The New Income Tax Bill, 2025 introduces a forward-looking provision that could significantly reduce the long-term capital gains (LTCG) tax burden for Non-Resident Indians (NRIs) investing in India’s unlisted equity shares. This provision, termed as the ‘forex fluctuation adjustment’, aims to correct a long-standing tax inequity faced by NRIs under the current Income Tax Act, 1961.
The Problem Under the Old Regime: Tax on Unreal Gains
Under the existing framework of the Income Tax Act, 1961, capital gains for NRIs are computed in Indian Rupees (INR), both for acquisition and sale, without accounting for depreciation of INR against foreign currencies. This results in artificially inflated capital gains, especially in cases of long-term investments where the rupee weakens over time.
For example, if an NRI acquired shares for USD 100,000 when 1 USD = ₹50, and sold them for USD 100,000 when 1 USD = ₹80, the tax law (as per Section 48) would still calculate a gain of ₹30 lakh — despite there being no actual profit in USD terms.
The Proposed Solution: Forex Fluctuation Adjustment
The New Income Tax Bill, 2025 proposes that NRIs (excluding FIIs) be allowed to compute capital gains after adjusting for exchange rate fluctuations. This means the acquisition and sale prices of unlisted equity shares will be converted into the same foreign currency — such as USD — and the capital gain will be determined in that currency.
Key Outcome: NRIs will now pay tax only on actual economic gains, not on notional gains caused by currency depreciation.
Estimated Tax Savings: Up to 72% Lower LTCG for NRIs
Preliminary analyses suggest this change could reduce LTCG tax liability by as much as 72% in certain scenarios — especially for long-held investments made when the INR was stronger.
This aligns India’s tax treatment of offshore investors with global standards, promotes certainty, and removes structural disadvantages that disincentivised long-term NRI equity investment.
Applicability of the Proposed Benefit
| Criteria | Details |
|---|---|
| Eligible Taxpayers | Non-Resident Indians (NRIs) and non-residents (except FIIs) |
| Asset Type | Unlisted equity shares of Indian companies |
| Transaction Type | Long-Term Capital Gains (holding period > 24 months) |
| Mechanism | Acquisition and sale values adjusted in same foreign currency (e.g. USD) |
Legal Insight: A Departure from Section 48 of ITA, 1961
Under Section 48 of the current Act, while residents are allowed indexation benefits, NRIs are denied any relief for currency devaluation. The New Bill seeks to structurally amend this inequity by introducing a currency-based cost inflation mechanism, likely within the revised capital gains computation provisions.
This overturns the principle of taxation on notional rupee gains, and realigns the capital gains framework to reflect realised foreign currency appreciation — a long-awaited reform.
Conclusion: A Game-Changer for NRI Investors
The forex fluctuation benefit in the proposed Income Tax Bill, 2025 marks a significant paradigm shift in how India treats NRI investments. By taxing only real gains in foreign currency terms, the government demonstrates its commitment to equitable treatment and tax fairness for global Indian investors.
Action Point: NRIs holding or planning to invest in Indian unlisted equity should revisit their investment and exit strategies in light of this proposed relief — and may consider deferring exits to benefit from this rule once enacted.
- CA Surekha Ahuja
