Vested’s mission is to make investing in the US stock market simple for investors from India. We have made reporting Indian taxes easy for you. In this article, we will give you a primer on how taxes work when buying US stocks from India. And to further simplify the process we create a report that you can easily submit to your tax preparer, with everything that you would need to file.
For investors in India, there are two types of taxation events when you have returns from your investments in US stocks:
Tax on investment gains:
This tax is payable if you sell your investments at a higher price than when you buy them, and is calculated as the sale price minus purchase price. You will be taxed in India for this gain. You will not be taxed in the US. The amount of taxes you have to pay in India, at the end of the fiscal year, depends on how long you hold the investment:
- To qualify as a long term capital asset, the period of holding in case of shares and ETFs is over 24 and 36 months respectively. Thus if you hold the shares for more than 24 months and ETFs for more than 36 months â†’ the gain will be taxed at a long term capital gains tax rate of 20% (plus the applicable surcharge and cess).
- Whereas, if you hold the shares and ETFs for less than 24 and 36 months respectively â†’ the gain qualifies as short-term capital gains and will be taxed as normal income in India. For example, if you buy one Google stock at a share price of $1000 and you sell your share less than 24 months later for $1100, you will be taxed in India for the $100 gain you have made. Taxation is based on the tax bracket that you fall under according to your income level.
Tax on dividend:
Unlike investment gains, dividends will be taxed in the US at a flat rate of 25%. This means that the company paying the dividend will deduct the 25% taxes before distributing the remaining 75% to the investor. For example, if Microsoft gives an investor $100 of dividend, it will withhold $25 as tax, and will give the investor the post tax dividend of $75. The gross dividend is included as taxable income in India as normal income and taxed at slab rates.
Fortunately, US and India have a Double Taxation Avoidance Agreement (DTAA) which allows taxpayers to offset income tax already paid in the US. The 25% tax you already paid in the US is made available as Foreign Tax Credit and can be used to offset your income tax payable in India.
Vested platform makes tax filing easy:
In order to make Indian tax fillings easy for you, we have prepared everything that you would need to give your Chartered Accountant or your tax preparer.
We have created summaries for capital gains, dividend and dividend tax (if applicable), and foreign asset reporting for the relevant periods. All these are converted to INR as per the Indian Tax Department’s guidelines. Note that all the documents are prepared as per the Indian fiscal year except Schedule FA. Schedule FA is prepared on a Calendar Year basis in line with the Income tax department’s rules.
You can find these documents under the Profile section of the platform.
Now that you know how taxes work when buying US stocks from India, learn how you can get started in buying US stocks.
Frequently Asked Questions:
1. 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.
2. 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.
3. 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.
4. What tax documents are required for investing in US Stocks from India?
A: ??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.