The New Income Tax Bill, 2025, has introduced a pivotal provision that offers significant tax relief to non-resident Indians (NRIs)—excluding Foreign Institutional Investors (FIIs)—on long-term capital gains (LTCG) earned from the sale of unlisted equity shares and debentures of Indian companies.
This relief comes in the form of the forex fluctuation benefit, a mechanism that allows NRIs to factor in foreign exchange movements when computing capital gains. By addressing the distortions caused by rupee depreciation over the investment holding period, the new provision ensures that NRIs are taxed only on actual economic gains in their base foreign currency, such as the US Dollar.
Current Challenge Under the Income Tax Act, 1961
Under the prevailing provisions of the Income Tax Act, 1961, NRIs are required to compute capital gains entirely in Indian Rupees (INR). Consequently, they often face higher tax liabilities when the rupee depreciates significantly during the investment period. This depreciation inflates the rupee-denominated sale proceeds, leading to taxable gains that are purely notional and not reflective of actual profit in the foreign investor’s home currency.
For example, if an NRI invested $1 when $1 = Rs. 60 (i.e., purchased a share at Rs. 60) and sold it later for Rs. 80 when $1 = Rs. 80, the INR-based computation would show a Rs. 20 gain, even though the dollar return remains flat at $1—thus creating a tax burden without any real gain.
Proposed Solution Under Clause 72(6) of the New Bill
To address this issue, Clause 72(6) of the New Income Tax Bill, 2025 proposes that NRIs be allowed to:
Compute capital gains in the foreign currency originally used for the acquisition of the unlisted shares or debentures.
Convert the cost of acquisition, transfer-related expenditure, and sale consideration into that foreign currency.
Subsequently, convert the net capital gains back into INR using the exchange rate on the date of sale.
This approach effectively neutralizes the impact of currency fluctuations, ensuring that only real gains—not those arising from depreciation of the rupee—are subject to taxation.
Potential Tax Impact
Estimates indicate that this amendment could reduce the LTCG tax liability for eligible NRIs by as much as 72%, depending on the extent of rupee depreciation during the holding period. This change aligns the Indian tax regime more closely with global taxation standards, where capital gains are typically measured in the investor’s functional currency.
Scope and Limitations
The forex fluctuation benefit is applicable only to unlisted equity shares and debentures of Indian companies.
It does not apply to listed securities traded on Indian stock exchanges, which continue to be taxed under existing rules.
The benefit is also not available to FIIs, thereby specifically targeting long-term NRI investors in private Indian businesses.
Conclusion
The proposed forex fluctuation adjustment under the New Income Tax Bill, 2025 represents a progressive step in addressing long-standing concerns of NRIs regarding over-taxation due to currency depreciation. By ensuring taxation on actual economic gains, the government aims to create a more equitable and investor-friendly tax environment, which could also encourage greater foreign investment into India’s unlisted corporate sector.
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