Compute the tax movement by invoice and year
For a company following mercantile accounting and closing FY 2025–26, section 43AA of the Income-tax Act, 1961 and notified ICDS VI govern the income-tax computation for ordinary foreign-currency trading balances, subject to section 43A where applicable. ICDS applies to computation under business or professional income and income from other sources, subject to the notified exception for individuals and HUFs not required to have a section 44AB audit; it does not prescribe how to maintain books. Settlement during the year and conversion of open monetary items at the end of the tax period (31 March 2026 here) can both produce recognised exchange differences. A gain or loss already reflected in taxable profit through the ledger is not added or deducted again.
Read the applicable text: Income-tax Act, 1961: section 43AA; CBDT Notification 87/2016: ICDS VI; Income-tax Act, 2025: section 536, as amended.
Classify the unit before choosing a rate
A trade receivable or payable for a fixed foreign-currency amount is a monetary item. Recognise an ordinary transaction at its date rate under paragraph 3; a weekly or monthly average may be used if it approximates the actual rate for that currency over the period. Use actual transaction-date rates when rates fluctuate significantly. Under paragraphs 4–5, translate outstanding monetary units at closing rate, subject to the specified exception where the rate is unrealistic or remittance restrictions make it unrepresentative and exchange at that rate cannot be effected. Support the likely realisation or disbursement in that case. A non-monetary inventory asset and the supplier payable financing it are two different units. Paragraph 4(d) separately addresses inventory carried at foreign-currency net realisable value.
Prevent a duplicate settlement or book adjustment
Start with the rupee tax carrying amount of the open units at the last tax close, or the transaction-date basis if first recorded this year. Compare the settled tranche with its corresponding carrying amount and value the remaining tranche at close. Reconcile resulting tax differences with book gains and losses by invoice. If prior-year revaluation was automatically reversed, trace the reversal together with the settlement or current revaluation before comparing net book and tax amounts.
Keep exceptions out of the trade workbook
Paragraph 6 preserves section 43A and Rule 115 where applicable. For qualifying capital assets acquired outside India for the business or profession, section 43A applies the exchange difference at actual payment to the relevant tax cost or expenditure, including on qualifying foreign-currency acquisition borrowings. Keep those items and forwards or hedges out of the ordinary trade calculation. Keep bank charges and credit impairment distinct from a currency movement. This article addresses AY 2026–27 under the 1961 Act; for tax year beginning 1 April 2026 check the 2025 Act and transition separately.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Open export invoice
USD 50,000 was recorded at ₹82/USD and remains open at ₹84/USD. Carrying amount rises from ₹41 lakh to ₹42 lakh: ₹1 lakh gain.
Illustrative example 2: Open import trade creditor
A trading-goods liability of USD 20,000 moves from ₹83/USD to ₹85/USD. Rupee payable increases from ₹16.60 lakh to ₹17 lakh: ₹40,000 loss.
Illustrative example 3: Partial customer receipt
USD 60,000 initially at ₹80/USD: USD 20,000 settles at ₹82/USD and USD 40,000 closes at ₹83/USD. Settlement gain is ₹40,000 and closing gain ₹1.20 lakh, for ₹1.60 lakh total.
Illustrative example 4: Prior-year tax close
USD 30,000 initially recognised at ₹80/USD had already been carried at ₹83/USD for the previous tax close. Collection at ₹84/USD creates ₹30,000 current gain; the original-to-cash difference of ₹1.20 lakh includes ₹90,000 previously recognised.
Illustrative example 5: Book-to-tax difference
Books include ₹75,000 currency gain; supported tax gain on the same items is ₹90,000. The net upward bridge is ₹15,000.
Illustrative example 6: Inventory and creditor
Trading inventory initially recorded at ₹9 lakh stays at cost on the assumption that its net realisable value is at least ₹9 lakh; its USD 10,000 creditor initially at ₹90/USD closes at ₹92/USD. The payable increases by ₹20,000, the ordinary exchange loss; no separate currency increase is added to the stock cost.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | List open and settled trade invoices | Invoice currency, quantities and ledger IDs. |
| 2 | Separate monetary and other items | Contractual rights and obligations per balance. |
| 3 | Reconcile opening tax bases | Prior-year workpaper and filed tax adjustments. |
| 4 | Check transaction rates | Dated source and policy for any approximations. |
| 5 | Match partial payments | Bank advice, currency units, settlement rates and separate fees. |
| 6 | Prove closing rates | Rate source, date and any restricted-currency evidence. |
| 7 | Calculate gains or losses | Separate settled and open monetary units. |
| 8 | Compare net book entries | Ledger revaluations, reversals and settlement postings. |
| 9 | Screen statutory exceptions | Imported asset, Rule 115 or forward-contract workpapers. |
| 10 | Approve the return bridge | Signed tax-minus-book reconciliation with invoice-level support. |
Sixteen practitioner FAQs
1. Can a closing gain arise before collection?
Yes. ICDS VI recognises exchange differences from conversion of monetary balances at the year-end.
2. Does a later receipt determine the prior year's closing rate?
No. Use the applicable year-end rule and retain later receipts as separate evidence.
3. Can a representative average be used when rates jump sharply?
ICDS VI calls for actual transaction-date rates when exchange rates fluctuate significantly.
4. Why does a weaker rupee produce a loss for a payable?
The same foreign-currency amount requires more rupees to discharge.
5. Can net currency gain be used without an invoice schedule?
Keep an invoice-level bridge so completeness, signs and tax bases can be checked.
6. Should a prior-year gain be recognised again on collection?
No. Reconcile settlement against the supported opening tax carrying amount.
7. Does the trading inventory move when its unpaid invoice moves?
The inventory and payable have distinct measurement rules.
8. How should restricted currencies be documented?
Keep evidence of the restriction or unrealistic rate and support the likely amount under paragraph 4(b).
9. Do bank fees form part of every currency difference?
Separate service charges from the actual translation or settlement movement.
10. What if ledger and tax figures agree?
There is no further net book-to-tax adjustment for those amounts.
11. Is a translation gain the same as a bad-debt reversal?
No. Trace credit impairment and currency movements independently.
12. Can one close a supplier ledger using a single average rate?
Apply the relevant rate rules and trace each settlement and remaining currency balance.
13. Do imported machines use this trading template?
Check whether section 43A applies and calculate any tax cost adjustment at actual payment, separately from open trade balances.
14. Can forward-contract gains be netted automatically?
No. Analyse the contract under its own ICDS VI rules and reconcile separately.
15. Why check opening reversals?
They can offset current settlement entries and distort a comparison made from one ledger account alone.
16. Which enactment governs this AY?
FY 2025–26 and AY 2026–27 use the 1961 Act framework; do not apply the later tax-year numbering.