An importer in Navi Mumbai buys a machine from Germany in October and pays for it in March. The rupee weakens in between. The accountant books an exchange loss, the auditor signs it, and everyone assumes the matter is closed. Then the tax computation is prepared, the loss is added back, and the owner wants to know why a real cost that left the bank account is not deductible.

It is a fair question with an unsatisfying answer: because the accounting standard and the tax law are asking different things. Ind AS 21 asks how the transaction should be reported to shareholders. The tax provisions ask what should be taxed and when. Where those purposes diverge, so do the numbers — and the business is left maintaining two versions of the same fact. This article sets out where that happens and what has to be tracked.

Two Rulebooks, One Transaction

It helps to be clear about what governs what.

• Ind AS 21 governs your financial statements. It determines how transactions in a foreign currency are recorded, how monetary items are restated at the reporting date, and where the resulting differences are presented.
• ICDS VI governs the computation of taxable income. The Income Computation and Disclosure Standards were notified for computing income under business or profession and other sources for taxpayers on the mercantile system. They do not affect your books at all — they exist only for the return.
• Specific statutory provisions override both. Where the law makes express provision for exchange differences on assets acquired from outside India, that provision prevails over the general standard.
• The result is a reconciliation, not a choice. You do not elect one treatment. You apply Ind AS in the books, apply the tax rules in the computation, and carry the difference as a reconciling item.

Where the Two Treatments Part Company

Simplified for orientation. The precise position depends on the terms of each instrument and on the assessee’s circumstances. Read the notified text before applying any row.

The Imported Asset Rule, and Why It Surprises People

This is the divergence that produces the most argument in practice, so it is worth working through with numbers.

• The adjustment happens on payment, not on accrual, and applies regardless of the method of accounting followed.
• It applies to the repayment of foreign currency borrowings taken specifically to acquire that asset, as well as to the payment for the asset itself.
• It applies only to assets acquired from outside India. A foreign currency liability for an asset bought within India falls under the general standard instead.
• Where a block of assets is involved, the adjustment flows to the written down value of the block whether or not the amount was capitalised in the books.

What the Reconciliation Looks Like in Practice

Pulling the divergences together for a single importer with an overseas branch and a hedging programme, the year-end adjustment to arrive at taxable income might look like this.

Illustrative figures for a hypothetical importer, shown to demonstrate the shape of the working rather than to represent any actual business. The trade payables line is nil because the book and tax treatments agree there — which is exactly why it belongs in the schedule, so a reviewer can see it was considered.

Three of those four lines require an adjustment and one does not. The discipline is to list every category of exchange difference, including the ones that agree, so that the working is complete and can be re-performed next year by someone else.

The Overseas Branch: A Reserve in the Books, Income for Tax

If your business runs a branch, project office or other foreign operation whose functional currency differs from the rupee, this divergence applies every single year rather than only when a transaction settles.

• Under Ind AS 21 the results and position of that operation are translated and the resulting difference is recognised in other comprehensive income, accumulating in a translation reserve within equity. It never touches reported profit while the operation is held.
• For tax purposes the financial statements of the foreign operation are translated as if its transactions had been those of the assessee directly — so the differences fall into the ordinary computation rather than into a reserve.
• The consequence is an annual reconciling item that has no counterpart in your profit and loss account, which makes it easy to overlook entirely.
• It is also the item most likely to be queried, because a reviewer comparing the return against the financial statements will not find it in the profit figure.

Forward Contracts: Two Different Clocks

Hedging is where the timing difference becomes most visible, because the two frameworks recognise the same economic outcome over different periods.

1. For tax, any premium or discount arising at the inception of a forward exchange contract is amortised as income or expense over the life of the contract.
2. Exchange differences on such a contract are recognised as income or expense in the year in which the rates change.
3. Any profit or loss on cancellation or renewal of the contract is recognised in the year the cancellation or renewal occurs.
4. Contracts entered into for trading or speculation, and those covering a firm commitment or a highly probable forecast transaction, are dealt with separately from that general rule.
5. Your books, meanwhile, apply the financial instruments standard — which for many entities means fair value movements recognised as they arise, and hedge accounting only where the documentation requirements have been met.

The practical outcome is that a hedge which nets to the same result over its life will land in different years in the two sets of numbers. That is a timing difference rather than a permanent one, but it still has to be tracked and reversed.

The Working Paper to Build

If you take one thing from this article, make it this schedule. It should be prepared alongside the accounts, not reconstructed at return-filing time.

A schedule in this form takes a morning to set up and saves considerably more than that at assessment.

One Thing to Check Under the New Income Tax Statute

The income tax law was replaced with effect from 1 April 2026. The substance described above — exchange differences on revenue items reaching income, differences on imported capital assets adjusting the cost of the asset, and separate treatment of forward contracts — reflects a settled policy that the new statute carries forward.

What has changed is the numbering. Provisions familiar by their old section numbers now sit elsewhere, and the notified computation standards are read against the new framework. Two practical consequences:

• Working papers, engagement letters and internal checklists that cite the old section numbers should be updated for periods governed by the new Act, even though the treatment itself is unchanged.
• Where an assessment covers an earlier year, the old references remain the correct ones for that year. Do not retrofit new numbering onto historical computations.

Six Errors We See Repeatedly

• Deducting the exchange loss on an imported machine. The most common one, and the one most likely to be picked up. It belongs in the cost of the asset, not the profit and loss account, for tax.
• Adjusting on accrual rather than on payment. For imported assets the adjustment is triggered by payment. Restating the liability at year end does not create the tax adjustment.
• Ignoring the branch translation reserve. It sits in equity, never appears in the profit figure, and is therefore invisible to anyone reconciling from the profit and loss account alone.
• Running one fixed asset register. Once the imported-asset rule bites, the book block and the tax block have permanently different values. One register cannot serve both.
• Treating all forward contracts alike. Hedging an existing exposure, covering a forecast transaction and trading are three different situations with three treatments.
• Leaving the reconciliation to the return. By then the rates, the payment dates and the contract terms have to be reconstructed. Prepare it with the accounts, while the evidence is at hand.

How We Help Importers and Exporters With This

Businesses around Navi Mumbai and Vashi tend to have exactly the exposure this article describes — imported plant, foreign currency payables, and sometimes an overseas office. We build the exchange difference schedule as part of the year-end file rather than as a separate exercise at filing time.

• Where the books are the issue, the treatment is settled during Ind AS implementation and reviewed again at audit.
• Where the computation is the issue, the reconciliation and the separate depreciation schedule are prepared as part of business tax filing.
• Cross-border payments bring their own trail — our Form 15CA and 15CB and international tax teams handle that alongside.
• For businesses setting up import or export operations, the reporting consequence is worth mapping before the first consignment — which sits with our import export code and advisory work.

Frequently Asked Questions