Conversion of income earned in foreign currency

ThinkLedger Editorial
7 min read

Introduction

If any income accrues or arises to a resident or non-resident person in foreign currency, it shall be translated into Indian Rupees. The translation shall be done as per the conversion rate as prevalent on the relevant dates.

1. About

The Indian taxation is based on the principle of the residence of the person and the source of income. Worldwide income of the Indian residents is taxable in India. Non-residents, however, are subject to a source-based taxation. Only amounts received or accrued from a source, or so deemed within India are subject to income-tax.

Where such income is earned in foreign currency or from the investment made in foreign currency, the income taxable in India shall be converted into Indian Rupees before it is charged to tax. The method of conversion of such income is provided under Rule 52 and Rule 206. The income subject to TDS shall be converted into Indian Rupees as per Rule 207.

However, the following income shall not be converted as per the below provisions if it is received in, or brought into, India by the assessee before the specified date in accordance with the provisions of FEMA.

(a) Income from house property;

(b) Profits and gains of business or profession (except income arising to non-resident from shipping operations); and

(c) Income from other sources (except dividends and Interest on securities).

2. Conversion of capital gains

2.1. Capital gains earned by non-resident [Rule 52]

Where a non -resident assessee (except FPI) acquires shares or debentures of an Indian company in foreign currency, the capital gain arising from the transfer of such shares or debentures shall be first computed into the same foreign currency as was initially utilized in the purchase of the shares or debentures, then it shall be converted into Indian currency. This provision shall also apply in respect of capital gain accruing or arising from sale of every re-investment thereafter in shares in or debentures of an Indian company.

Such computation and conversion of capital gains shall be made as per following provisions:

2.1-1. Conversion of full value of consideration

The full value of consideration shall be converted into foreign currency at the average rate of foreign currency as on the date of transfer. Average rate is computed by dividing the aggregate of Telegraphic Transfer (TT) buying and selling rate as adopted by the State Bank of India (SBI).

2.1-2. Conversion of cost of acquisition

The cost of acquisition shall be converted into foreign currency at the average rate of foreign currency as on the date of acquisition of share or debenture. Average rate is computed by dividing the aggregate of TT buying and selling rate as adopted by the SBI. In this case, the benefit of indexation shall not be available.

2.1-3. Conversion of expenditure in connection with transfer

The expenditure incurred wholly and exclusively in connection with transfer of the capital asset shall be converted into foreign currency at the average rate of foreign currency as on the date of transfer. Average rate is computed by dividing the aggregate of Telegraphic Transfer (TT) buying and selling rate as adopted by the State Bank of India (SBI).

2.1-4. Conversion of capital gains

The resultant capital gains shall be converted into Indian Rupees at TT buying rate of such currency on the date of transfer of the capital asset.

2.2. In case of other capital gains [Rule 206]

The capital gains arising to a resident or non-resident person in foreign currency shall be converted into Indian Rupees at the rate of exchange as it existed on the last day of the month immediately preceding the month in which the capital asset is transferred.

However, if tax has been deducted in India from the income payable in foreign currency, the rate of conversion of such income into Indian Rupees shall be of the date on which the tax was required to be deducted under the relevant provisions.

Example, if on 15 May 2021 an Indian resident transfers a plot of land situated in Dubai. The capital gains arising therefrom shall be converted into Indian Rupee at the rate of exchange as it existed on 30 April 2021.

3. Conversion of income in other cases [Rule 206]

3.1. Conversion of salary income

If salary income, earned in foreign currency, is taxable in India it shall be converted into Indian Rupees at the rate of conversion existed on the last day of the month immediately preceding the month in which the salary is due, or is paid in advance or in arrears.

3.2. Conversion of interest on securities

If interest on securities, earned in foreign currency, is taxable in India it shall be converted into Indian Rupees at the rate of conversion existed on the last day of the month immediately preceding the month in which income is due.

3.3. Conversion of income from house property

If income earned in foreign currency is chargeable to tax in India under the head Income from house property, it shall be converted into Indian Rupees at the rate of exchange existed on the last day of the tax year of the assessee.

3.4. Conversion of business income

If income earned in foreign currency is chargeable to tax under the head profits and gains from business or profession, it shall be converted into Indian Rupees at the rate of exchange existed on the last day of the tax year of the assessee. In the case of a non-resident engaged in the business of operation of ships, the rate of conversion as on the last day of the month immediately preceding the month in which such income is deemed to accrue or arise in India shall be considered.

3.5. Conversion of other income

Any other income received in foreign currency, if taxable in India under the head Other Sources, shall be converted into Indian Rupees at the exchange rate as prevailing on the last day of the tax year of the assessee. The dividend received in foreign currency shall be converted into Indian Rupees at the rate of exchange existed on the last day of the month immediately preceding the month in which the dividend is declared, distributed or paid by the company.

4. Conversion of income for TDS [Rule 207]

For the purpose of deduction of tax at source from any income payable in foreign currency, the rate of exchange for the calculation of the value in rupees of such income payable-

(a) to an assessee outside India;

(b) to a Unit located in an International Financial Services Centre;

(c) by a Unit located in an International Financial Services Centre to an assessee in India,

shall be the TT buying rate of such currency as on the date on which the tax is required to be deducted at source under the relevant provisions. Where the TT buying rate is not published on the relevant date, the last published TT buying rate may be adopted.

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.