Section 43A of Income Tax Act 1961: Foreign Exchange Fluctuation on Imported Assets
Section 43A dealt with the tax treatment of an increase or reduction in the rupee liability for an asset acquired from outside India when the exchange rate changed. From 1 April 2026, the corresponding rule is contained in Section 42 of the Income-tax Act, 2025, titled Capitalising impact of foreign exchange fluctuation.
Meaning and scope of Section 43A
Section 43A of the Income-tax Act, 1961 was a special provision for exchange-rate changes connected with certain assets acquired from a country outside India for the purposes of business or profession. The provision focused on the change in the assessee's liability expressed in Indian currency and the amount actually taken into account when payment was made.
In practical terms, if an imported business asset was acquired or financed in foreign currency and the rupee value of the relevant liability changed before payment, Section 43A required the qualifying increase or reduction to be reflected in the tax cost or specified capital expenditure.
Section 43A of the Income-tax Act, 1961
43A. Special provisions consequential to changes in rate of exchange of currency.
Notwithstanding anything contained in any other provision of the Act, where an assessee acquired an asset in a previous year from a country outside India for the purposes of business or profession, and a subsequent change in the exchange rate increased or reduced the liability expressed in Indian currency at the time of making payment, the provision applied to qualifying payments:
- towards the whole or part of the cost of the asset; or
- towards repayment of the whole or part of money borrowed, directly or indirectly, in foreign currency specifically for acquiring the asset, together with interest, if any.
The qualifying increase or reduction in liability taken into account at the time of payment was added to, or deducted from, the relevant tax base, including:
- the actual cost of the asset under Section 43(1);
- specified capital expenditure referred to in Section 35(1)(iv);
- capital expenditure referred to in Section 35A;
- specified capital expenditure referred to in Section 36(1)(ix); or
- the cost of acquisition of a capital asset, other than an asset referred to in Section 50, for the purposes of Section 48.
The resulting amount was treated as the adjusted actual cost, capital expenditure or cost of acquisition, as applicable.
Definitions and explanations under legacy Section 43A
Rate of exchange
For Section 43A, "rate of exchange" meant the rate determined or recognised by the Central Government for conversion between Indian currency and foreign currency.
Foreign currency and Indian currency
The expressions "foreign currency" and "Indian currency" took their meanings from Section 2 of the Foreign Exchange Management Act, 1999.
Liability met by another person
If the whole or any part of the relevant liability was met directly or indirectly by another person or authority rather than by the assessee, that part was excluded for the purposes of Section 43A.
Forward contract with an authorised dealer
Where the assessee entered into a contract with an authorised dealer under the Foreign Exchange Management Act, 1999 for a specified foreign-currency sum at an agreed rate on or after a future date, the Section 43A adjustment for the amount covered and available to discharge the liability was computed by reference to that contracted rate.
Current provision: Section 42 of the Income-tax Act, 2025
Section 42 - Capitalising impact of foreign exchange fluctuation
For Tax Year 2026-27 onward, Section 42 of the Income-tax Act, 2025 carries forward the core rule. It applies where, at the time of payment during the tax year, the rupee liability varies because of a change in exchange rate in relation to an asset acquired from outside India for business or profession.
How variation in liability is computed
Under Section 42(2), A is the variation in liability; B is the payment expressed in Indian currency when it is made towards the whole or part of the asset cost, or repayment of qualifying foreign-currency borrowing together with interest; and C is the corresponding liability expressed in Indian currency at the time the asset was acquired.
The liability excludes any part met directly or indirectly by another person or authority.
Where the variation is adjusted
Section 42(3) requires the variation to be added to or reduced from the relevant tax base, including the actual cost referred to in Section 39 of the 2025 Act, specified capital expenditure, or the cost of acquisition of a qualifying capital asset for Section 72. The resulting figure becomes the adjusted tax cost or expenditure.
Forward exchange contracts under the 2025 Act
Section 42(4) continues a specific rule for contracts with an authorised dealer under the Foreign Exchange Management Act, 1999. For the portion of the contracted foreign-currency amount available to discharge the relevant liability, the adjustment is computed with reference to the exchange rate specified in that contract.
Section 42 and Section 43 of the Income-tax Act, 2025
Section 43 of the Income-tax Act, 2025 contains the general rule for taxation of gains or losses arising from changes in foreign exchange rates on foreign-currency transactions, but it is expressly subject to Section 42. This means the special capitalisation rule for qualifying imported assets takes priority where Section 42 applies.
| Issue | 1961 Act | 2025 Act from 1 April 2026 |
|---|---|---|
| Special rule for imported business assets | Section 43A | Section 42 |
| Basic timing | Adjustment linked to the liability taken into account at the time of payment | Variation in liability at the time of making payment during the tax year |
| Actual cost reference | Section 43(1) | Section 39 |
| General forex taxation rule | Section 43AA, subject to Section 43A | Section 43, subject to Section 42 |
| Forward contract | Explanation 3 to Section 43A | Section 42(4) |
Simple example
Suppose a business acquires machinery from outside India and the relevant foreign-currency liability equals Rs. 80 lakh when the asset is acquired. When the qualifying payment is made, the same foreign-currency amount requires Rs. 84 lakh because of exchange-rate movement. Subject to the statutory conditions, the Rs. 4 lakh increase is reflected by increasing the relevant tax cost rather than treating the capital exchange difference as an unrelated item.
If the rupee liability instead falls to Rs. 77 lakh at payment, the Rs. 3 lakh reduction is correspondingly reflected by reducing the relevant tax cost, subject to the applicable statutory provision and facts.
Important points for taxpayers
- Identify the tax year first. Section 43A belongs to the Income-tax Act, 1961, while Section 42 of the Income-tax Act, 2025 applies for Tax Year 2026-27 onward.
- The special rule concerns qualifying assets acquired from outside India for business or profession.
- The payment event and the corresponding exchange-rate variation are central to the computation.
- Maintain the purchase agreement, foreign-currency invoice, borrowing documents, payment records and exchange-rate evidence.
- If a forward contract is used, retain the authorised dealer contract and evidence showing the amount available for discharge of the liability.
- For other foreign exchange gains or losses, examine the general foreign exchange provision separately: legacy Section 43AA or current Section 43, as applicable.
Official legal resources
For the current law, use the Income Tax Department's official materials for the Income-tax Act, 2025 and its 1961 Act to 2025 Act comparison utility. The statutory meanings and regulatory framework for foreign currency and authorised dealers may also be checked in the Foreign Exchange Management Act, 1999.
This page is an informational summary of the statutory provisions. Application can depend on the tax year, transaction documents, accounting treatment and transition provisions.