Key Takeaways
- Reinvesting a US dividend does not make it tax-free.
- The dividend and the additional shares bought through reinvestment are separate transactions for tax purposes.
- US tax is deducted from the dividend before the remaining amount is reinvested.
- Eligible investors may be able to claim a foreign tax credit in India for tax paid in the US.
- The additional shares bought through dividend reinvestment may need to be reported as foreign assets in Schedule FA.
When you receive a dividend from a US stock, you can either take it as cash or use it to buy more shares. If you choose the second option, you may wonder whether the dividend is still taxable.
However, reinvesting the dividend does not change how it is taxed. In this article, we will explain how tax on reinvested US stock dividends in India works and how to report them in your ITR.
| In short, reinvesting a US dividend does not make it tax-free. The dividend is still taxed as income from other sources in India, after 25 to 30 percent US withholding. The shares you buy with this money count as a new investment and have their own cost basis for capital gains. |
Are Reinvested US Dividends Taxed?
Yes. A dividend from a US stock is taxable even if you do not withdraw the money from your brokerage account. If you choose to reinvest it, the tax treatment of the dividend does not change. The dividend is still considered income when you receive it.
Take a simple example. Suppose you receive a $100 dividend from a US company. If 25% is withheld as US tax, $25 goes towards tax, and $75 is left for you. If your brokerage account then uses this $75 to buy more shares, you have still received a $100 dividend for tax purposes.
The $75 used to buy additional shares is a separate transaction. Those new shares become a fresh investment, with their own purchase price. If you sell them later, that purchase price will be relevant when calculating your capital gains.
So, reinvesting the dividend changes what happens to the money, but it does not change how the original dividend is taxed.
How Does A Dividend Reinvestment Plan Work?
A Dividend Reinvestment Plan (DRIP) is an arrangement that lets you use your dividend to buy more shares. With a DRIP, you can instruct your broker to use your dividends to purchase additional shares instead of crediting the amount to you as cash.
Quick definition: A DRIP (Dividend Reinvestment Plan) takes your cash dividend and uses it to purchase extra shares of the same stock rather than putting the cash into your account; it alters the fate of the money, not the way in which the original dividend is taxed.
Say you receive a $50 dividend and the stock is trading at $100. If your broker allows fractional shares, that $50 could be used to buy 0.5 shares instead of sitting in your account as cash. This is where the tax implications of automatic dividend reinvestment in US shares come into the picture.
What Are The Tax Implications Of Reinvesting US Dividends?
When you receive dividends from a US stock, there are tax implications at two levels. First, under the US domestic tax rules, dividends from US stocks are subject to a withholding tax of 30%. Indian investors, however, can claim the lower 25% treaty tax under the India-US DTAA (Double Taxation Avoidance Agreement). The treaty rate applies when the investor meets the applicable requirements, including submitting Form W-8BEN to the broker. The dividend also needs to be reported in India and is generally taxable as income from other sources.
The US tax is deducted before the remaining dividend is reinvested. So, the amount available to buy additional shares is the dividend left after the tax deduction and not the full dividend amount.
How Do You Report Dividend Reinvestment In Your ITR?
When you reinvest a US dividend, there are two separate things to report in your ITR. First, the dividend is generally treated as Income from Other Sources and reported in the relevant section of your ITR. Since it is foreign-source income, you also need to report the relevant details in Schedule FSI (Foreign Source Income).
If you have already paid tax on the dividend in the US, you may be able to claim a foreign tax credit in India. The relevant details are reported in Schedule TR, and you need to file Form 67 to claim the credit.
The additional US shares bought through the reinvestment are a separate part of the reporting. The exact disclosure requirements can also depend on your residential status and the ITR form you are filing. When filing your ITR, keep the reinvestment transaction details and information about the resulting shareholding handy.
How Can Vested Help With Reinvested Dividend Tax Reporting?
Reinvested dividends can leave you with several figures to track, especially when you have investments across multiple US stocks. Vested’s Tax Documents module brings together the information needed for tax reporting, including dividend income, foreign assets, foreign-source income, tax relief and Form 67.
Vested also integrates with ClearTax, allowing you to transfer the relevant information to ClearTax when you are ready to file your ITR.
Conclusion
Using a US dividend to buy more shares does not change its tax treatment. The dividend still needs to be reported, along with the US tax deducted. You should also keep the details of the shares bought with the reinvested amount for your ITR.
Keeping these details handy can make the filing process easier. If you invest through Vested, you can also use its tax documents to find information on dividends, foreign assets, foreign-source income, tax relief and Form 67.
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Frequently Asked Questions
Are DRIP dividends taxable in India for US stocks?
Dividends received through a reinvestment plan are taxed like normal dividends. They are generally subject to 30% withholding tax in the US. A lower rate of 25% is applicable for Indian resident investors under the India-US DTAA. These dividends, even if they are reinvested, should be reported in India while filing Income Tax Returns (ITR).
Do I pay tax on US dividends if I do not withdraw cash?
The tax treatment does not depend on whether you move the money to your bank account. Once the dividend is credited and then reinvested, it still needs to be reported as income in India.
Does automatic dividend reinvestment create a new investment?
Yes, it does. The reinvested amount is used to purchase additional shares, which become a separate holding.
How to report dividend reinvestment in ITR Schedule FA?
The additional US shares may need to be reported as foreign equity holdings in Schedule FA if you are an eligible resident taxpayer. The dividend itself is reported as foreign-source income in Schedule FSI, while Schedule TR is used to report eligible foreign tax relief.
Does a DRIP change the US tax deducted from my dividend?
No, a dividend reinvestment plan does not change the US tax deducted from your dividend. The dividend is available for reinvestment only after the applicable US tax is deducted.
