Non-residents investing in Indian securities face specific rules for computing capital gains under the Direct Tax Code (DTC) 2025. The foreign exchange rate rules under Section 72(6) and Rule 52 provide a mechanism for converting foreign currency into Indian rupees for capital gains computation. This guide analyses the foreign exchange rate rules for non-resident capital gains and their relevance to export structuring.
The Foreign Exchange Rate Framework
Section 72(6) — Computation of Capital Gains for Non-Residents
Section 72(6) provides that 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 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
- The capital gains so computed in such foreign currency shall be reconverted into Indian currency
Section 72(7) — Rupee Appreciation
In the case of an assessee who is a non-resident, any gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company held by the assessee, shall be ignored for computing the full value of consideration under this section.
Section 72(8)(d) — Rate of Exchange
The conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at such rate of exchange as may be prescribed in this behalf.
Foreign Exchange Rate Rules Under Rule 52
Rule 52(1) — Rate of Exchange
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, the rate of exchange shall be, in the circumstances referred to in column B of the following table, as per column C thereof:
| Sl. No. | Circumstances | Rate of Exchange |
|---|---|---|
| 1 | 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 |
| 2 | For converting the expenditure incurred wholly and exclusively in connection with the transfer of the capital asset referred to in Sl. No. 1 | 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 |
| 3 | For converting the full value of consideration received or accruing as a result of the transfer of the capital asset referred to in Sl. No. 1 | 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 |
| 4 | For converting the 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 |
Rule 52(2) — Definitions
- "Telegraphic transfer buying rate" shall have the meaning assigned to it in Rule 207
- "Telegraphic transfer selling rate", in relation to a foreign currency, means the rate of exchange adopted by the State Bank of India for selling such currency where such currency is made available by that bank through telegraphic transfer
Telegraphic Transfer Buying Rate — Rule 207
Rule 207(1) — Rate for TDS
For the purpose of deduction of tax at source on any income payable in foreign currency, the rate of exchange for calculation of the value in rupees shall be the telegraphic transfer buying rate of such currency as on the date on which such tax is required to be deducted under the provisions of Chapter XIX-B.
Rule 207(3) — Definition
"Telegraphic transfer buying rate", in relation to a foreign currency, means the rate or rates of exchange adopted by the State Bank of India for buying such currency, having regard to the guidelines specified from time to time by the Reserve Bank of India for buying such currency, where such currency is made available to that bank through a telegraphic transfer.
Relevance to Export Structuring
1. Export Income
Export income is typically denominated in foreign currency. The foreign exchange rate rules affect the computation of:
- Export income in Indian rupees
- Capital gains on export-related investments
- Tax liability on export income
2. Export-Oriented Units
Export-oriented units may have investments in Indian companies. The foreign exchange rate rules affect:
- Capital gains on sale of investments
- Computation of taxable income
- Tax planning for exits
3. FDI and FPI
Foreign direct investment and foreign portfolio investment in India are subject to the foreign exchange rate rules for capital gains computation.
4. Hedging Strategies
The foreign exchange rate rules affect:
- Hedging strategies for currency risk
- Tax implications of hedging
- Structuring of export transactions
Practical Compliance
1. Determine Applicable Rates
- Determine the telegraphic transfer buying rate on the date of acquisition
- Determine the telegraphic transfer buying rate on the date of transfer
- Compute the average of buying and selling rates if required
2. Compute Cost of Acquisition in Foreign Currency
- Convert the cost of acquisition into the foreign currency initially utilised
- Use the average of buying and selling rates on the date of acquisition
3. Compute Consideration in Foreign Currency
- Convert the full value of consideration into the foreign currency initially utilised
- Use the average of buying and selling rates on the date of transfer
4. Compute Capital Gains in Foreign Currency
- Compute capital gains in the foreign currency
- Convert the capital gains into Indian rupees
- Use the telegraphic transfer buying rate on the date of transfer
5. Maintain Records
- Maintain records of exchange rates used
- Maintain records of computations
- Retain documents for the prescribed period
Consequences of Non-Compliance
Incorrect Computation
If the exchange rates are incorrectly applied:
- The capital gains may be incorrectly computed
- Income may be recomputed
- Interest and penalty may be levied
Penalty
Non-compliance may result in penalty under Section 439 for under-reporting of income.
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on foreign exchange rate rules for non-resident capital gains. Our international tax experts help non-residents understand the computation rules, apply the correct exchange rates, and navigate the regulatory framework. We assist in computation, documentation, and representation before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on foreign exchange rate rules or any other international tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex foreign exchange rate rules for non-resident capital gains requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive international tax advisory services, including:
- Computation: Assistance with capital gains computation
- Exchange Rate Analysis: Guidance on applicable exchange rates
- Documentation: Assistance with record keeping
- Representation: Representation before income-tax authorities
Contact us for expert legal guidance on your non-resident capital gains matters.