Computation of Capital Gains under Proviso to S. 48
Statutory provisions
According to proviso to S. 48, in the case of an assessee, who is a nonresident, capital gains arising from the transfer of a 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 arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company.For the aforesaid purpose, rule 115A prescribes the rate of exchange.
For the purpose of computing capital gains arising from the transfer of a capital asset being shares in, or debentures in an Indian company shall be computed by applying the first proviso to section 48 of the Act
As per the first proviso to section 48, the capital gains arising from the transfer of shares or debentures in an Indian company shall be computed by converting
(i) the cost of acquisition of the asset
(ii) the expenditure incurred wholly and exclusively in connection with such transfer and
(iii) sale consideration received or accruing as a result of capital asset
into the same foreign currency as was initially utilised in the purchase of such shares or debentures. The capital gain so computed in the foreign currency shall be reconverted into Indian currency.
The method of conversion is stated as per rule 115A of the Income-tax Rules, 1962 which is as follows:
• 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 utilised for the purchase of shares/debentures) as on the date of acquisition of shares/debentures.
• The expenditure in connection with the transfer shall be converted at the average of TTBR and TTSR (of the foreign currency initially utilised for the purchase of shares/debentures) as on the date of transfer of shares/debentures.
• The sale consideration shall be converted at the average of TTBR and TTSR (of the foreign currency initially utilised for the purchase of shares/debentures) as on the date of transfer of shares/debentures.
• 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.
For the purpose of computation of tax on capital gain arises on transfer of capital assets being shares
• Short-term capital gain under section 111A :
Short-term capital gain arises on transfer of capital asset being equity shares in a company or a unit of an equity oriented fund on or after October 1, 2004 and such transaction is chargeable to securities transaction tax which is to be charged at the rate of 10 per cent for the assessment year 2008-09 and at 15 per cent for the assessment year 2009-10.
• Long-term capital gain on transfer of shares :
After introduction of section 10(38) by the Finance Act, 2004, any long term capital gain arising on transfer of capital assets being equity shares, units of equity oriented fund shall be exempt from tax.
Explanation
(a) Section 10(38) shall not apply in the following cases—
(i) Where listed equity shares are sold on or after October 1, 2004 other than through recognized stock exchange.
(ii) Where units of equity oriented fund are sold on or after October 1, 2004 other than through recognized stock exchange.
(iii) Where listed debentures/bonds are sold since exemption under section 10(38) is not available for listed debenture/bonds.
(iv) Where units of a mutual fund other than equity oriented fund are sold since exemption under section 10(38) is not available to units of a mutual fund other than equity oriented fund.
(b) Equity oriented fund means a fund—
(i) Where the invisible funds are invested by way of equity shares in domestic companies to the extent of more than 65 per cent of the proceeds of such fund; and
(ii) Which has been set up under a scheme of mutual fund specified under section 10(23D).
• Further incentives to attract foreign investments – As per section 47(viii), the transaction shall not be regarded as transfer if Bonds or Global Depository Receipts are, referred to in section 115AC, made outside India by a non-resident to another nonresident.
Reference:
As Per Rule 115A, of the Income Tax Act, 1961-
Rate of exchange for conversion of rupees into foreign currency and reconversion of foreign currency into rupees for the purpose of computation of capital gains under the proviso to clause (a) of sub-section (1) of section 48 of the Income-tax Act, 1961.
For the purpose of computing capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company, in the case of an assessee who is a non-resident Indian, the rate of exchange shall be :—
(a) for converting the cost of acquisition of the capital asset, the average of the telegraphic transfer buying rate and telegraphic transfer selling rate of the foreign currency initially utilised in the purchase of the said asset, as on the date of its acquisition;
(b) for converting expenditure incurred wholly and exclusively in connection with the transfer of the capital asset referred to in clause (a), the average of the telegraphic transfer buying rate and telegraphic transfer selling rate of the foreign currency initially utilised in the purchase of the said asset, as on the date of transfer of the capital asset;
(c) for converting the full value of consideration received or accruing as a result of the transfer of the capital asset referred to in clause (a), the average of the telegraphic transfer buying rate and telegraphic transfer selling rate of the foreign currency initially utilised in the purchase of the said asset, as on the date of transfer of the capital asset;
(d) for reconverting capital gains computed in the foreign currency initially utilised in the purchase of the capital asset into rupees, the telegraphic transfer buying rate of such currency, as on the date of transfer of the capital asset.
Explanation: For the purposes of this rule—
(i) “Telegraphic transfer buying rate” shall have the same meaning as in the Explanation to rule 26;
(ii) “telegraphic transfer selling rate”, in relation to a foreign currency, means the rate of exchange adopted by the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), for selling such currency where such currency is made available by that bank through telegraphic transfer.