NRIs to pay lower LTCG tax on these equity shares due to proposed forex fluctuation benefit in New Income Tax Bill 2025

Time of India

29-05-2025

The
New Income Tax Bill
, 2025 has a provision with which non-residents individuals (excluding FIIs) can effectively pay a lower capital gains tax than allowed under the Income Tax Act, 1961. This provision is called 'forex fluctuation benefit' and using it NRIs can pay a lower long term capital gains tax (LTCG) on sale of unlisted equity shares of an Indian company.
As per calculations, if this beneficial provision in the new tax bill, 2025 is incorporated by the Indian government in the final act, then NRIs can pay as much as 72% lower long term capital gains tax when compared to before. The reason for this high percentage of savings in capital gains tax payment for NRIs is earlier under the old tax act of 1961, NRIs had to pay income tax on artificially high income due to depreciation of Indian Rupee (INR). This disadvantage is now removed and NRIs are only required to pay income tax on their actual gains in USD terms.
Read below to understand what the forex fluctuation benefit about which Income Tax Bill 2025 talks is about and how NRIs stand to gain from this benefit if the government implements it in the final income tax act.
by Taboola
by Taboola
Sponsored Links
Sponsored Links
Promoted Links
Promoted Links
You May Like
Empresas de Uberlândia reduzem custos agora [Saiba mais]
Sistema TMS embarcador
Saiba Mais
Undo
What is the forex fluctuation benefit which can result in lower LTCG tax outgo for NRIs?
When NRIs invest in unlisted Indian equity shares, the USD is exchanged for INR, but when the same shares are sold, NRIs exchange INR for USD to take the gains back to their resident country.
Now a situation may arise when an NRI who invested in an Indian share when 1 USD was Rs 60 and at the time of sale 1 USD became Rs 80, so this NRI gained Rs 20 due to depreciation of INR. But if the share price also rose from Rs 60 to Rs 80 during this period then from the NRI's perspective he earned zero income since he invested 1 USD for one share and got back 1 USD only after selling one share. But despite this fact, the said NRI used to pay capital gains tax, as in INR terms he earned Rs 20. This exact problem is what the forex fluctuation benefit solves under the new Income Tax Bill, 2025.
Live Events
If the forex fluctuation benefits feature is implemented in the final tax act, then NRIs will only pay income tax on the actual gains in United States Dollar (USD) terms and not INR terms.
'Currently, Income Tax Act, 1961 does not allow the forex fluctuation benefit to non-residents for sale of unlisted equity shares. This leads to a higher taxable gain, especially where Indian Rupee depreciates significantly during the holding period,' says Pavan Sisodia, Tax Partner, EY India.
The table below shows how an NRI can potentially save as much as 72% tax when forex fluctuation benefit is given to the LTCG transaction.
Particulars
INR
INR/ USD
Converted in USD
Full value of Consideration (assumed sold in 2026) [A]
8,50,000
85
10,000
Cost of Acquisition (assumed acquired in 2014) [B]
5,40,000
60
9,000
Without benefit of foreign exchange fluctuation
Taxable capital gains [C = A-B]
3,10,000
Tax on capital gains (@12.5%* on C)
38,750
With the benefit of foreign exchange fluctuation
Capital gains [D = A - B]
1,000
Taxable capital gains (converted in INR)
85,000
Tax on capital gains (@12.5%* on D)
10,625
Source:
EY India
Chartered Accountant (Dr.) Suresh Surana says this benefit- forex fluctuation ensures investors are not overtaxed.
'This method intends to ensure that the capital gains reflect the real economic gain or loss in the investor's home currency, thereby neutralising the distorting impact of currency fluctuations. As such, it prevents over-taxation that may result from rupee depreciation and aligns the tax liability more closely with the actual financial outcome realised by the non-resident,' says Surana.
What did the New Income Tax Bill 2025 say about giving NRIs forex fluctuation benefit?
The New Income Tax Bill, 2025 said that the forex fluctuation benefits as explained above is applicable to NRIs only for unlisted Indian equity shares like NSE, etc and not for listed equity shares like BSE, etc.
