Classify the contract before calculating the adjustment
For FY 2025–26 / AY 2026–27, ICDS VI paragraph 8 separates qualifying forward contracts from trading or speculative contracts and hedges of firm commitments or highly probable forecast transactions. The first group has distinct premium amortisation and exchange-difference rules; paragraph 8(5) recognises the specified amounts for the excluded groups at settlement. A single year-end mark-to-market journal cannot answer the tax timing question. Sources were checked on 28 October 2026. ICDS VI, especially paragraph 8.
Use the earlier-year enactment correctly
This article concerns the Income-tax Act, 1961, including section 43AA and the standards notified under section 145(2). Notification 87/2016 applies to mercantile-system assessees within its stated scope, excluding an individual or HUF not required to undergo section 44AB audit. A company should not assume exemption merely because its turnover is small. The 2025 Act's sections 43 and 276 belong to the newer framework and are not replacements to insert into this earlier financial year's computation. ICDS VI, especially paragraph 8.
The qualifying-contract test is substantive
Paragraph 8(2) requires that the contract is not intended for trading or speculation and establishes the reporting-currency amount required or available at settlement. Paragraph 8(3) excludes hedges of a firm commitment or highly probable forecast transaction from paragraph 8(1). For this purpose, firm commitment does not include assets and liabilities existing at the previous-year end. Preserve the underlying invoice, liability or receivable, contract designation and year-end status; an internal label saying hedge is insufficient. ICDS VI, especially paragraph 8.
Maintain separate premium and exchange columns
For a qualifying contract, paragraph 8(1) amortises its inception premium or discount over its life, recognises exchange differences in the previous year of exchange-rate change, and addresses cancellation or renewal profit or loss in that previous year. Paragraph 8(4) measures the inception difference by comparing the inception exchange rate with the contractual forward rate. The income or expense direction depends on whether foreign currency is bought or sold and the actual terms. A forward purchase premium and a forward sale premium do not have identical economic signs. ICDS VI, especially paragraph 8.
Do not restart exchange measurement at inception every year
The exchange comparison uses the settlement-date rate where settled during the year, otherwise the year-end rate, against inception or the immediately preceding year-end rate, whichever is later. Carry forward the opening tax basis. Comparing every closing value with inception can recognise the same earlier movement twice. Keep the underlying receivable or payable retranslation separate from the forward contract calculation and reconcile any offset; do not simply delete both ledger entries because the commercial exposure is hedged. ICDS VI, especially paragraph 8.
Settlement timing does not resolve every other tax issue
Paragraph 8(5) puts premium, discount and exchange differences on trading/speculative contracts and the specified commitment/forecast hedges on settlement timing. An accounting loss before settlement may therefore require a tax adjustment. Settlement does not itself establish the correct income head, remove loss set-off restrictions or prove business purpose. Section 43AA is expressly subject to section 43A: imported-capital-asset cases need their separate analysis. These illustrations exclude such cases and do not prescribe MAT treatment. ICDS VI, especially paragraph 8.
Prepare a lifetime book-to-tax register
For each contract retain opening unrecognised amounts, current book income or expense, current tax recognition, adjustments and closing amounts awaiting later treatment. Use income-positive signs consistently. The adjustment to book profit is tax income minus book income for the item; an expense is a negative income amount. Link settlement and cancellation statements to the same contract identifier so an earlier exclusion reverses once. Review tax-computation adjustments even when the financial-statement hedge accounting is correct. ICDS VI, especially paragraph 8.
Applicable primary references
ICDS VI, especially paragraph 8 Notification 87/2016: notified scope Income-tax Act, 1961: section 43AA 2025 Act as amended in 2026: sections 1 and 536, period distinction
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Forward purchase premium across year end
A qualifying USD 1,00,000 purchase contract has inception spot ₹82 and forward ₹83 per USD. Premium expense is ₹1,00,000. Assume its 180-day life includes 90 days up to 31 March 2026 and straight-line day allocation is appropriate. Current premium expense is ₹1,00,000 × 90/180 = ₹50,000; the remaining ₹50,000 belongs to the remaining contract life. Exchange differences are a separate column.
Illustrative example 2: Forward sale with an inception income element
A qualifying USD 50,000 sale contract has inception spot ₹85 and forward ₹86. Assume the ₹50,000 favourable inception difference is income over a 150-day life, of which 45 days fall in the year. Current inception income is ₹50,000 × 45/150 = ₹15,000; ₹35,000 remains for the rest of the life. Do not describe the same favourable sale difference as a purchase-premium expense.
