Income Tax Bill 2025 offers forex adjustments for non-residents on unlisted shares

February 21, 2025

A major shift under the Financial Bill 2025 allows non-residents to adjust acquisition costs based on currency fluctuations when computing capital gains tax on unlisted shares and stocks purchased in foreign currency

The Income Tax Bill 2025 introduces key amendments addressing foreign exchange fluctuations in capital gains taxation for non-resident investors, a move expected to reduce tax burdens and enhance market participation, tax experts said.

A major shift under the Financial Bill 2025 allows non-residents to adjust acquisition costs based on currency fluctuations when computing capital gains tax on unlisted shares and stocks purchased in foreign currency.

“The introduction of the ‘Variation in Liability’ provision under Section 42 enables non-residents to offset forex fluctuations, ensuring a more accurate tax assessment,” said Prithiviraj Senthil Nathan, partner at King Stubb & Kasiva.

Previously, non-resident investors were taxed on long-term capital gains from unlisted securities at 12.5 per cent without any forex adjustment benefits. This often led to inflated tax liabilities when
the rupee depreciated against foreign currencies.

Private equity (PE) investors and foreign portfolio investors (FPIs) stand to benefit from the changes, which align Indian tax regulations with global accounting standards.

“Under existing rules, forex fluctuation benefits were not extended to unlisted shares, unlike listed securities. This placed non-resident investors at a disadvantage,” said Mehul Bheda of Dhruva Advisors. “The removal of this limitation in the new Section 197 makes the tax framework more equitable.”

The adjustment, based on Indian Accounting Standard-21, allows investors to factor in currency variations at the time of acquisition, reducing the taxable capital gain when the rupee weakens.

“The revision ensures that non-residents, especially private equity investors with long holding periods, do not face unfair tax burdens due to currency depreciation,” said Rajarshi Dasgupta, executive director of tax at AQUILAW.

Over the past six months, the Indian rupee has experienced notable volatility. In September 2024, the rupee was trading at approximately 83.49 per US dollar. By February 2025, it almost touched 87. This decline has been attributed to factors such as sluggish domestic growth, equity outflows, and a strengthening US dollar.

The new bill also permits non-residents to refer to exchange rates in forward contracts with authorised dealer banks for tax calculations.

“This provides flexibility to hedge against forex volatility and minimises unexpected tax liabilities,” said Nathan.

[The Telegraph]