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Indian investors face various tax obligations, including capital gains tax, dividend tax, and regulations related to foreign currency. Understanding taxes on US stocks from India can be difficult, but it’s important for anyone looking to invest in the US market.
Taxation on US stocks is influenced by factors such as how long you hold the investment and agreements like the Double Taxation Avoidance Agreements (DTAAs) and the Foreign Account Tax Compliance Act (FATCA).
As the US stock market offers diverse investment opportunities, from tech giants to innovative startups, knowing how these taxes work will help you make informed decisions and manage your investments effectively. Read along as we break down the tax implications and regulations for investing in US stocks.
Page Contents
Double Taxation Avoidance Agreement
Before exploring the tax implications of your earnings, it’s important to understand the Double Taxation Avoidance Agreement (DTAA). This treaty, which India has with over 80 countries, helps prevent you from paying taxes twice on the same income in the country where you earn it and your home country.
Understanding Residential Status for Taxes
Understanding how your residential status affects taxability is key when dealing with income from US stocks. The Income Tax Act classifies individuals into three categories based on residency:
- Resident and Ordinarily Resident (ROR): Your global income, including earnings from US stocks, is taxable in India. This means all dividends and capital gains from foreign investments are subject to Indian tax laws.
- Resident but Not Ordinarily Resident (RNOR): Only income received or accrued in India is taxable. Foreign income, including US stock earnings, is not taxed unless received in or accrued to India.
- Non-Resident Indian (NRI): Taxation mirrors that of RNOR status. Income from US stocks is not taxable in India unless received or accrued within the country.
Your residential status is based on the number of days spent in India during the financial year and previous years. For specific tax implications on foreign investments, refer to Section 6 of the Income Tax Act.
What are the Tax Implications for US stocks?
Indians investing in US stocks must understand that any dividends or profits earned from US Stocks are taxed under Indian tax legislation. Here is an overview of everything you need to know.
1. Tax on Dividends
When you invest in US stocks, the dividends you receive are subject to tax both in the US and in India. Here’s how it works:
US companies withhold a 25% tax on dividends before paying you. For instance, if you earn a $200 dividend from a US company, $50 will be deducted as tax, and you will receive $150.
In India, the entire $200 dividend amount is considered as income. Even though $50 was already taxed in the US, you must report the full $200 on your Indian tax return. But does this mean that you’ll be paying taxes twice? Not really!
Suppose your Indian tax liability on the $200 dividend amount is $60. Thanks to the DTAA between India and the US, you can claim a credit for the $50 already paid to the US. Therefore, you’ll only need to pay an additional $10 in India.
This ensures you don’t have to pay taxes twice on the same income. While the US tax is withheld upfront, the DTAA helps reduce your total tax burden in India by allowing you to offset the US tax paid.
2. Capital Gains Tax
When you sell US stocks and make a profit (capital gains), you don’t pay tax on those gains in the US, but you do have tax obligations in India. Capital gains in India are categorised into short-term and long-term, based on how long you hold the stock before selling it. Here’s how it works:
- Long-Term Capital Gains (LTCG): The gains are considered long-term if you hold the stock for more than 24 months before selling. For these gains, you’ll pay a tax of 20% plus applicable fees and surcharges.
- Short-Term Capital Gains (STCG): If you sell the stock within 24 months of purchasing it, the gains are short-term. These gains are added to your total income and taxed according to your income tax slab.
Examples
Suppose you buy shares for $400 and sell them for $600 after 26 months. You make a long-term capital gain of $200. You’ll pay 20% tax on this gain, which amounts to $40, plus any additional fees or surcharges.
Alternatively, if you sell the shares after 15 months, you make a short-term capital gain of $200. This gain will be added to your other income and taxed based on your tax bracket. For instance, if your tax slab rate is 30%, you’ll pay $60 in tax on this gain.
Example of Tax Paid for Investing in US Stocks from India
Priya, a tax resident in India, has earned short-term capital gains of $2,500 and dividend income of $1,200 from a US company. In the US, a 25% tax on dividends has been withheld. Priya is in the 30% tax slab.
Here’s how we calculate her tax liability in India, considering that INR/USD rate is at Rs. 82:
| Particulars | Amount (INR) |
| Short-term Capital Gain ($2,500 * 82) | 205,000 |
| Dividend Income ($1,200 * 82) | 98,400 |
| Total Income | 303,400 |
| Income Tax @ 30% | 91,020 |
Less:
| Relief Calculation | Amount (INR) |
| Lower of the two amounts: | |
| Actual Tax Withheld [(25% of $1,200)*82] | 24,000 |
| Slab Tax Rate * Dividend Income [(30% of $1,200)*82] | 36,000 |
| Relief u/s 90 (DTAA) | 24,000 |
| Balance Tax Payable | 67,020 |
Tax Collection at Source on Foreign Investments
Apart from these taxes, one other concept you should know about is tax collected at source. When you send more than Rs. 7 lakh abroad in a year for expenses or investments, you’ll face an additional tax called Tax Collected at Source (TCS). This tax is not extra but is collected upfront and can be adjusted against your overall tax obligations.
The TCS rate is 20%, up from 5% before October 2023. For instance, if you transfer Rs. 7,20,000 abroad, Rs. 4,000 will be deducted as TCS on the Rs. 20,000 exceeding the Rs. 7 lakh limit.
Tax Reporting Requirements
Under the FEMA, you must declare your foreign investments when filing your Income Tax Return (ITR) in India, even if your total income is below the basic exemption limit. This is done through various schedules:
- Schedule FA (Foreign Asset Disclosure): You must provide details about US stocks, US bank accounts, and any investment in immovable property abroad. This schedule is mandatory for tax residents.
- Schedule FSI (Foreign Source Income): If you have foreign income subject to double taxation and wish to claim relief under Section 90, you must complete this schedule. It requires details about foreign assets, income from foreign investments, foreign taxes paid, and tax credits claimed under the DTAA.
Also, file Form 67 before submitting your ITR to claim foreign tax credits. Depending on your income type, you may need to file either ITR-2 or ITR-3.
Conclusion
Navigating taxes on US stocks can be complex, but understanding how they work is important for effective investment management. From dividend taxation to capital gains and TCS, each aspect requires careful attention to optimise your tax liabilities and comply with regulations.
When investing in US stocks from India, using a good trading app like Appreciate can simplify your experience. Appreciate facilitates easy access to the US stock market and offers features like fractional shares and real-time updates, making it a practical choice for investors.
FAQs
Do I have to pay tax on US stocks in India?
Indian investors must pay a flat tax rate of 25% on dividends earned from US stocks, which US companies withhold. Additionally, if dividends are reinvested, they are added to the investor’s income and taxed accordingly. Capital gains from selling these stocks are taxed based on whether they are categorised as long-term or short-term gains, each with specific tax implications.
Is it OK to invest in US stocks from India?
Investing in US stocks from India is perfectly legal and feasible. Indian investors have multiple options to buy and hold US stocks, such as direct equities, ETFs, and mutual funds. These investments can be made directly by purchasing US stocks through a brokerage or indirectly by investing in mutual funds or ETFs that include US stocks in their portfolio.
Is it legal for Indians to invest in US stocks?
Yes, it is legal for Indians to invest in US stocks under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS). This scheme allows Indian residents to invest up to $250,000 per financial year in foreign assets, including US stocks. The $250,000 limit applies to all foreign investments, ensuring investors comply with regulatory requirements.
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