Ind AS 21 (The Effects of Changes in Foreign Exchange Rates) is the standard that governs how every foreign currency transaction appears in your books — imports, exports, foreign currency loans, bank accounts in USD or EUR, and any other payment or receipt involving a currency other than the Indian Rupee. For Indian SMEs that do any business with overseas clients or suppliers, this standard affects bookkeeping every single month.
This guide explains Ind AS 21 practically — step by step, with journal entries, real examples, and specific guidance on the things most generic explanations miss: which exchange rate to actually use, what happens at the financial year end, how GST interacts with foreign currency invoices, and when you need to deduct TDS on foreign payments.
Quick ReferenceForeign Currency Items — Year-End Treatment at a Glance
| Item in Your Books | Retranslate at Year-End? | Rate to Use | Exchange Difference |
|---|---|---|---|
| Trade receivable (USD/EUR/GBP) | Yes | Closing rate (31 Mar) | To P&L |
| Trade payable (foreign supplier) | Yes | Closing rate (31 Mar) | To P&L |
| EEFC / foreign currency bank balance | Yes | Closing rate (31 Mar) | To P&L |
| Foreign currency loan (ECB) | Yes | Closing rate (31 Mar) | To P&L |
| Imported machinery / plant | No | Transaction date rate | None — locked |
| Inventory purchased overseas | No | Transaction date rate | None — locked |
| Prepaid expenses in USD | No | Transaction date rate | None — locked |
| Revenue / Sales | Never restated | Invoice date rate | None |
The single most common Ind AS 21 error in Indian SME books is on this table: retranslating an imported asset at year-end (wrong) instead of only the creditor that funded it (right).
The Core MechanicsRecording Foreign Currency Transactions — Step by Step
Choose the Right Exchange Rate
The first question every bookkeeper has is: which rate do I use? Ind AS 21 is clear — use the spot exchange rate, the rate for immediate delivery on the transaction date. In practice, Indian businesses use one of two:
- RBI reference rate — the Reserve Bank of India publishes reference rates daily for USD, EUR, GBP, JPY, and other major currencies on rbi.org.in. This is generally accepted as the spot rate for the transaction date.
- Bank's transaction rate — the rate at which your bank actually bought or sold the foreign currency for you. For an import paid through an LC or TT, or an export where the bank purchased the forex from you, this is the most accurate rate because it reflects the actual INR received or paid.
Ind AS 21 also permits a weekly or monthly average rate as a practical approximation — but only if the rate did not fluctuate significantly during that period. Most SMEs use the previous day's closing RBI reference rate as a default, which is acceptable for most transactions.
Practical tip: Set your accounting software to pull the RBI reference rate for each transaction date automatically. Do not use the same rate for the whole month — rates move daily, and consistency means using the rate on the actual date of each transaction.
Record an Import Purchase in Foreign Currency
The most common scenario for Indian trading and manufacturing businesses: you buy goods or raw materials from an overseas supplier and receive an invoice in USD, EUR, or another currency.
Example — Machinery imported from Germany. A Mumbai manufacturer imports machinery on 1 June 2026. Invoice: EUR 20,000. EUR/INR spot rate on 1 June: Rs. 93.00.
EUR 20,000 × Rs. 93.00 = Rs. 18,60,000. Machinery recorded at INR equivalent on the purchase date.
The machinery is now permanently recorded at Rs. 18,60,000. It is a non-monetary asset — never retranslated, regardless of what happens to the EUR/INR rate. Only the creditor is a monetary item needing ongoing tracking. Assume the creditor is still outstanding at year-end and the EUR/INR closing rate on 31 March 2027 is Rs. 94.50:
EUR 20,000 × (Rs. 94.50 − Rs. 93.00) = Rs. 30,000 exchange loss. Creditor balance now Rs. 18,90,000.
The Rs. 30,000 loss is a real expense in your P&L for FY 2026-27 — the EUR appreciated, so your future payment will cost more than when you booked the purchase. When you finally pay on 30 June 2027 at EUR/INR Rs. 94.00:
Creditor was Rs. 18,90,000 at 31 March. Payment at Rs. 94.00 costs Rs. 18,80,000. Gain of Rs. 10,000 recognised in FY 2027-28.
