Income tax
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
16 May 2014
1.is first proviso to section 48 applicable to unlisted shares and debentures??
2.is second proviso to section to section 48 applicable to unlisted shares?
2.is second proviso to section to section 48 applicable to unlisted shares?
16 May 2014
yes and yes...........
Querist : Anonymous
Querist :
Anonymous
(Querist)
17 May 2014
Many thanks sir......but plzz reply-When a non resident purchases unlisted shares or debentures in indian currency first proviso to section 48 is applicable........but while calculating tax on ltcg flat rate of 20% is applicable without giving effect to both first proviso and second proviso to section 48-is my understanding correct??
31 July 2024
### Understanding Section 48 and Its Provisos
Section 48 of the Income Tax Act, 1961, deals with the mode of computation of capital gains. Here, we focus on the applicability of the first and second provisos to this section in relation to unlisted shares and debentures.
#### First Proviso to Section 48
The first proviso to Section 48 provides relief in the case of capital gains arising from the transfer of shares or debentures of an Indian company acquired in foreign currency by a non-resident. It allows the capital gains to be computed in the same foreign currency which was used for the purchase of the shares or debentures. This conversion helps to mitigate the impact of foreign exchange fluctuations on the capital gains.
#### Second Proviso to Section 48
The second proviso to Section 48 deals with the benefit of indexation, which is available to certain long-term capital assets, allowing the adjustment of the purchase price based on the Cost Inflation Index (CII) to account for inflation over the period of holding the asset.
### Applicability to Unlisted Shares and Debentures
1. **First Proviso Applicability:**
- The first proviso applies to unlisted shares and debentures of an Indian company acquired in foreign currency by a non-resident. The capital gains are computed by converting the cost of acquisition, the sale consideration, and the expenses incurred in connection with the transfer into the same foreign currency, which is then converted into Indian currency for tax purposes.
2. **Second Proviso Applicability:**
- The second proviso, which allows for indexation benefits, applies to long-term capital assets. However, for non-residents, the benefit of indexation is not available for the transfer of shares or debentures of an Indian company. This includes both listed and unlisted shares and debentures.
### Tax Implications for Non-Residents
When a non-resident purchases unlisted shares or debentures in Indian currency:
- The first proviso to Section 48 is **not applicable** because the purchase was made in Indian currency, not foreign currency.
- The second proviso (indexation benefit) is **not applicable** for unlisted shares or debentures held by non-residents.
### Tax Calculation on Long-Term Capital Gains (LTCG)
- For non-residents, LTCG from the transfer of unlisted shares or debentures is taxed at a flat rate of 10% without the benefit of indexation (as per Section 112(1)(c)(iii)).
- If the LTCG is computed under the special provisions (like first proviso to Section 48 for foreign currency transactions), the flat rate of 10% applies, but since this scenario involves Indian currency, this proviso does not apply.
### Summary of Your Understanding
Your understanding is almost correct, but with the following clarifications:
- **First Proviso**: Not applicable if the purchase was in Indian currency.
- **Second Proviso**: Not applicable to non-residents for unlisted shares or debentures.
- **LTCG Tax Rate**: For unlisted shares or debentures held by a non-resident, the LTCG is taxed at a flat rate of 10% (without indexation benefits) as per Section 112(1)(c)(iii).
### Conclusion
In the context of your scenario, the correct tax treatment would be:
1. No applicability of the first proviso to Section 48 as the purchase was in Indian currency.
2. No applicability of the second proviso to Section 48 for indexation benefits.
3. LTCG would be calculated at a flat rate of 10% for non-residents without considering the first and second provisos to Section 48.
This ensures that the LTCG is correctly calculated and taxed according to the provisions of the Income Tax Act.
Section 48 of the Income Tax Act, 1961, deals with the mode of computation of capital gains. Here, we focus on the applicability of the first and second provisos to this section in relation to unlisted shares and debentures.
#### First Proviso to Section 48
The first proviso to Section 48 provides relief in the case of capital gains arising from the transfer of shares or debentures of an Indian company acquired in foreign currency by a non-resident. It allows the capital gains to be computed in the same foreign currency which was used for the purchase of the shares or debentures. This conversion helps to mitigate the impact of foreign exchange fluctuations on the capital gains.
#### Second Proviso to Section 48
The second proviso to Section 48 deals with the benefit of indexation, which is available to certain long-term capital assets, allowing the adjustment of the purchase price based on the Cost Inflation Index (CII) to account for inflation over the period of holding the asset.
### Applicability to Unlisted Shares and Debentures
1. **First Proviso Applicability:**
- The first proviso applies to unlisted shares and debentures of an Indian company acquired in foreign currency by a non-resident. The capital gains are computed by converting the cost of acquisition, the sale consideration, and the expenses incurred in connection with the transfer into the same foreign currency, which is then converted into Indian currency for tax purposes.
2. **Second Proviso Applicability:**
- The second proviso, which allows for indexation benefits, applies to long-term capital assets. However, for non-residents, the benefit of indexation is not available for the transfer of shares or debentures of an Indian company. This includes both listed and unlisted shares and debentures.
### Tax Implications for Non-Residents
When a non-resident purchases unlisted shares or debentures in Indian currency:
- The first proviso to Section 48 is **not applicable** because the purchase was made in Indian currency, not foreign currency.
- The second proviso (indexation benefit) is **not applicable** for unlisted shares or debentures held by non-residents.
### Tax Calculation on Long-Term Capital Gains (LTCG)
- For non-residents, LTCG from the transfer of unlisted shares or debentures is taxed at a flat rate of 10% without the benefit of indexation (as per Section 112(1)(c)(iii)).
- If the LTCG is computed under the special provisions (like first proviso to Section 48 for foreign currency transactions), the flat rate of 10% applies, but since this scenario involves Indian currency, this proviso does not apply.
### Summary of Your Understanding
Your understanding is almost correct, but with the following clarifications:
- **First Proviso**: Not applicable if the purchase was in Indian currency.
- **Second Proviso**: Not applicable to non-residents for unlisted shares or debentures.
- **LTCG Tax Rate**: For unlisted shares or debentures held by a non-resident, the LTCG is taxed at a flat rate of 10% (without indexation benefits) as per Section 112(1)(c)(iii).
### Conclusion
In the context of your scenario, the correct tax treatment would be:
1. No applicability of the first proviso to Section 48 as the purchase was in Indian currency.
2. No applicability of the second proviso to Section 48 for indexation benefits.
3. LTCG would be calculated at a flat rate of 10% for non-residents without considering the first and second provisos to Section 48.
This ensures that the LTCG is correctly calculated and taxed according to the provisions of the Income Tax Act.
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