Foreign stock investments: Why your actual loss could show up as a capital gain for tax purposes

A question has been raised regarding the tax treatment of investments in foreign shares and ETFs by Indian residents, particularly those made through the Liberalised Remittance Scheme (LRS).

The query relates to the computation of capital gains, the determination of the cost of acquisition, and the applicable foreign exchange conversion rates under the Income-tax Act. The specific issue is whether the actual INR outflow or the prescribed exchange rate on the date of acquisition of the securities should be considered while computing capital gains.

Today's Q&A explains such details in response to a query by a reader.

Cash can sit in your foreign brokerage account for weeks before you actually buy a stock, as well as after you sell it. For taxation purposes, the date to be considered is the date on which the asset is bought or sold.

Rule 115 of the Income-tax Rules, 1962, was applicable until FY 2025–26. From the current financial year, the provisions of Rule 206 of the Income-tax Rules, 2026, will apply.

Rule 206 clearly provides guidelines for the conversion of foreign currency into Indian rupees, depending on the nature of income. The rule provides that, for the purchase cost of an asset, the SBI Telegraphic Transfer (TT) Buying Rate on the last day of the month immediately preceding the month in which the shares were purchased is to be considered.

Likewise, for the sale transaction, the SBI TT Buying Rate on the last day of the month immediately preceding the month in which the shares were sold is to be used.

Please note that, for conversion purposes, you do not have to use the exact spot rate on the trade date but have to use the closing rate of the last day of the previous month, as prescribed under the specific provision of the law.

From the above discussion, it becomes apparent that, for computing capital gains, you neither use the spot rate on the day the shares were sold or bought nor the rate applicable on the date the money was remitted to the broker or received back from the broker. Instead, you have to use the closing SBI Telegraphic Transfer Buying Rate of the last day of the previous month.