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Home >Money >Personal Finance >When a relative abroad repays loan, forex gains are not taxable

Sometimes, taxpayers can land in a unique situation. They could make some monetary gains that are not specified under income tax laws. In such cases, the taxation depends on the interpretation of the provisions under the I-T Act. One prevalent example of this is how bitcoins generated during the “mining" process will be taxed. There are different views on this as it is not covered under tax laws.

In such rare and unique situations, the assessee may take the view that the gains are not taxable as they are not covered under any I-T regulations. The assessing officer, however, will look at it as a revenue loss for the government. Officers usually try to tax such gains.

Let’s look at another example. Suppose you give a $100,000 personal loan to a relative staying abroad without charging any interest. Say, the exchange rate was 70 for a dollar. The lender will need to transfer 70 lakh from India. The borrower repays the money after some years. At the time of repayment, the rupee weakens against the dollar. Say, it’s 76 for a dollar. When the borrower transfers $100,000, the lender will receive 76 lakh. Due to the exchange rate difference, the lender makes 6 lakh extra. There is no provision under the I-T Act for such gains.

The Income Tax Appellate Tribunal (ITAT), Mumbai, recently dealt with a similar case. It held that gains arising due to forex fluctuation when receiving repayment of a personal loan will not be taxable.

During an assessment, a tax officer noticed that an individual had received 1.12 crore. The taxpayer explained that he had extended an interest-free personal loan to his cousin in Singapore. The remittance was made under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India.

Due to a change in the exchange rate, the amount received on repayment was more than the money advanced initially. The taxpayer said that the loan was purely personal—it was not in the nature of a business transaction. There was no motive for economic gains in this transaction. The assessing officer, however, opined that the gains were taxable and made additions to the income, classifying them as interest income.

“The Mumbai ITAT held that the money that the assessee had received could not be taxed as income unless it is a revenue receipt, or there are provisions to tax it under the law," said Naveen Wadhwa, a chartered accountant and deputy general manager at Taxmann.com, a leading publisher on taxation and corporate laws.

The ITAT ruled in favour of the taxpayer, saying gains due to currency fluctuation in this instance should not be taxed.

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