Record an Export Sale in Foreign Currency
For Indian IT companies, service exporters, and manufacturers selling overseas, the foreign currency sale is the starting transaction: you raise an invoice in USD, collect payment later, and the rate movement between the two dates creates a gain or loss.
Example — IT services exported to a US client. An Indian IT company invoices a US client USD 15,000 on 1 July 2026. USD/INR rate: Rs. 84.00.
USD 15,000 × Rs. 84.00 = Rs. 12,60,000. Revenue and receivable recorded at the spot rate on invoice date.
If the receivable is still outstanding at year-end and the USD/INR closing rate on 31 March 2027 is Rs. 84.80:
USD 15,000 × (Rs. 84.80 − Rs. 84.00) = Rs. 12,000 exchange gain. Receivable balance now Rs. 12,72,000.
When payment is received on 30 April 2027 at USD/INR Rs. 84.50:
USD 15,000 × Rs. 84.50 = Rs. 12,67,500 received. Receivable was Rs. 12,72,000. Loss of Rs. 4,500 in FY 2027-28.
Key rule: Revenue is always recorded at the invoice date rate — it is never restated. Only the receivable changes as the rate moves. Revenue stays at Rs. 12,60,000 here regardless of what the USD does afterwards.
Monetary vs Non-Monetary Items
Under Ind AS 21, your treatment of a foreign currency item at year-end depends entirely on whether it is monetary or non-monetary. Getting this wrong is the most common Ind AS 21 bookkeeping error in Indian SME accounts.
| Type | Examples | Year-End Treatment |
|---|---|---|
| Monetary | USD receivable, EUR payable, foreign currency loan, foreign currency bank balance | Retranslate at closing rate; exchange difference to P&L |
| Non-monetary at cost | Machinery imported, inventory purchased overseas, prepaid expenses in USD | No retranslation — use original transaction date rate forever |
| Non-monetary at fair value | FVTPL / FVOCI investments in foreign currency | Retranslate using the rate when fair value was determined; the exchange difference follows the investment's classification |
Two errors dominate: (1) retranslating imported machinery at 31 March — incorrect; once recorded at the invoice-date rate it stays there, and only the creditor is retranslated. (2) Not retranslating a foreign currency bank balance — if you hold USD 5,000 in an EEFC (Exchange Earners' Foreign Currency) account on 31 March, it must be converted at the March 31 rate with the difference to P&L.
Before You Close the BooksThe Year-End Retranslation Every SME Must Do
On 31 March each year, before closing the books, every monetary item in foreign currency must be converted at the closing rate — the spot rate on 31 March. The resulting exchange differences, gains or losses, go into the profit and loss account for that year. Items to check:
For small businesses using outsourced bookkeeping services, N D Savla & Associates performs this year-end retranslation as part of the annual accounts closure — pulling the March 31 RBI rates, identifying all outstanding foreign currency monetary items, and booking the exchange differences before the final trial balance is prepared.
Where GST Meets Foreign CurrencyGST and Foreign Currency Transactions
The intersection of GST and foreign currency accounting confuses many business owners. Here is the practical reality, split by the three scenarios SMEs actually face.
1. Export of Services (IT, Consulting, Freelance)
Export of services is zero-rated under GST — you charge no GST on the invoice to the foreign client, but you must still record the transaction in your GST system. The INR equivalent for your GSTR-1 is calculated using the customs exchange rate notified by CBIC (not the RBI rate). These CBIC rates differ slightly from RBI reference rates.
In your accounting books (for Ind AS purposes), use the RBI reference rate or your bank's rate. This creates a small difference between your GST return figure and your accounting books — which is normal and expected. Document the rate source for both.
Export of services: Invoice in USD with no GST charged. GSTR-1 records the INR equivalent using the CBIC customs rate; accounting books use the RBI reference rate. Both are correct for their respective purposes.
2. Import of Goods (Customs Duty and IGST)
When you import goods, you pay IGST on the customs value (CIF value in INR plus customs duty). The customs value uses the CBIC customs exchange rate, not the RBI rate. The IGST paid at customs is available as input tax credit in your GST returns.
