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Indian investors are increasingly drawn to global equities, particularly those of tech giants like Meta, Microsoft, Tesla, and Alphabet. To diversify their portfolios, many are turning to foreign stocks.
Once investors understand how to invest in US stocks from India, the next crucial step is navigating the complexities of tax liability. Understanding the tax on stock trading and the applicable rules for foreign investments can often feel overwhelming.However knowing the tax implications on an investment is crucial as it would determine your real post-tax gains.
Types of income from investing in US Stocks
Investors in India can make profits from investing in US Stocks in primarily two ways:
- Capital Gains: This is the profit you make when you sell your US stocks for a higher price than what you paid for them. The difference between the selling price and your purchase price is your capital gain.Capital gains are subject to different tax treatment compared to regular income tax and are classified based on the holding period of the asset.
- Dividends: Some US companies distribute a portion of their profits to shareholders in the form of dividends. This is a regular income stream for investors. Dividends are paid at the discretion of the company from its generated profits. They can be considered a monetary bonus awarded to shareholders when the company performs well.
| Nature of the Income | Taxation in US | US Tax Rate | Taxation in India | Tenure | India Tax Rate |
| Dividends | Yes | 25% withholding | Yes | N/A | Applicable as per the slab rate; Can take credit for the tax withheld in the US |
| Long-term Capital Gains (LTCG) | No | – | Yes | >24 months | 12.5% |
| Short-term Capital Gains | No | – | Yes | <24 months | Applicable as per the slab rate |
How Capital Gains are taxed on US Stocks
If the country of residence is India, an investor is liable to pay tax on US stocks in India as per the prevalent tax treatments. The capital gain arises when you sell a US stock at a profit. Unlike many other countries, the US does not levy capital gains tax on non-residents. However, Indian investors must comply with Indian tax laws regarding capital gains on foreign shares.
The tax implications depend on how long you’ve held the stock:
- Long-Term Capital Gains (LTCG): If you hold the stock for more than 24 months, the profit is considered LTCG, and the capital gains on foreign shares are taxed at a flat rate of 12.5% plus applicable surcharge and cess. Prior to Budget 2024, investors had to pay a 20% tax on long-term capital gains, however, they were allowed to claim indexation benefits.
Indexation is a method to adjust the purchase price of an asset, such as stocks, bonds, or real estate, to account for inflation which essentially helps in realizing the real value of returns earned by the investor. As of 2024, the government has removed the Indexation benefit but reduced the overall tax rate.
- Short-Term Capital Gains (STCG): If you hold the stock for 24 months or less and realize a profit on the same then the tax on share market income in such cases is classified as STCG and is added to your total income, taxed at your applicable income tax slab rate. This means that if your income for a financial year falls under a 20% tax slab, then short-term capital gains will be calculated as 20%
Budget 2024 introduced significant changes to capital gains tax. The government reduced the long-term capital gains (LTCG) tax rate from 20% to 12.5%, keeping it similar to the taxation on Indian equities. Even though the government has removed the indexation benefits, this 37.5% tax reduction is expected to benefit investors and encourage increased Indian participation in global markets. By aligning LTCG tax rates for both domestic and foreign stocks. This uniform tax treatment is expected to encourage more Indian investors to explore foreign investment opportunities by simplifying the tax treatment on long-term gains, making foreign investments more accessible to Indian investors.
How Dividends are taxed on US Stocks
For US stocks, the tax treatment differs from the tax on shares in India, particularly in how dividend income is taxed. When a US company generates excess profits, it might distribute a portion of these as dividends to shareholders. The US government imposes a 25% withholding tax on these dividends. This means that 25% of the total dividend is deducted before you receive the remaining amount.
While you only receive 75% of the dividend, the entire gross dividend amount (before the US tax) is considered your income for Indian tax purposes.
It might seem unfair to be taxed twice on the same income – once in the US and again in India. Fortunately, the India-US Double Taxation Avoidance Agreement (DTAA) allows you to claim a foreign tax credit. This means you can reduce your Indian tax liability by the amount of tax you’ve already paid in the US. Dividend income is categorized as ‘Income from Other Sources’.
Filing your US Stock Returns in India
If you are an individual who invests in US stocks from India, then to claim the tax already paid in the US, you must submit Form 67 along with your Income Tax Return.
Currency Conversion for tax calculations
Converting US dollars to Indian rupees for tax calculations can be complex due to fluctuating exchange rates and complicated regulations. Vested simplifies this process by automatically converting your gains in INR, based on official exchange rate guidelines. However, just so you know how it’s done – The Indian tax authorities use the SBI TT buying rate on the last day of the previous month to determine the conversion rate. For instance, if you receive a dividend on July 20th, the exchange rate on June 30th is to be used for tax filing purposes.
Example calculations
| Particular | Amount (INR) |
| Short-term capital gain ($3,000 * 83) Assumed using INR 83 as the SBI TT INR/USD rate, based on the last day of the previous month as per tax guidelines. | 249,000 |
| Dividend Income ($1,500 * 83) | 124,500 |
| Total Income | 373,500 |
| Income tax @ 30% | 112,050 |
| Less: | |
| You may deduct the lower of the two values mentioned below. However, to claim the foreign tax credit, Form 67 must be filed before submitting your ITR: – Actual tax withholding – Slab tax rate * Dividend Income | 31,125 37,365 |
| Relief u/s 90 | 31,125 |
| Balance tax payable | 80,925 |
Let’s look at a quick example – Anuj, a tax resident in India, has received short-term capital gains of $3,000 and dividend income of $1,500 from his investment in US stocks. As per the rules, a 25% tax on Dividend on the dividend income, amounting to $375 was withheld in the US. Anuj is in the 30% tax slab. Let’s compute the tax liability in India.
