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CA Final · Direct Tax Laws & International Taxation · Taxation of Digital Transactions

An Indian software startup holds a US dollar receivable and has entered a forward exchange contract. The rupee-dollar rate changes, giving rise to a gain. Under the Income-tax Act, 2025, which statement on taxing the gain is correct?

The gain is treated as income, computed under the notified income computation and disclosure standards. The provision applies to all foreign currency transactions, expressly including forward exchange contracts, monetary and non-monetary items, translation of foreign operations and foreign currency translation reserves.

  1. AThe gain is income computed per the notified income computation and disclosure standards, and the rule extends to forward exchange contractsCorrect
  2. BThe rule on foreign exchange gains covers only monetary items, so the receivable is covered but the forward contract is not
  3. CThe gain is taxable only when the foreign currency is physically converted, regardless of the standards
  4. DThe rule covers forward contracts but excludes foreign currency translation reserves and translation of foreign operations

Explanation

Any gain or loss from changes in foreign exchange rates on foreign currency transactions is income or loss, computed as per the notified income computation and disclosure standards. The provision applies to all such transactions, including monetary and non-monetary items, translation of foreign operations, forward exchange contracts and foreign currency translation reserves. The option excluding forward contracts is wrong because they are expressly listed.

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