Forex Adjustment

The proposed New Income Tax Bill, 2025 is a part of a significant initiative that makes Indian investments much more attractive for non-resident Indians (NRIs). The proposed New Income Tax Bill, 2025 provides substantive tax reliefs on long-term capital gains (LTCG) derived from unlisted equity shares and debentures of Indian companies. The most important provision—Section 72(6)—allows NRIs (excluding Foreign Institutional Investors to take into consideration foreign currency exchange rate variations in computing their capital gains which could reduce tax liability by as much as 72% in certain situations. Let's Use Actual Gains as the Measure, Not Notional Gains Under the existing provisions of the Income Tax Act, 1961, NRIs are taxed on capital gains denominated in Indian Rupees (INR) irrespective of the currency invested. Given that the INR has depreciated against all major foreign currencies, like the US dollar, over time, NRIs experienced notional gains—and thus higher taxation—in the event that real returns were minimal or nil in foreign currency. New Income Tax Bill, 2025 intends to remove any misunderstanding by ensuring that NRIs are taxed only on actual economic gains, rather than all gains resulting from inflation from foreign currency. The Forex Fluctuation Benefit Explained The new Section 72(6) allows non-resident Indians (NRIs) to compute capital gain in the base currency (e.g., USD) based on when they initially purchased the shares and to convert the net capital gain back to Indian rupee (INR) at the exchange rate at which the capital gain was realized. This effectively removes artificial inflation of a capital gain due to depreciation of the INR currency during the holding period. “NRIs are no longer disadvantaged because of a weak Indian rupee under the proposed Section 72(6). By providing the opportunity to compute the capital gain based on the original investment currency, the amended law ties taxation back to actual economic value," said CA (Dr.) Suresh Surana, a tax expert. Illustration: With vs Without Forex Adjustment To understand the practical implication, consider the following case: ParticularsExisting Regime (INR-Based)Proposed Regime (USD-Based)Investment AmountUSD 750,000USD 750,000Exchange Rate at PurchaseRs. 75/USDRs. 75/USDCost in INRRs. 5.625 croreUSD 750,000Sale ProceedsUSD 1.2 millionUSD 1.2 millionExchange Rate at SaleRs. 85/USDRs. 85/USDSale Value in INRRs. 10.20 croreRs. 10.20 croreCapital GainRs. 4.575 croreRs. 3.825 croreLTCG Tax (12.5%)Rs. 57.19 lakhRs. 47.81 lakhTax Saving—Rs. 9.38 lakh In the existing regime, the entire gain in INR (Rs. 4.575 crore) is taxed — even though part of that gain simply reflects the rupee’s depreciation from Rs. 75 to Rs. 85 per USD. The proposed method taxes only the real gain in USD, converted at the exit rate, ensuring a fairer tax assessment. Scope and Limitations The benefit under Section 72(6) will be restricted to unlisted equity shares and debentures of Indian companies. Listed equity shares traded on Indian stock exchanges are explicitly excluded, as clarified in the draft clause: "In the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company (other than equity shares referred to in section 198) 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… into the same foreign currency as was initially utilised in the purchase…” This means that the forex adjustment mechanism applies only to private equity and startup investments, which are typically made in unlisted Indian companies. A Step Toward Global Best Practices: This reform is a step closer to global best practices of taxation. Prompting the taxation of real gains (accounting for inflation or forex movements) would be more in line with tax principles around the world. For NRI’s specifically looking to make Indian startups, joint ventures and private capital investments, this shift greatly improves their after-tax returns, and assures their investment decisions. Impact and Response from the Industry: Experts and others see the amendment making far-reaching impacts: More NRI investment: Private equity funds and venture capital investment capital from NRIs may rise dramatically. Flexibility on exit: Investors will be able to think about exits based on market events and the situation, and not currency rates. Lower dispute counts over disputes: By aligning capital gains with the actual foreign currency returns rather than their inflation adjusted value, there would be less litigation and other disputes to determine the correct tax. Conclusion: Fairer Taxation arrangement for a Global Diaspora: If the latest New Income Tax Bill, 2025, were to be enacted, it could change the way NRIs think about their investment in unlisted Indian companies. By furnishing the forex (and local inflation) benefit through section 72(6), the government would recognize that capital is global, and rectify a historical tax anomaly that discriminated against foreign investors. Read More: Private Universities Not Liable To Pay Tax On Supply Of Food Stuff To Students: Himachal Pradesh High Court

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