Tax Collection at Source (TCS)
If you’re remitting more than Rs. 10 lakh in a year for spending or investing abroad, there will be an additional tax collected on your payments called TCS. This is not an additional tax and can be adjusted against other tax obligations. Currently, the TCS rate is 20% (it used to be 5% before October 2023). For instance, if you remit Rs. 10,10,000 abroad, an additional Rs. 2,000 will be deducted as TCS on the amount exceeding the Rs. 10 lakh threshold.
Although taxpayers could previously claim TCS credit while filing returns, the 2024 Budget has simplified the process of adjusting tax credits for amounts already paid.
If you’ve paid Tax Collected at Source (TCS) on expenses like foreign travel, foreign investments, or foreign remittances, you can now directly inform your employer. Your employer will then reduce the amount of Tax Deducted at Source (TDS) from your salary.
Previously, if you paid TCS on any of the mentioned transactions, you could only adjust this amount against your advance tax payments or when filing taxes at the end of the year. This often led to delays in getting refunds or adjustments and the money was often tied up with the government for months.
The new rule allows you to directly inform your employer about the TCS you’ve paid. Your employer will then reduce the TDS deducted from your salary accordingly. This ensures better cash flow management, as it allows more of your earnings to remain available without waiting for a tax refund.
Filing your US investing taxes with Vested
At Vested, we strive to make tax filing as straightforward as possible for you. Our tax module provides all the necessary summaries for capital gains, dividends, and foreign asset reporting, converted to INR as per the Indian Tax Department’s guidelines.
You can find these documents under the Profile section of the platform.
To further simplify the process, we have also integrated with ClearTax. Here’s how it works:
- Visit the ‘Tax Documents’ section on Vested
- Select ‘File with ClearTax’
- Log in or sign up on ClearTax
- All your tax documents generated by Vested will be auto-captured on the ClearTax portal in INR
- Complete the remaining sections of your income tax return and file your ITR seamlessly using the integrated ClearTax platform.
Conclusion
Investing in US equities presents significant opportunities for Indian investors. However, understanding the associated tax implications is essential for maximizing returns and ensuring compliance with tax regulations. This article aims to simplify the taxation on US stocks for Indian investors by breaking down key aspects of capital gains, dividends, TCS, and reporting.
Now that you understand how taxes work when investing in US stocks from India, you’re ready to start your investment journey. If you have any questions or need further assistance, our team at Vested is here to help!
Frequently Asked Questions
Do Indians need to pay taxes on US Stocks?
Yes. Depending on the duration and nature of income, you may be required to pay taxes on US stock investments made from India. India and the US have a Double Taxation Avoidance Agreement (DTAA) to assist investors in avoiding paying twice the taxes on their income in both the source and residence countries.
Types of tax implications for Investing in US Stocks from India.
As an Indian investor in US stocks, you need to be aware of two types of capital gains taxes that may apply to you:
Long-term capital gains tax- If you hold stocks for more than 24 months and then sell them for gains, you will be subject to a capital gains tax of 20% plus applicable fees and surcharges.
Short-term capital gains tax – If you sell stocks for gains within 24 months of acquiring them, the gains will be added to your taxable income and taxed based on your income tax slab.
How to calculate Capital gains on Foreign Shares?
As an Indian investor in US stocks, you will be subject to two types of taxation events:
Taxes on investment gains: You will be taxed on investment gains in India but not in the US. The tax amount payable in India is dependent on the length of the investment holding period. If the investment is held for more than 24 months, the gain will be classified as a long-term capital gain and will be subject to a tax rate of 20% with an indexation benefit. If the investment is held for less than 24 months, the gain will be classified as a short-term capital gain and taxed according to the investor’s income tax slab.
Taxes on dividends: Unlike investment gains, dividends earned will be taxed in the US at a flat rate of 25%. However, India and the US have a Double Taxation Avoidance Agreement (DTAA) in place, allowing taxpayers to offset the income tax already paid in the US. The 25% tax paid in the US is made available as a Foreign Tax Credit, which can be used to offset the income tax payable in India.
What tax documents are required for investing in US Stocks from India?
If you have direct investments in US stocks, you must file the ITR 2 or ITR 3 form for tax purposes depending on your other income details and income source.
You will also need to fill in several schedules, including:
- Capital Gains: If you sold or transferred any shares during the year.
- Other Income: If you earned any dividend or interest income.
- Form 67: To claim tax credit for taxes paid on foreign dividends.
- Schedule FA: If you are a Resident and Ordinarily Resident and hold foreign shares/securities, whether sold or not.
- Schedule AL: If your total income exceeds Rs. 50 lakhs, you need to provide details of your assets and liabilities.
- Schedule FSI: If you earned income from outside India, such as gains from shares, dividends, or interest, you could claim credit for any taxes paid.
- Schedule TR: If you claimed a tax credit in earlier years, you need to provide details of tax refunds regarding tax claimed as a credit.