In your accounting books, record the import at the invoice rate (RBI/bank rate) on the date of import. Customs duty, IGST, and clearing charges are typically added to the cost of the imported goods or expensed separately — discuss the treatment with your CA based on the nature of the import.
3. Import of Services (Reverse Charge)
When you receive services from a foreign supplier — cloud software subscriptions, freelance work from overseas, consulting from a foreign firm — you must pay GST under the reverse charge mechanism (RCM). You raise a self-invoice and pay GST on it. The value for GST is the INR equivalent of the foreign currency payment, at the customs exchange rate.
Many small businesses miss this entirely. If you pay for AWS cloud services, Zoom enterprise, foreign SaaS tools, or overseas consultants, RCM GST applies. Our GST return filing team handles RCM liability computation and filing for clients with foreign service purchases.
TDS on Foreign Payments Under Section 195
This is where Ind AS 21 accounting meets income tax compliance — and an area where small businesses frequently make errors that create problems months later. Under Section 195 of the Income Tax Act, when you make any payment to a non-resident or foreign company that is potentially taxable in India, you are required to:
- Determine taxability in India — based on the nature of the payment (services, royalty, interest, technical fees) and the applicable DTAA between India and the recipient's country.
- Deduct TDS at the applicable rate if the payment is taxable — the rate is the DTAA rate or the Income Tax Act rate, whichever is lower.
- File Form 15CA — an online declaration before remitting, covering the nature, amount, and tax treatment of the payment.
- Obtain Form 15CB from a CA — a Chartered Accountant's certificate confirming the tax treatment, required for most remittances above a threshold.
The journal entry when TDS is deducted on a foreign payment (payment to a foreign supplier of Rs. 1,00,000 equivalent, TDS at 10%):
Payment to foreign supplier of USD equivalent Rs. 1,00,000. TDS at 10% = Rs. 10,000; bank pays Rs. 90,000. Simplified for illustration — actual rates depend on the DTAA.
Payments to foreign service providers covered by a DTAA — for example, a US company under the India-US tax treaty — may attract lower withholding rates or be exempt, provided the foreign entity furnishes a Tax Residency Certificate (TRC) and Form 10F. Without these documents, the default rates under the Income Tax Act apply.
Our TDS return filing team handles Form 15CA and 15CB preparation for clients making regular payments to foreign vendors — software subscriptions, overseas contractors, freight and logistics, and internationally sourced professional services.
Making a foreign remittance without the required Form 15CA/15CB attracts penalties under the Income Tax Act. Determine taxability and obtain the CA certificate before the money leaves your account — not after.
The Most Common Ind AS 21 Bookkeeping Mistakes
Based on work with SMEs across Mumbai, these are the Ind AS 21 errors that show up most often when we review books or prepare first-time Ind AS financial statements:
Configure Your Accounting System for Foreign Currency
Handling foreign currency correctly is far easier when the software is set up properly from Day 1. Four things to configure before you record a single foreign currency transaction:
Multi-Currency Mode
TallyPrime, Zoho Books, and QuickBooks all support it — enable it first. Never record foreign currency amounts in a single INR field; use the currency module.
Currency Master
Set up each currency (USD, EUR, GBP) with the correct rate type — transaction date rate or RBI reference rate.
Separate Party Ledgers
Create a separate creditor/debtor ledger for each foreign counterparty, so outstanding foreign currency balances are trackable for retranslation.
EEFC Account Ledger
A foreign currency bank account in India must be its own ledger in the right currency — not lumped into a generic INR bank account.
If setting this up from scratch feels complicated, or your existing books are in disarray from inconsistent prior-year handling, our accounting and tax compliance team can take over the setup and ongoing management — Ind AS 21 bookkeeping is part of our standard monthly accounting service for SMEs and growing exporters.
Foreign Currency Accounting, Handled End-to-End
N D Savla & Associates provides outsourced bookkeeping for Indian SMEs and exporters — including correct Ind AS 21 treatment for every foreign currency transaction. Our team handles initial recording at the right rate, year-end retranslation of all monetary items, P&L booking of exchange differences, GST compliance for export and import of services under RCM, and preparation of Form 15CA and 15CB for foreign remittances. For businesses approaching adoption, our Ind AS implementation advisory walks through the specific impacts — especially where there are foreign currency borrowings, overseas subsidiaries, or significant export receivables — before the first Ind AS financial statements are prepared.
