The payment event matters
For tax year 2026–27, section 42 of the Income-tax Act, 2025 deals with exchange-rate variation at the time of payment in a liability relating to an asset acquired from outside India for business or profession. The variation adjusts the relevant capital cost or specified capital expenditure. A year-end accounting restatement alone is not the payment event specified by this section. Keep the accounting exchange entry separate from the section 42 working. Income-tax Act, 2025, sections 1 and 42, as amended by Finance Act, 2026.
Use the corresponding original liability
Under subsection (2), variation equals the rupee amount of payment minus the corresponding rupee liability at acquisition. Match the foreign-currency quantity settled to its acquisition-date basis. On a partial payment, do not compare the payment with the entire original invoice liability. The relevant payment can concern the asset cost or repayment of borrowing specifically used to acquire it, including the interest described in the provision. Income-tax Act, 2025, sections 1 and 42, as amended by Finance Act, 2026.
Check exclusions and the correct destination
The liability excludes any part met directly or indirectly by another person or authority. Subsection (3) specifies the capital amounts that are increased or reduced, including actual cost under section 39 and the other expressly identified capital expenditure or acquisition-cost cases. Do not automatically post every exchange loss as a business expense or assume every foreign-currency borrowing relates to an eligible imported asset. Income-tax Act, 2025, sections 1 and 42, as amended by Finance Act, 2026.
A qualifying authorised-dealer contract changes the rate working
Subsection (4) addresses a contract with an authorised dealer for a specified foreign-currency sum on or after a stipulated future date at a specified rate to meet the liability. For the covered sum available to discharge that liability, compute the adjustment using that contractual rate. Confirm the contract's conditions, coverage and settlement evidence; an internal budget rate is not such a contract. Separately analyse any premium or unrelated hedge item rather than inventing its treatment here. Income-tax Act, 2025, sections 1 and 42, as amended by Finance Act, 2026.
Keep a tranche register
For each settlement, retain the original invoice, acquisition date, foreign-currency amount, original rupee equivalent, bank payment, any eligible contract and the capital-cost adjustment. Track unpaid balances separately. Compare the tax adjustment with accounting entries to avoid counting the same variation twice. A zero payment-based adjustment under this section does not decide every separate accounting or tax question concerning an unpaid balance. Income-tax Act, 2025, sections 1 and 42, as amended by Finance Act, 2026.
Period and numerical scope
The 2025 Act commenced on 1 April 2026. This article applies its section 42 to tax year 2026–27; it does not relabel an AY 2026–27 return for FY 2025–26. Each example assumes eligibility and uses fictional exchange rates, no other cost movements, and no separate charges unless expressly stated. The computations isolate the cost variation rather than the full current depreciation or tax liability. Income-tax Act, 2025, sections 1 and 42, as amended by Finance Act, 2026.
Applicable primary references
Income-tax Act, 2025, sections 1 and 42, as amended by Finance Act, 2026
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Rupee cost increases on payment
An eligible USD 10,000 liability has an acquisition-date rate of ₹80 per USD and is settled at ₹85. Original corresponding liability is ₹8,00,000 and payment ₹8,50,000. Variation is positive ₹50,000, increasing the relevant model capital cost by that amount.
Illustrative example 2: Rupee cost decreases
An eligible USD 20,000 liability is originally recorded at ₹82 and settled at ₹79. Original corresponding amount is ₹16,40,000 and payment ₹15,80,000. Variation is negative ₹60,000. The model reduces the relevant capital cost; it does not treat the amount as an additional cost merely because the foreign-currency invoice is unchanged.
Illustrative example 3: Two partial settlements
A USD 10,000 eligible liability has original rate ₹80. USD 5,000 is settled at ₹84 and the remaining USD 5,000 at ₹86. Each tranche has original basis ₹4,00,000. Payments are ₹4,20,000 and ₹4,30,000, giving adjustments ₹20,000 and ₹30,000. Total adjustment is ₹50,000 and total payments ₹8,50,000.
