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CMA Final · Direct Tax Laws and International Taxation · Income Computation and Disclosure Standards (ICDS)

Under the Income-tax Act, 2025, which statement about the taxation of foreign exchange fluctuation on foreign currency transactions is correct?

Foreign exchange gains or losses on foreign currency transactions are treated as income or loss and computed as per the notified income computation and disclosure standards. The provision covers monetary and non-monetary items, forward contracts, foreign operations translation and translation reserves, so no category is excluded.

  1. AGains and losses are computed as per the notified income computation and disclosure standardsCorrect
  2. BOnly gains are taxed; losses are ignored
  3. CGains and losses on forward exchange contracts are excluded
  4. DGains on non-monetary items alone are taxed

Explanation

Section 43(1) says any gain or loss from changes in foreign exchange rates on foreign currency transactions is income or loss computed as per the notified standards. Section 43(2) extends this to monetary and non-monetary items, translation of foreign operations, forward contracts and translation reserves. Hence the exclusions in the other options are wrong.

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