Illustrative example 3: Use the previous closing rate
A qualifying contract's USD 1,00,000 foreign-currency purchase leg was measured at ₹84 at the preceding year end and ₹86 at the current year end. Its current exchange movement is ₹2,00,000 favourable, assuming the fixed rupee obligation and no other relevant changes. If inception was ₹82, using ₹82 again would show ₹4,00,000 and repeat ₹2,00,000 already captured earlier. Premium amortisation remains separate.
Illustrative example 4: Forecast hedge unsettled at year end
A corporate forecast-transaction hedge within paragraph 8(5) has a ₹90,000 accounting mark-to-market expense and is unsettled on 31 March 2026. Assume no tax amount is yet recognised under that paragraph and no other provision changes the result. Book income is minus ₹90,000, tax income zero, so the book-profit adjustment is plus ₹90,000. Record the amount for later settlement review rather than treating it as a permanent deduction denial.
Illustrative example 5: Settlement after an earlier accounting gain
A paragraph 8(5) contract settles during FY 2025–26 with total gain ₹1,70,000. Books recognised ₹70,000 in the previous year and only ₹1,00,000 this year. Assume the previous ₹70,000 was correctly excluded for tax and no other restriction applies. Current tax gain ₹1,70,000 minus current book gain ₹1,00,000 requires an upward adjustment of ₹70,000. Close the earlier unrecognised-gain balance.
Illustrative example 6: Net income is a reconciliation result
For one qualifying contract assume verified current inception-premium expense ₹15,000 and separately measured exchange income ₹40,000, with no cancellation amount. Net current tax income is ₹25,000. If books show net income ₹18,000 for that contract, the adjustment is plus ₹7,000. Preserve both tax components; ₹25,000 is not an alternative premium measurement.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix the applicable period | FY 2025–26 and AY 2026–27 identification |
| 2 | Establish ICDS applicability | Accounting method, entity and notification scope |
| 3 | Identify each contract | Bank contract number, currency and direction |
| 4 | Link its underlying exposure | Invoices, forecasts and commitment terms |
| 5 | Classify paragraph 8 treatment | Documented qualifying or settlement-only conclusion |
| 6 | Compute inception difference | Spot, forward rate, currency units and sign |
| 7 | Allocate contract-life amounts | Dated day schedule and opening balance |
| 8 | Measure exchange movement | Opening or inception and closing or settlement basis |
| 9 | Reconcile books with tax | Contract-wise adjustments and later-recognition register |
| 10 | Approve the complete working | Settlement evidence, exceptions and no duplicated adjustment |
Sixteen practitioner FAQs
1. Does this guide use tax-year 2026–27 section numbers?
No. It addresses FY 2025–26 / AY 2026–27 under the 1961 Act.
2. Does ICDS replace the company's books?
No. It governs the relevant tax computation; keep a separate adjustment bridge.
3. Is a small company automatically outside ICDS?
No. Apply the notification's actual exclusions rather than a turnover assumption.
4. Is every contract called a hedge covered by amortisation?
No. Establish paragraph 8(2) and the paragraph 8(3) exclusions.
5. What is special about a forecast-transaction hedge?
Paragraph 8(5) specifies settlement timing for its premium, discount and exchange difference.
6. Are existing year-end assets treated as firm commitments for this exception?
Paragraph 8(3) expressly excludes assets and liabilities existing at year end from that term for this purpose.
7. Is inception premium always an expense?
No. Identify the contract direction and whether the inception difference is favourable or adverse.
8. Can the entire lifetime premium be deducted at inception?
Paragraph 8(1)'s qualifying-contract rule amortises it over the contract life.
9. Which opening rate is used in a later year?
For paragraph 8(4)'s exchange comparison, use inception or the immediately preceding year-end basis, whichever is later.
10. Can the underlying payable's loss be ignored because a forward exists?
No. Compute and reconcile the underlying item and forward separately under their applicable rules.
11. What happens on cancellation of a qualifying contract?
Paragraph 8(1) recognises the cancellation or renewal profit or loss in that previous year.
12. Does settlement automatically make a speculative loss freely usable?
No. Timing and applicable classification or set-off restrictions are different questions.
13. Is an unsettled accounting loss necessarily a permanent add-back?
No. A timing exclusion needs a tracked later-recognition analysis.
14. How do earlier excluded accounting gains enter the settlement-year working?
Compare current tax recognition with current book recognition and close the earlier outstanding tax difference once.
15. Are imported-capital-asset contracts covered without qualification?
No. Section 43AA is subject to section 43A and those cases need their own computation.
16. What proves the adjustment is complete?
A contract-wise lifetime reconciliation tying inception, book entries, tax entries, settlement and closing differences.
Conclusion
Build a contract-wise AY 2026–27 tax bridge separating amortised premiums, exchange differences and settlement-only items under ICDS VI.