When Non-Resident Indians (NRIs) invest in Indian capital markets, the outcome of their investments depends on more than just market performance. Currency fluctuations can significantly alter the real return on investment—often creating a mismatch between notional gains in Indian rupees and actual gains (or losses) in the investor’s home currency.

To address this, Indian tax law—through Section 48 of the Income-tax Act, 1961—provides a specific mechanism for NRIs. The first proviso under this section allows eligible non-residents to compute capital gains in foreign currency, thereby neutralizing the impact of exchange rate movement between purchase and sale. However, this benefit comes with rules that must be applied consistently—not selectively.

Residents vs NRIs: Different Capital Gains Computation

For resident taxpayers, long-term capital gains are computed using indexation, which adjusts the acquisition cost for inflation using the Cost Inflation Index (CII). This reduces the taxable gain.

NRIs, however, are not allowed indexation. Instead, they are granted a special relief:

• Capital gains are computed in the same foreign currency in which the investment was made (typically USD, GBP, EUR, etc.).
• The gain is then reconverted to INR for tax computation.

This ensures that only real economic gains—and not artificial gains due to rupee depreciation—are subject to tax.

Example 1: When There’s No Real Gain

Interpretation:
While it appears the investor has earned ₹15,000 in rupee terms, their return in USD is zero. Under the first proviso to Section 48, this foreign currency computation method results in no capital gain tax because there is no actual economic gain in the NRI’s base currency.

Example 2: When the Rupee Appreciates

Interpretation:
Despite a modest gain of ₹15,000 in INR terms, the investor has actually doubled their investment in USD. As a result, when calculated under the foreign currency computation method, the taxable gain increases significantly—reflecting the true profit.

Can NRIs Choose When to Apply the Foreign Currency Rule?

No.
The first proviso to Section 48 is mandatory for NRIs who have acquired Indian shares, debentures, or specified securities in foreign currency.

You cannot selectively apply this benefit in years when the rupee depreciates and ignore it when it appreciates. The law requires consistent application regardless of whether it increases or reduces your tax liability.

Key Takeaways for NRIs

• Indexation is not available to NRIs—but foreign currency computation is.
• This benefit applies only to assets acquired in foreign currency such as shares, debentures, and government securities.
• The computation must be applied consistently—it’s not an optional tax planning tool.
• The rule ensures that only actual gains, adjusted for currency movement, are taxed—not notional INR-based profits.
• Proper documentation of exchange rates on purchase and sale dates is crucial to support your calculation.

Final Word

Understanding the application of Section 48 is vital for NRIs to avoid overpaying taxes on notional or inflated rupee gains. Whether the rupee appreciates or depreciates, this provision ensures that taxation reflects your real return in foreign currency terms.

If you have complex capital gains, cross-border transactions, or uncertainties around exchange rate use or tax computation, it is highly advisable to consult a tax advisor experienced in NRI taxation.

The right tax strategy not only ensures compliance but protects your wealth across borders.