Ind AS 21 Foreign Currency — Common Questions
Which exchange rate should I use when recording a foreign currency transaction in my books?
Under Ind AS 21, use the spot exchange rate at the date of the transaction — the rate available for immediate settlement on that specific day. For Indian businesses, this is typically the RBI reference rate published daily on the RBI website, or the bank's own transaction rate for the specific payment or receipt. If exchange rates do not fluctuate significantly during a week or month, an average rate for that period may be used as a practical approximation. The rate must be consistently applied and disclosed in the notes to the financial statements.
What is an exchange difference under Ind AS 21?
An exchange difference is the difference in the INR value of a foreign currency amount when it is translated at two different exchange rates. For example, if you invoice a US client for USD 10,000 when the rate is Rs. 83.50 per dollar, your books show Rs. 8,35,000. When the client pays three months later and the rate is Rs. 84.20, you receive Rs. 8,42,000. The Rs. 7,000 difference is an exchange gain. Under Ind AS 21, exchange differences on monetary items — receivables, payables, and bank balances in foreign currency — are recognised in profit or loss in the period they arise.
Do I need to retranslate my foreign currency payables and receivables at year-end?
Yes. Under Ind AS 21, monetary items — trade receivables and payables in foreign currency, foreign currency bank balances, and foreign currency loans — must be retranslated at the closing rate (the spot rate at the balance sheet date, typically March 31). Any exchange difference arising is recognised in profit or loss for the year. Non-monetary items — such as machinery purchased in foreign currency — are not retranslated after initial recognition; they remain at the original transaction date rate.
Is GST applicable on export services invoiced in USD?
Export of services is zero-rated under GST — the invoice does not carry any GST. However, the invoice must still be recorded in INR equivalent in your GST records. The INR equivalent for GST purposes is calculated at the exchange rate notified by the CBIC (usually the customs exchange rate), not the RBI reference rate. Your GSTR-1 must include the export invoice with the INR equivalent, reported as zero-rated export turnover. In your accounting books, use the RBI reference rate — the CBIC and RBI rates differ slightly, which is normal.
When do I need to deduct TDS on foreign payments?
Under Section 195 of the Income Tax Act, TDS must be deducted when making any payment to a non-resident or foreign company that is chargeable to tax in India — including payments for services, royalties, interest, and technical fees. The TDS rate depends on the DTAA (Double Tax Avoidance Agreement) between India and the recipient's country, or the Income Tax Act rate if no DTAA applies or the DTAA rate is higher. Before remitting any payment above a threshold to a foreign entity, a Form 15CA (online declaration) and Form 15CB (CA certificate) are required from a Chartered Accountant.
What is the difference between monetary and non-monetary items under Ind AS 21?
Monetary items are assets or liabilities that will be received or paid in a fixed number of currency units — such as trade receivables, trade payables, bank balances, and loans in foreign currency. These are retranslated at the closing rate at each balance sheet date, with exchange differences in profit or loss. Non-monetary items do not represent a right to receive or obligation to pay a fixed number of currency units — such as machinery, inventory, and prepaid expenses purchased in foreign currency. Non-monetary items at historical cost are not retranslated after initial recognition; they remain at the original transaction date rate for their entire life.
Ind AS 21 is not complicated once the core rule is clear: record every foreign currency transaction at the spot rate on its date, retranslate only monetary items at year-end, and route every exchange difference through the P&L. The costly mistakes — retranslating fixed assets, missing the EEFC balance, forgetting Form 15CA/15CB on a foreign remittance, or omitting a zero-rated export from GSTR-1 — are all avoidable with the right software setup and a consistent monthly process.
Reach N D Savla & Associates at +91 9819 000 511 or +91 91670 58000 to discuss Ind AS 21 bookkeeping, year-end retranslation, or Form 15CA/15CB support — or visit ndsavlaa.com to explore the firm's services.
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