1. Section 111A:  Tax @ 15% if following conditions are fulfilled:

  • STCG arising from the transfer of a short-term asset, being an equity share in a company or a unit of an equity oriented fund.
  • The transaction of sale of such equity share of unit is entered into on or after 1-10-2004 and
  • Such transaction is chargeable to securities transaction tax

2. STCG other than referred in section 111A shall be taxable at the normal rate applicable to assessee.

Section 112: Long Term Capital Gains

Capital Asset Benefit of First Proviso to Section 48 and Second Proviso to Section 48 Taxability
Listed Equity Shares sold on stock exchange (whether purchased in Indian Currency or Foreign Currency) Not Available Exempt under section 10(38)
Listed Equity Shares sold off market (Purchased in foreign currency or a case of reinvestment) First Proviso to section 48 available Flat Rate of 10%

Slab of Rs. 2 lacs is not available.

Listed Equity Shares Sold off market (Purchased in Indian Currency) Second Proviso to Section 48 is available -10% without Indexation

-20% with Indexation

whichever is lower.

Slab of Rs. 2 lacs is not available

Unlisted Equity Shares (whether purchased in Indian Currency or Foreign Currency) First Proviso to section 48 and Second Proviso to section 48 is not available.

(However, if after applying the First Proviso or Second Proviso to Section 48, as the case may be, there is a loss under the head Capital Gains, then tax shall not be levied.)

Flat Rate of 10%.

Slab of Rs. 2 lacs is not available.

Unlisted Equity Shares sold through public offer and such sale forms part of public offer and STT paid by seller and shares subsequently listed (Whether purchased in Indian Currency or Foreign Currency) Not Available Exempt under section 10(38)
Unit of Equity Oriented Mutual Funds and on sale STT paid Not Available Exempt under section 10(38)
Units of Equity Oriented Mutual Funds and on sale no STT Paid First Proviso is not applicable to units and second proviso available -10% without Indexation

-20% with Indexation

whichever is lower.

Slab of Rs. 2 lacs is not available

Units of other Mutual Funds First Proviso is not applicable to units and second proviso available. -10% without Indexation

-20% with Indexation

whichever is lower.

Slab of Rs. 2 lacs is not available

Listed Bonds and Debentures (Purchased in foreign currency or a case of reinvestment) First Proviso to Section 48 is applicable. Flat Rate of 10% .

Slab of Rs 2 lacs is not available.

Listed Bonds and Debentures (Purchased in Indian Currency) First Proviso and Second Proviso is not available. Flat Rate of 10% .

Slab of Rs 2 lacs is not available.

Listed Bonds and Debentures (Purchased in Indian Currency) First Proviso and Second Proviso not available. Flat Rate of 10% .

Slab of Rs 2 lacs is not available.

Unlisted Bonds and Debentures (Purchased in Foreign Currency or in Indian Currency) First Proviso to section 48 and second proviso to section 48 not available. Flat Rate of 10% .

Slab of Rs 2 lacs is not available.

Other Assets (Whether purchased in Indian Currency or in Foreign Currency) Indexation is Available. 20% Flat Rate

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