Sections 40 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Three sections of Part D of Chapter IV deal with cost and exchange rates. Section 40 sets the cost of acquisition of an asset that is sold as stock-in-trade after coming by amalgamation, gift, will, irrevocable trust or partition. Section 42 adds or subtracts an exchange-rate variation on a foreign asset to its cost. Section 43 says how other foreign exchange gains and losses are taxed. This article explains them as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026.
Section 40: the cost of acquisition of such an asset, when sold as stock-in-trade, is the transferor's cost plus improvement plus transfer expenditure. Section 42: where a payment for an asset acquired from outside India differs from the liability at the time of acquisition because of a change in the rate of exchange, the variation (A = B minus C) is added to or reduced from the cost. Section 43: other exchange gains and losses are income or loss, computed as per the income computation and disclosure standards notified under section 276(2).
Where these sections sit
Section 41, on written down value, falls between sections 40 and 42; it is covered in our post on Section 41. Section 39 sets the actual cost to which section 42 refers; see the article on section 39. Section 44, on preliminary expenses, follows in its own article. If your business buys assets abroad or trades in foreign currency, our books of accounts compliance team can set up the records these sections need.
Section 40: cost of acquisition for stock-in-trade
Section 40(1)
For computing income under the head "Profits and gains of business or profession", the cost of acquisition of an asset which becomes the property of:
- (a) an amalgamated company under a scheme of amalgamation; or
- (b) an assessee under a gift, will or irrevocable trust, or on total or partial partition of a Hindu undivided family,
when sold as stock-in-trade, is the sum of:
| Item | Component |
|---|---|
| (i) | Cost of acquisition of the asset in the hands of the amalgamating company (clause (a)) or the transferor or donor (clause (b)) |
| (ii) | Any cost of improvement made |
| (iii) | Any expenditure incurred by the amalgamating company, transferor or donor, as the case may be, wholly and exclusively in connection with the transfer |
Section 40(2)
The section does not apply to an asset referred to in section 67(6).
Example: plot inherited and sold as stock
Dev (invented) inherits a plot from his father and starts selling it in his real estate business as stock-in-trade. The father's cost of acquisition was Rs. 20,00,000. Dev made improvements costing Rs. 2,00,000, and the father's executor incurred Rs. 50,000 wholly and exclusively in connection with the transfer. The cost of acquisition under section 40(1) is 20,00,000 + 2,00,000 + 50,000 = Rs. 22,50,000. Section 40 gives the cost only; how the profit from the sale is brought to tax is for other provisions.
Section 42: capitalising exchange variation on an asset from abroad
Section 42(1): when it applies
Irrespective of anything in any other provision, where at the time of making payment during the tax year, there is a variation in the liability of an assessee, expressed in Indian currency, due to a change in the rate of exchange, in relation to an asset acquired for the purpose of business or profession from a country outside India, it is dealt with as sub-sections (2) and (3) say.
Section 42(2): the formula
The liability excludes any part met directly or indirectly by any other person or authority. The "variation in liability" is:
A = B minus C, where:
- A = variation in liability;
- B = payment expressed in Indian currency at the time it is made, (a) towards the whole or part of the cost of the asset, or (b) towards repayment of the whole or part of moneys borrowed, directly or indirectly, along with interest in foreign currency, specifically for acquiring that asset;
- C = liability corresponding to the amount in B, in Indian currency, at the time of acquisition of the asset.
Section 42(3): where the variation goes
The variation in liability is added to or reduced from:
- the actual cost of the asset referred to in section 39; or
- expenditure of capital nature referred to in section 32(i) or 45(1)(a)(i); or
- the cost of acquisition of a capital asset (not being a capital asset referred to in section 74) for the purpose of section 72,
and the resulting figure is taken to be the actual cost, the capital expenditure or the cost of acquisition, as the case may be. For cost of acquisition in capital gains, see our post on Section 72.
Section 42(4): forward contracts
Where the assessee has a contract with an authorised dealer (as defined in section 2 of the Foreign Exchange Management Act, 1999) to provide a specified sum in foreign currency on or after a stipulated future date at the rate of exchange in the contract, to meet the whole or part of the liability, the addition or deduction, for so much of the sum as is available for discharging the liability, is computed with reference to the rate of exchange specified in the contract. The Foreign Exchange Management Act, 1999 is another law; check it.
Example: imported machine
Surya Tools (an invented firm) acquires a machine from a supplier outside India. The liability, in Indian currency at the time of acquisition (C), is Rs. 80,00,000. When it makes the payment in the tax year, the payment expressed in Indian currency (B) is Rs. 84,00,000 because the rate of exchange has changed. The variation is A = 84,00,000 minus 80,00,000 = Rs. 4,00,000, which is added to the actual cost of the asset under section 39. If B had been Rs. 78,00,000, A would be minus Rs. 2,00,000 and the actual cost would be reduced by Rs. 2,00,000. The figures are invented and show only the arithmetic.
Section 43: taxation of other foreign exchange gains and losses
Section 43(1)
Subject to section 42, any gain or loss arising on account of change in foreign exchange rates on foreign currency transactions is treated as income or loss, as the case may be, and is computed as per the income computation and disclosure standards notified under section 276(2).
Section 43(2)
Sub-section (1) applies to all foreign currency transactions, including those relating to:
- (a) monetary items and non-monetary items;
- (b) translation of financial statements of foreign operations;
- (c) forward exchange contracts; and
- (d) foreign currency translation reserves.
The standards under section 276(2) are notified separately; what has been notified is not in the text consulted. Section 43 prints no formula.
| Section | Subject | Key operative words |
|---|---|---|
| 40 | Cost of acquisition for stock-in-trade | Sum of transferor's cost, improvements and transfer expenditure |
| 42 | Exchange variation on foreign asset | A = B minus C, added to or reduced from cost |
| 43 | Other exchange gain or loss | Income or loss, as per the notified standards |
Need help with foreign currency and asset costing?
Exchange variation can change the depreciation base for years, and its treatment depends on how the payment and the acquisition are recorded. To set up the workings, see our books of accounts compliance service.
Key takeaways
- Section 40: stock-in-trade acquired by amalgamation, gift, will, irrevocable trust or partition has a cost made of three parts: the transferor's cost, improvements and transfer expenditure.
- Section 42: a variation in liability on a foreign asset (A = B minus C) is added to or reduced from the cost, not treated as ordinary income or loss.
- An authorised dealer forward contract fixes the rate used for the covered portion.
- Section 43: other exchange gain or loss is income or loss, computed as per the notified standards.
- Section 43 is subject to section 42.
- The standards and rules are outside the Act text consulted.
Read next
- Section 39: actual cost of assets
- Section 44: amortisation of certain preliminary expenses
- Section 41: written down value
- Section 72: capital gains computation
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.