New Income Tax Bill 2025: NRIs to Benefit from Forex Fluctuation on LTCG from These Equity Shares
The New Income Tax Bill, 2025, has a rule that helps non-resident Indians (except FIIs) pay lower tax on capital gains from selling unlisted equity shares of an Indian company. This rule is called the ‘forex fluctuation benefit‘. It allows NRIs to reduce their long-term capital gains tax by adjusting for changes in foreign exchange rates.
As per calculations, if this rule in the New Tax Bill, 2025, is incorporated in the final act, NRIs could end up paying up to 72% less LTCG tax compared to before. This is because, under the old tax act of 1961, NRIs had to pay higher taxes because the Indian Rupee (INR) was losing value over time due to depreciation. Now, under the new rule, NRIs are only required to pay tax on real profit in USD.
Understanding Forex Fluctuation Benefits
When NRIs buy unlisted Indian equity shares, the USD is exchanged for INR. However, when the same shares are sold, NRIs exchange INR for USD. Now, a condition can arise when an NRI who had bought Indian shares when 1 USD was worth Rs. 60 and while selling the shares, 1 USD’s value increases to Rs. 80. Now this will result in earning Rs. 20 profit for the NRI due to the value of the INR reducing. However, if the share price also increased from Rs. 60 to Rs. 80 during this period, for the NRI, he earned zero income, as he invested 1 USD per share and received only 1 USD after selling one share. Under the old tax law, this NRI would still have to pay capital gains tax on the Rs. 20 profit, even though it was only due to the rupee’s depreciation and not a real gain.
However, under the new Income Tax Bill, 2025, NRIs will be taxed only on their actual profit in USD, not on gains that only appear due to currency changes. This is known as the Forex Fluctuation Benefit.
As per an expert, right now, under the Income Tax Act, 1961, non-residents do not get the benefit for the sale of unlisted equity shares. This often results in a higher taxable gain, especially when the Indian Rupee loses a lot of value during the time they held the investment.
The forex fluctuation makes sure that the capital gain indicates the actual economic profit or loss in the investor’s home currency. This would neutralise the misrepresenting effect of the changes in the value of currencies. It also ensures that the investor is not overtaxed due to rupee depreciation and is taxed according to his/her actual profit. This would reduce the tax burden on non-residents.
What are the Provisions for the Forex Fluctuation Benefit in the New Income Tax Bill 2025?
Under the New Income Tax Bill 2025, NRIs can only benefit from forex fluctuation if they invest in unlisted indian equity shares such as NSE, etc. It is not available for listed equity shares.
As per Clause 72(6) of the New Income Tax Bill 2025, ” 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 utilises in the purchase of the shares or debentures…”
This means that the forex fluctuation benefit is only available to NRIs if they earn LTCG from the transfer of unlisted shares.
How is the provision for Forex Fluctuation Benefit Helpful for NRIs?
Fair Valuation of Capital Gains
Non-residents who invest in India using foreign currency can now adjust the purchase price of their investment as per exchange rate changes. This means if the Indian Rupee loses its value during the time they hold the investment, their cost in rupees increases. As a result, the capital gains they are taxed on go down. This change ensures that tax is only charged on real profits and not on paper gains caused by currency depreciation.
Better Returns for Long-Term Investors
Private equity and venture capital funds, which usually operate for 5 to 7 years, benefit a lot. Since the amendment reduces taxes on gains that only appear large due to currency changes, it improves the fund’s post-tax returns (IRR). This makes India a more attractive destination for long-term investors.
