Currency Conversion for Income Tax Purpose : 2 Most Important Rules Everyone Should Know

Have you earned income in foreign exchange ? How  do you convert in rupees for accounting for the purpose showing income in your tax return. Similarly , the issue of conversion of foreign exchange to rupees will come up if you are required to deduct tax amount of credit to the accounts of a foreigner who is required to be paid  in foreign exchange . How will you convert liability in foreign exchange to rupees and pay the TDS to government. This post is going to explain the rules and law regarding the correct way to convert foreign exchange for the purpose of complying provisions under Income Tax Act.

Conversion of Earning in  Foreign Exchange in Rupees

Rule 115 of the Income Tax Rules  are required to be followed in case o earnings in foreign exchange. This rule provides that the foreign exchange earning of income received or accrued or deemed to be received or accrued to an assessee should be converted at the same rate which was used by SBI for buying that currency  on the specified date. ‘For knowing that you will have to visit the SBI branch ( quite strange Income Tax Department creates rules without making facilities to taxpayer).

What is specified date for conversion?

Rule 115 provides different specified dates for different types of income . But , if the income is such that TDS is required to be deducted , the date of conversion i.e specified date will be the date on which tax was required to be deducted . The following table gives you the clear picture of specified dates which will be the date for conversion of foreign to rupees.

Sl No.	Income	Meaning of Specified Date
a.	Income Chargeable under the head “Salaries”	the last day of the month immediately preceding  the month in which the  salary is due,or is paid in  advance or in arrears
b.	Income by way of ” interest on securities “	the last day of the month immediately preceding the month in which the income is due
c.	Income chargeable under the heads “Income form house property”,”Profits and gains of business or profession” [not being income referred to in cl (d)] and “Income from other sources ” (not  being income by way of dividends and  “Interest on Securities”)	the last day of the previous year of the assessee
d.	Income chargeable under the head  “Profits and gain of business or  profession” in the case of a non- resident engaged in the business of operation of ships	the last day of the month immediately preceding the month in which such income is deemed to accrue or arise in India
e .	Income by way od dividends,	the last day of the month  immediately preceding the month in which the dividend is declared , distributed or paid by the company
f.	Income chargeable under the head “Capital gains”	the last day of the month  immediately preceding the month in which the capital asset is transferred

 

Conversion of Forex For TDS Purpose

Section 195 prescribes that payer will deduct the income tax at the rates specified either at the time of credit of payment or at the time of payment whichever is earlier. It has been provided under Rule 26 that for TDS on any income payable in foreign exchange , following two rules shall be adopted

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1. The rate of exchange of foreign currency shall be same as that of SBI use for buying currency on that date.
2. The date on which conversion rate will be applied is the date on which tax was required to be deducted .

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For ready reference , please read the Rule 26 below

Rate of exchange for the purpose of deduction of tax at source on income payable in foreign currency.

26. For the purpose of deduction of tax at source on any income payable in foreign currency, the rate of exchange for the calculation of the value in rupees of such income payable to an assessee outside India shall be the telegraphic transfer buying rate of such currency as on the date on which the tax is required to be deducted at source under the provisions of Chapter XVIIB by the person responsible for paying such income.

Explanation : For the purposes of this rule, telegraphic transfer buying rate, in relation to a foreign currency, means the rate or rates of exchange] adopted by the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), for buying such currency , having regard to the guidelines specified from time to time by the Reserve Bank of India for buying such currency, where such currency is made available to that bank through a telegraphic transfer.

If the rates applied by ABC CO is same as telegraphic rate adopted by SBI on 31/3/2008 , the action of the company was according to the provision of the I T Act and any more payment in rupees terms on account of fluctuation of exchange rate shall not require tax at source.