The Income Tax Bill 2025 introduces significant changes that address the impact of foreign exchange fluctuations on capital gains taxation for non-resident investors, a development anticipated to alleviate tax pressures and boost market involvement, according to tax specialists.
A pivotal change under the Financial Bill 2025 enables non-residents to modify their acquisition costs based on currency fluctuations when calculating capital gains tax on unlisted shares and stocks acquired in foreign currency.
“The new ‘Variation in Liability’ provision under Section 42 allows non-residents to account for forex variations, leading to a more precise tax evaluation,” stated Prithiviraj Senthil Nathan, a partner at King Stubb & Kasiva.
Historically, non-resident investors faced a 12.5 percent tax on long-term capital gains from unlisted securities without benefits from forex adjustments. This often resulted in overstated tax responsibilities when the rupee weakened against foreign currencies.
Private equity (PE) and foreign portfolio investors (FPIs) are expected to gain from these improvements, which bring Indian tax laws in line with international accounting principles.
“Under the previous regulations, the advantages of forex fluctuations were not available for unlisted shares, in contrast to their listed counterparts. This created an imbalance for non-resident investors,” noted Mehul Bheda from Dhruva Advisors. “The new Section 197 rectifies this issue, making the tax framework more balanced.”
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This adjustment, following Indian Accounting Standard-21, permits investors to incorporate currency shifts at the time of acquisition, thereby lowering the taxable capital gain when the rupee declines.
“The changes ensure that non-residents, particularly private equity investors with extended holding durations, do not encounter disproportionate tax burdens caused by currency depreciation,” remarked Rajarshi Dasgupta, the executive director of tax at AQUILAW.
In recent months, the Indian rupee has seen marked fluctuations. In September 2024, its value was around 83.49 per US dollar, climbing to nearly 87 by February 2025. This drop has been attributed to slow domestic growth, equity withdrawals, and a robust US dollar.
Additionally, the new bill allows non-residents to consider exchange rates in forward contracts with authorized dealer banks for tax computations.
“This offers the opportunity to mitigate forex volatility risks and reduce unforeseen tax responsibilities,” summarized Nathan.
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