Illustrative example 4: Restatement without payment
An unpaid USD 10,000 eligible liability moves from original rate ₹80 to a reporting-date book rate ₹87. The model accounting liability movement is ₹70,000, from ₹8,00,000 to ₹8,70,000. No amount has been paid: the section 42 payment-event adjustment at that date is nil. Assess the accounting entry and any independently applicable tax provisions separately.
Illustrative example 5: Contract rate for the covered amount
Assume a qualifying subsection (4) authorised-dealer contract covers USD 8,000 at ₹83 against original acquisition rate ₹80. The covered original basis is ₹6,40,000 and contractual settlement amount ₹6,64,000. Adjustment is ₹24,000. An observed spot rate of ₹86 would imply ₹48,000, but it is not substituted for the qualifying contract rate for this covered sum.
Illustrative example 6: Exclude a third-party-funded part
A USD 10,000 asset liability has original rate ₹80. A properly established USD 2,000 portion is met by another person and excluded from this model section 42 liability. The assessee settles the remaining USD 8,000 at ₹85. Corresponding original basis is ₹6,40,000, payment ₹6,80,000 and variation ₹40,000, rather than ₹50,000 on the entire USD 10,000.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the governing year | 2025 Act applicability and earlier-period separation. |
| 2 | Establish the imported asset | Outside-India acquisition and business-use evidence. |
| 3 | Identify the eligible liability | Supplier or specifically linked borrowing documents. |
| 4 | Exclude externally met portions | Third-party payment and funding evidence. |
| 5 | Preserve original-rate information | Acquisition date, currency quantity and rupee basis. |
| 6 | Match each actual payment | Bank settlement and corresponding original tranche. |
| 7 | Test any dealer contract | Authorised dealer, coverage and contractual-rate conditions. |
| 8 | Compute the signed variation | Payment basis minus corresponding acquisition basis. |
| 9 | Post to the proper capital amount | Applicable subsection (3) destination and reconciliation. |
| 10 | Review book-to-tax differences | No duplicate adjustment and separate unpaid-balance analysis. |
Sixteen practitioner FAQs
1. Which provision is addressed?
Section 42 of the Income-tax Act, 2025 for the stated tax year.
2. Does every foreign-currency expense qualify?
No. Establish the imported-asset and eligible-liability conditions.
3. Is acquisition from outside India relevant?
Yes. It is part of the provision's stated scope.
4. What event drives the adjustment here?
Exchange-rate variation at the time of the relevant payment.
5. Does a year-end restatement alone satisfy that event?
No. Do not equate an unpaid accounting restatement with payment.
6. What does the original-rate comparator represent?
The acquisition-date rupee liability corresponding to the amount being paid.
7. Can a partial payment be compared with the whole invoice?
No. Match the corresponding tranche.
8. Can the adjustment be negative?
Yes. A qualifying decrease reduces the relevant capital amount.
9. Is every qualifying loss a direct revenue expense?
The section specifies capital-cost or capital-expenditure adjustment destinations.
10. What about a part met by another person?
The provision excludes the stated directly or indirectly met portion.
11. Can eligible acquisition borrowing be relevant?
Yes, subject to the provision's specifically linked borrowing terms.
12. Does a budget exchange rate qualify as a dealer contract?
No. Verify the actual subsection (4) contract conditions.
13. Which rate applies to a qualifying covered sum?
The specified contractual rate under subsection (4).
14. Does the article decide separate forward-premium treatment?
No. Analyse such items under their own applicable requirements.
15. Does a nil adjustment decide every unpaid-balance tax issue?
No. Review other independently applicable provisions separately.
16. Can this new number be substituted into an FY 2025–26 return?
No. Establish the correct enactment and period first.
Conclusion
Reconcile imported-asset tax cost under section 42 using actual payment, corresponding acquisition-date liability and any qualifying authorised-dealer contract.