Understanding Rule 115: How Foreign Income is Converted into INR for Indian Taxation

For Indian residents earning income from outside India, understanding how that foreign income is converted into Indian Rupees (INR) for tax purposes is essential. This conversion is not arbitrary; it is governed by a specific provision in Indian tax law that prescribes the rate and date to be used. Even minor differences in exchange rates can significantly impact your taxable income and, consequently, your tax liability.

This article provides a detailed explanation of Rule 115 of the Income Tax Rules, 1962 — the cornerstone of foreign income conversion under Indian taxation — along with relevant illustrations to help resident taxpayers comply accurately.

While the Income Tax Act, 1961 lays down the overall principles of income taxation, the Income Tax Rules, 1962, particularly Rule 115, specify the manner in which income denominated in foreign currency must be converted into Indian currency for tax computation purposes.

As per Rule 115, the applicable exchange rate for converting foreign currency income into INR is the “Telegraphic Transfer Buying Rate (TTBR)” of the State Bank of India (SBI). This is a standard rate widely accessible and published regularly, thus bringing consistency and transparency to the process.

Rule 115 defines not only the applicable rate but also the “specified date”, i.e., the date on which the TTBR is to be taken. The specified date depends on the nature of income:

1. For Salaries, Business Income, and Income from Other Sources

Use the SBI TTBR on the last day of the month immediately preceding the month in which the income is due or received, whichever is earlier.

Illustration:
If an Indian resident receives a salary or dividend of USD 1,000 on July 10, 2025, the TTBR as of June 30, 2025, will be used for conversion into INR.

2. For Capital Gains on Foreign Assets

Use the SBI TTBR on the last day of the month immediately preceding the month in which the transfer (i.e., sale) of the foreign asset takes place.

Illustration:
If a foreign property or equity is sold on July 25, 2025, the conversion will be done using the TTBR as of June 30, 2025.

The tax treatment of capital gains from foreign assets depends on the holding period of the asset:

• Long-Term Capital Gains (LTCG): If held for more than 24 months, taxed at 12.5% plus surcharge and cess.
• Short-Term Capital Gains (STCG): If held for up to 24 months, taxed as per slab rates applicable to the individual.

Let’s break this down with an example:

Scenario:
An individual resident and ordinarily resident (ROR) in India invested in US equities.

• Investment Date: 15th April 2020
• Investment Amount: USD 1,500
• Exchange Rate on 15/04/2020: 1 USD = ₹80
• Cost in INR: ₹1,20,000

The stock is sold on 25th May 2025 for USD 2,500.

• TTBR on 30/04/2025: 1 USD = ₹100
• Sale Value in INR: ₹2,50,000 (USD 2,500 × ₹100)
• Capital Gain: ₹2,50,000 – ₹1,20,000 = ₹1,30,000
• Holding Period: More than 24 months → LTCG
• Tax Payable: 12.5% of ₹1,30,000 = ₹16,250 (plus surcharge and cess)

1. Residential Status is Fundamental

The conversion rule under Rule 115 primarily applies to those classified as Resident and Ordinarily Resident (ROR) in India. Such individuals are taxed on their global income.
In contrast, Non-Residents (NRIs) and Resident but Not Ordinarily Residents (RNORs) are taxed only on income that is received or accrues in India. Hence, Rule 115 is not relevant in the same way for NRIs.

2. Maintain Detailed Documentation

Ensure you retain records of:

• Date of receipt or accrual of foreign income
• Currency-wise value of income
• Source and country of origin
• SBI TTBR on the specified date
• Supporting documents (contract notes, bank statements, invoices)

This documentation is critical, especially during scrutiny assessments or when claiming tax credits.

3. Double Taxation Avoidance Agreements (DTAA)

Even after converting the income into INR and computing the Indian tax liability, the actual tax paid in the foreign country may be eligible for a Foreign Tax Credit (FTC) in India.

To claim this benefit:

• The relevant DTAA must be referred to (e.g., India-USA, India-Singapore, etc.)
• Form 67 must be filed electronically before the ITR due date
• Proper foreign tax payment proofs and TRC (Tax Residency Certificate) are often required

For instance, if tax is deducted in the USA on your stock sale, and the same income is taxable in India as LTCG, you may claim FTC against your Indian tax liability.

Rule 115 offers clarity and structure to the process of converting foreign income into INR for taxation purposes. However, it requires careful compliance in terms of date selection, rate application, and record-keeping.

For Indian residents earning globally — whether through foreign salaries, dividends, business income, or investments — a clear understanding of these provisions is essential to ensure:

• Accurate tax computation
• Avoidance of penalties due to incorrect conversion
• Full utilization of DTAA and FTC benefits

It is always advisable to seek professional guidance, especially where multiple currencies, jurisdictions, and income heads are involved.