Divya Raghavendra

I am able to repro the issue in vanilla org.

Steps:

1. Navigate to the Account form in Dynamics 365.
2. Ensure the Contact subgrid is present on the form, showing the Email column.
3. In the subgrid, click + New Contact.
4. Enter the following email address in the Email field: abc@example.com
5. Save the Contact record.
6. 
   
7. Observe the email shows as Punycode (abc@xn--example.com) in the subgrid. please find the below screenshots

Note:-

they explained that if the email address contains Unicode characters it is represented in ASCII, so this happens from a translation between Unicode and ASCII, if the email contains non-ASCII characters, Dynamics 365 converts the domain to Punycode for compatibility. 

So requesting to implement the feature in future