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Income-tax Act, 1961 | Business and profession

Section 43A of Income-tax Act, 1961: Exchange Rate Changes on Imported Assets

Section 43A deals with changes in the rupee value of specified liabilities incurred to acquire capital assets from outside India. It can adjust the tax cost of the asset when a qualifying foreign-currency liability is actually paid.

Law transition: The Income-tax Act, 2025 applies from 1 April 2026, subject to its transitional and savings provisions. This article explains Section 43A of the 1961 Act for periods and proceedings to which that law applies. For tax year 2026-27 onwards, consult the corresponding provisions of the 2025 Act and applicable rules before determining the tax treatment.

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What is Section 43A?

Section 43A is a special tax rule for assets acquired from a country outside India for use in a business or profession. Where a change in the exchange rate changes the rupee liability for the asset's purchase price or a foreign-currency borrowing specifically used to acquire it, the qualifying difference is reflected in the asset's cost or the other specified capital expenditure or acquisition cost.

Conditions for applying the provision

  • The taxpayer acquired an asset from outside India for business or professional purposes.
  • A qualifying liability exists for the asset's cost or for money borrowed in foreign currency specifically to acquire the asset, including interest where covered by the provision.
  • The exchange rate changed after acquisition.
  • The increase or reduction in the rupee liability is taken into account at the time of making payment, irrespective of the taxpayer's accounting method.

How exchange differences affect the asset cost

When the statutory conditions are met, an increase in the relevant liability is added to the prescribed tax cost or expenditure, and a reduction is deducted. Depending on the facts, the adjustment may affect actual cost under Section 43(1), specified capital expenditure under Sections 35, 35A or 36, or the acquisition cost of an eligible capital asset for Section 48. The precise statutory categories and exceptions must be checked.

The payment-based rule is important: a year-end unrealised foreign exchange restatement is not, by itself, the same as an exchange difference recognised upon payment for Section 43A. Other foreign-exchange transactions may instead fall under Section 43AA, subject to the applicable rules.

Explanations to Section 43A

Explanation 1: Exchange rate and currencies

The expression rate of exchange means the rate determined or recognised by the Central Government for conversion between Indian and foreign currency. Foreign currency and Indian currency take their meanings from Section 2 of the Foreign Exchange Management Act, 1999.

Explanation 2: Liability paid by another person

Any part of the relevant liability met directly or indirectly by another person or authority is excluded when applying Section 43A.

Explanation 3: Forward exchange contract

Where the taxpayer has contracted with an authorised dealer to obtain specified foreign currency at an agreed future rate to discharge the relevant liability, the adjustment for the covered sum is computed by reference to the contracted rate, as provided in the Explanation.

Illustrative calculation

A business imports machinery for USD 100,000. Assume the relevant exchange rate at acquisition is Rs. 80 per USD and the amount is paid when the rate is Rs. 84 per USD.

Initial rupee cost: Rs. 80,00,000.
Rupee liability on payment: Rs. 84,00,000.
Exchange difference: Rs. 4,00,000.

Assuming all conditions of Section 43A are satisfied and no other adjustment applies, Rs. 4,00,000 is added to the relevant tax cost. This is an illustration, not a depreciation calculation.

Section 43A compared with related rules

Section 43(1) defines actual cost for relevant business-income provisions. Section 43A is a special rule for qualifying exchange-rate changes on assets acquired from outside India. Section 43AA addresses foreign-exchange gains and losses more generally, subject to Section 43A and the notified income computation and disclosure standards. Accounting treatment under applicable financial reporting standards need not be identical to tax treatment.

Frequently asked questions

Does Section 43A apply to assets purchased in India?

The provision concerns assets acquired from a country outside India. An Indian purchase does not satisfy that condition merely because it is financed by a foreign-currency loan.

Does a year-end exchange loss automatically increase actual cost?

No. Under the post-Finance Act, 2002 formulation, the relevant exchange adjustment is linked to payment. The exact facts and statutory conditions must be examined.

Does Section 43A apply to a forward contract?

Explanation 3 prescribes treatment where a qualifying contract with an authorised dealer covers foreign currency used to discharge the specified liability.

Section 43A: Statutory text from the original webpage

The following is the source webpage's statutory extract and historical amendment note, retained for reference. Verify amendments and the applicable law for the relevant tax period against the official statute.

1Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment-

(a) towards the whole or a part of the cost of the asset; or

(b) towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any,
the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from-

(i) the actual cost of the asset as defined in clause (1) of section 43; or

(ii) the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35; or

(iii) the amount of expenditure of a capital nature referred to in section 35A; or

(iv) the amount of expenditure of a capital nature referred to in clause (ix) of sub-section (1) of section 36; or

(v) the cost of acquisition of a capital asset (not being a capital asset referred to in section 50) for the purposes of section 48,

and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid:

Provided that where an addition to or deduction from the actual cost or expenditure or cost of acquisition has been made under this section, as it stood immediately before its substitution by the Finance Act, 2002, on account of an increase or reduction in the liability as aforesaid, the amount to be added to, or, as the case may be, deducted under this section from, the actual cost or expenditure or cost of acquisition at the time of making the payment shall be so adjusted that the total amount added to, or, as the case may be, deducted from, the actual cost or expenditure or cost of acquisition, is equal to the increase or reduction in the aforesaid liability taken into account at the time of making payment.

Explanation 1.-In this section, unless the context otherwise requires,-

(a) "rate of exchange" means the rate of exchange determined or recognised by the Central Government for the conversion of Indian currency into foreign currency or foreign currency into Indian currency;

(b) "foreign currency" and "Indian currency" have the meanings respectively assigned to them in section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999).

Explanation 2.-Where the whole or any part of the liability aforesaid is met, not by the assessee, but, directly or indirectly, by any other person or authority, the liability so met shall not be taken into account for the purposes of this section.

Explanation 3.-Where the assessee has entered into a contract with an authorised dealer as defined in section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999), for providing him with a specified sum in a foreign currency on or after a stipulated future date at the rate of exchange specified in the contract to enable him to meet the whole or any part of the liability aforesaid, the amount, if any, to be added to, or deducted from, the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset under this section shall, in respect of so much of the sum specified in the contract as is available for discharging the liability aforesaid, be computed with reference to the rate of exchange specified therein.
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1. Subs. by Act 20 of 2002, s. 21, for section 43A (w.e.f. 1-4-2003).

Official legislation and resources

Last reviewed: 25 October 2026. General information only; statutory amendments, notifications and judicial decisions may affect individual cases.