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An exchange rate can be defined as the relative price of one currency stated in terms of another currency. In simple words, it is the rate at which you can exchange the currency of your home country with the currency of a foreign country.
Currency exchange rates are determined by the rates set by the global market of supply and demand. Additionally, it is affected by economic performance, interest rates, central bank policies, inflation, and political stability.
To manage the foreign currency risk, you can use hedging instruments such as forward contracts, invest in SIP, use currency options, and more.
For NRE accounts, generally, currency gains are not taxable since the principal amount comes from foreign income. For NRO accounts, based on the short-term and long-term capital gains, tax is charged on currency gains. Considering this, the tax is calculated on the INR difference between deposit and withdrawal values.
By Pankaj Shaw |Last Updated: December 11, 2025