Clause 72(6) of the New Income Tax Bill 2025 said: ' 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 above legal provision in the new income tax bill, 2025 means forex fluctuation benefit is available only for Indian unlisted equity shares and not for listed equity shares under Section 198.
Surana, says: 'The proposed change in the new Income-tax Bill, 2025, seeks to extend the benefit of foreign exchange fluctuation to non-residents (other than foreign institutional investors) in respect of LTCG arising from the transfer of unlisted shares.'
Surana explains: 'In accordance with the proposed mechanism i.e. clause 72(6) of the new Income Tax Bill 2025, the cost of acquisition, sale consideration, and transfer-related expenses are first converted into the same foreign currency that was initially utilised for the acquisition of the unlisted shares or debentures. Capital gains are then computed in such foreign currency and subsequently reconverted into INR for tax purposes.'
How can this provision in the new tax bill help NRIs?
Here is a calculation to show how exactly NRIs are going to benefit from forex fluctuation feature:
Example 1
Particulars
Existing Regime
(Without Forex Benefit)
Proposed Regime
(With Forex Benefit – Sec 72(6)
Currency of Computation
Indian Rupees (INR)
US Dollars (USD), then reconverted to INR
Amount Invested
USD 1 million
USD 1 million
Exchange Rate at Time of Purchase
Rs 70/USD
Rs 70/USD
Cost of Acquisition (INR equivalent)
Rs 7 crore
USD 1 million
Sale Consideration
USD 1.5 million
USD 1.5 million
Exchange Rate at Time of Sale
Rs 90/USD
Rs 90/USD
Sale Value in INR
Rs 13.50 crore
USD 1.5 million
Capital Gain (computed)
Rs. 6.50 crore
(Rs 13.50 crore less Rs 7.00 cr)
Rs. 4.50 crore
[(USD 1.5 mn less USD 1 mn)
Rs. 90/USD)]
Tax Rate on LTCG
12.5%
12.5%
Tax Payable in INR
Rs. 81.25 lakh
(Rs. 6.50 crore * 12.5%)
Rs. 56.25 lakh
(Rs.4.50 crore * 12.5%)
Effective Tax Saving Due to Forex Benefit
Not applicable
Rs 25 lakh
Source: Chartered Accountant (Dr.) Suresh Surana
CA J Jambukeswaran, Founder, CEO & Managing Director of Uniqey by JJ tax, says: "The introduction of this benefit through the new Section 42 – 'Variation in Liability' is a strategic move that strengthens India's position as an attractive investment destination for private equity, venture capital, and international strategic investors. So far, while the concessional LTCG tax rate of 12.5% did apply to non-residents, it did not account for currency fluctuations—especially the depreciation of the Indian rupee against the investor's home currency. This created a situation where tax was levied on inflated capital gains that were notional in nature and not reflective of true economic benefit."
Jambukeswaran explains how this helps NRIs:
Fair Valuation of Capital Gains:
Non-residents investing in India using foreign currency can now adjust the acquisition cost based on exchange rate movement. So, if the rupee depreciates during the holding period, their cost in INR terms increases—leading to a lower taxable gain. This ensures tax is applied only on real, economic gains, not on notional appreciation due to currency erosion.
Higher Net Returns for Long-Term Investors:
Private equity and venture capital funds, which typically operate on 5–7-year investment cycles, benefit significantly. By reducing the tax outgo on paper gains inflated by forex movements, the amendment improves post-tax internal rate of return (IRR) and makes India more competitive for long-term strategic capital.
Surana says this proposed change in the New Income Tax Bill, 2025 enhances India's competitiveness as an investment destination by removing a structural disincentive for long-term non-resident and NRI investors.
Surana says: 'By proposing this relief under clause 197 read with 72(6) of the new Income Tax Bill, 2025 the government seeks to address a longstanding concern faced by foreign investors namely, the inflation of taxable gains due to depreciation in the Indian rupee over the holding period.'
Surana adds: 'It tends to ensure tax neutrality for currency fluctuations, enabling non-resident investors to compute their capital gains in the same foreign currency used for the initial investment. This aligns the tax outcome with the investor's economic reality, as gains are taxed only to the extent of the actual increase in value measured in their base currency. It eliminates artificial gains caused solely by INR depreciation, which had the effect of increasing the tax burden even in cases where real returns were modest or flat in foreign currency terms.'