Chapter IV - Computation of Total Income
Section 43
Section 43: taxation of foreign exchange fluctuation
Section 43 is the general rule for taxing foreign-exchange gains and losses on business transactions, applying wherever Section 42 (which capitalises exchange variation relating to foreign-currency asset acquisitions) does not apply.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Subject to the provisions of section 42, any gain or loss arising on account of change in foreign exchange rates on foreign currency transactions shall be treated as income or loss, as the case may be, and shall be computed as per the income computation and disclosure standards notified under section 276(2).
(2) The provisions of sub-section (1) shall be applicable to all foreign currency transactions, including those relating to— (a) monetary items and non-monetary items; (b) translation of financial statements of foreign operations; (c) forward exchange contracts; and (d) foreign currency translation reserves.
Introduction
Once Section 42's asset-cost rule is ruled out, Section 43 governs qualifying foreign-exchange gains and losses. Its computation follows the notified income computation and disclosure standards.
Key takeaways
Foreign-exchange gains and losses
Subject to Section 42, gains or losses caused by foreign-exchange rate changes on foreign-currency transactions are treated as income or loss.
Computation standard
The gain or loss is computed under the income computation and disclosure standards notified under Section 276(2).
The general rule
Section 43(1) provides that, subject to Section 42, any gain or loss arising from a change in foreign exchange rates on foreign currency transactions is treated as income or loss, and is computed as per the income computation and disclosure standards (ICDS) notified under Section 276(2).
What kinds of transactions are covered
Section 43(2) clarifies that this rule applies to all foreign currency transactions, including those relating to:
- Monetary items and non-monetary items.
- Translation of financial statements of foreign operations.
- Forward exchange contracts.
- Foreign currency translation reserves.
Classify the currency exposure
Identify whether the item is a monetary balance, non-monetary item, foreign-operation translation, forward contract or currency translation reserve.
Test Section 42 first for an asset-acquisition liability; then use Section 43 and the applicable notified computation standard for the remaining covered transaction.
Step-by-step flow for applying Section 43
- 1
Does the gain or loss arise from a change in exchange rates on a foreign currency transaction?
- No: Section 43 does not apply.
- Yes: Go to the next step.
- 2
Is it covered by Section 42 (liability for an asset acquired from outside India)?
- Yes: Adjust the asset cost under Section 42.
- No: Go to the next step.
- 3
Classify the transaction
Monetary or non-monetary item, translation of foreign operations, forward exchange contract, or foreign currency translation reserve (Section 43(2)).
- 4
Compute as per the notified income computation and disclosure standards (Section 276(2))
Treat the result as income or loss.
Practical checklist
Do
- Maintain currency, contract, transaction and closing-rate records for each exposure.
- Reconcile accounting forex entries to the notified tax-computation standard and Section 42 exclusions.
Avoid
- Do not automatically post an imported-asset liability variation as current forex income or loss.
Illustrative example
Worked example: an export receivable
Hypothetical facts (illustration only, not a real taxpayer): An exporter invoices USD 10,000 when the rate is assumed at ₹83 and books ₹8,30,000. It collects the money when the rate is assumed at ₹84. Exchange rates are assumed for illustration.
Section 42 check
This is a sale receivable, not a liability for an imported asset, so Section 42 does not apply.
Amount realised
USD 10,000 × ₹84 = ₹8,40,000.
Exchange difference
₹8,40,000 - ₹8,30,000 = ₹10,000 gain.
Treatment
It is treated as income, computed per the notified standards. Timing (for example if the receivable spans a year end) follows those standards, which Section 43 does not set out.
Outcome
- ₹10,000 is taxable as income from the foreign currency transaction.
- A rate fall would give a loss treated the same way.
Glossary
- ICDS
- Income computation and disclosure standards notified for tax computation under Section 276(2).
- Monetary item
- A currency-denominated amount receivable or payable, one of the item types covered by Section 43.
Frequently asked questions
How is a forex gain or loss on a business transaction taxed?
It is treated as income or loss and computed as per the income computation and disclosure standards (ICDS) notified under Section 276(2), except where Section 42 requires the variation to be capitalised into an asset's cost instead.
Does Section 43 cover forward exchange contracts?
Yes - Section 43(2)(c) explicitly includes forward exchange contracts among the foreign currency transactions to which this taxation rule applies.
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Get expert guidance on taxing forex gains and lossesLast updated 9 October 2026