Uncover the taxing truth of investing in US stocks from India. Navigate the complexities of Indian and US tax systems, understand implications on dividends and capital gains, and learn to minimize tax liabilities. CA Mridul Gupta, a practicing Chartered Accountant, breaks down the intricacies to guide investors through informed decision-making. Brace yourself for the taxing reality of investing in the colossal US stock market from the comfort of your home in India.
Imagine this scenario: You’re at home, casually scrolling through your social media feeds when you stumble upon an article discussing the immense returns that can be gained by investing in US stocks. Intrigued, you begin researching various stocks and their potential. However, before you take the plunge, it’s important to acknowledge a harsh truth – investing in foreign stocks, especially US stocks from India, has its own set of tax implications that can affect your profits. But don’t worry, we’re here to assist you in navigating through the complexities of the Indian and US tax systems, so that you can make informed investment decisions. Get ready to uncover the taxing reality of investing in US stocks from India.
We all have come across advertisements relating to investments in US Stocks and being hammered by the news of likes of Elon musk and Mark Zuckerberg makes us want to be a part of their success stories by investing in their stocks. Many apps like Vested, INDMoney, Groww etc. provide such intermediary services hassle free. It is however important to understand the complete structure of how the money leaves your pocket and ends up in US regulated exchange. The present article aims to explore this structure and the tax incidence levied on various transactions in this structure. Income earned from foreign investments, including US stocks, is taxable in India. Therefore, you must be prepared to pay taxes on any dividends and capital gains you earn from your US investments.
Tax on Dividends for Indian Investors in US Stocks
When companies pay out dividends to shareholders, it represents profits and is considered taxable income for investors. Indian investors who invest in US stocks and receive dividends need to be aware of the tax implications. Dividend income received from a foreign company is taxable under “Income from Other Sources” and is taxed at slab rates in India.
For Indian investors, the tax rate on dividends received from US stocks is 25%, which is lower than the rate for other foreign investors. The tax is withheld by the US company, and the investor receives only 75% of the dividend amount. For example, if an investor, Mr. Sharma invests in Apple Inc. and receives a $500 dividend, the company withholds 25% tax ($125), and the net payout is $375.
It’s important to note that the dividend received, whether in cash or reinvested, is added to the investor’s income and is taxed at normal slab rates. However, relief from double taxation is provided by the Double Taxation Avoidance Agreement (DTAA) between India and the US. This means that the tax withheld in the US can be set off against the tax liability in India.
Using the example above, if Mr. Sharma declares $500 as income in his tax return, it will be taxed as per the applicable tax slabs. However, he can claim a credit of $125 for the tax withheld by the US company. As a result, only the balance will be payable after deducting $125 from the total tax payable by Mr. Sharma. To claim the foreign tax credit, the taxpayer can file Form 67 on the income tax website in India. However, it’s important to note that the credit for US taxation can only be claimed up to the amount of tax liability in India, and any excess amount cannot be claimed as a credit.
For a more laid back, but inquisitive mind, here’s a comprehensive version of the above blabber.
| Topic | Information |
| Definition | Dividends are profits paid out by companies to shareholders. |
| Taxability in India | Dividend income from a foreign company is taxable under the “Income From Other Sources” head and is taxed at slab rates. |
| Tax rate on US dividends | The tax rate on dividends received from US stocks is 25% for Indian investors. |
| Tax withholding | The US company withholds 25% tax on dividends paid to Indian investors. |
| Net payout | After tax withholding, Indian investors receive 75% of the dividend amount. |
| DTAA relief | The Double Taxation Avoidance Agreement between India and the US provides relief from double taxation. |
| Foreign tax credit | Indian investors can claim a credit for the tax withheld in the US by filing Form 67 on the income tax website. |
| Limitations on foreign tax credit | The credit for US taxation can only be claimed up to the amount of tax liability in India. Excess amounts cannot be claimed as a credit. |
Taxation on Capital Gains
People usually invest in stocks, not for the dividend income as explained above, rather for wealth creation. This wealth is usually built up over time and may give exemplary returns to the investor. The return that is earned on sale of your stock holding is known as Capital Gains. There are two types of Capital Gains – Long Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG), each with its own tax implications. Let’s understand these in detail:
1. Short Term Capital Gain (STCG):
When an investor purchases a stock and sells it within 24 months, it is considered as a short-term investment. Any gain generated from such a sale will be taxed under the ordinary tax rate in India (For buddhijivi’s, STCG on listed securities in India is calculated if the security is sold within 12 months, but US stocks are considered as unlisted stocks, therefore 24 months). This means that the profit earned from the sale of the stock will be added to the investor’s regular income and will be taxed as per their applicable tax slab rates.
For example, if an investor bought a stock for $500 and sold it for $800 after 13 months, the profit of $300 will be added to their regular income and taxed as per their applicable tax slab rates. If the investor is in the 30% tax bracket, they will have to pay $90 as STCG tax.
2. Long Term Capital Gain (LTCG):
When an investor purchases a stock and holds it for more than 24 months, it is considered as a long-term investment. Any gain generated from the sale of such a stock is taxed under the Long Term Capital Gains tax rate in India. The LTCG tax rate in India is 20%, plus applicable surcharge and cess fees. In addition to the LTCG tax rate, investors can also benefit from indexation on their long-term capital gains. The indexed cost of acquisition is then deducted from the sale price to arrive at the LTCG, which is then taxed at the LTCG tax rate. By using indexation, investors can effectively reduce their tax liability and increase their overall returns on long-term investments.
For example, if an investor bought a stock for $500 and sold it for $1300 after 13 months, the profit of $800 will be taxed as LTCG in India as the holding period was more than 24 months. The LTCG tax that the investor will have to pay is (20% * $800) $160, plus applicable indexation benefits, surcharge and cess fees.
It is important to note that while there is no capital gains tax charged by the US government for Indian investors, they are still required to pay tax on such gains in India. Thus, it is crucial for investors to be aware of the tax implications of their investments and plan their investments accordingly.
Here is a summary of Capital Gain tax implications for Indian residents investing in US stocks:
| Type of Gain | Holding Period | Tax Rate |
| Long Term Capital Gain (LTCG) | More than 24 months | 20% + applicable surcharge and fees (With Indexation Benefits) |
| Short Term Capital Gain (STCG) | Less than 24 months | Taxed as per slab rates applicable to the investor. |
| No capital gains tax in the US for foreign investors | N/A | N/A |
Carry Forward and Set off Losses from Sale of Foreign Shares
One critical aspect that investors should be aware of is the concept of carry forward loss. This is a tax provision that allows investors to offset losses from the sale of foreign shares against future capital gains, thereby minimizing their tax liability.
There are two types of losses that investors can carry forward: Short Term Capital Loss (STCL) and Long-Term Capital Loss (LTCL). The treatment of these losses is as follows:
- STCL can be set off against both Short Term Capital Gain (STCG) and Long-Term Capital Gain (LTCG). If there is any remaining loss, it can be carried forward for up to 8 years and set off against STCG and LTCG only.
- LTCL can be set off against LTCG only. If there is any remaining loss, it can be carried forward for up to 8 years and set off against LTCG only.
By carrying forward these losses, investors can effectively reduce their tax liability in the future. For instance, if an investor incurs a loss of $5,000 from the sale of foreign shares and has no capital gains to offset against it in the current year, they can carry forward this loss for up to 8 years. Suppose the investor generates a capital gain of $10,000 in the following year. In that case, they can offset the carried forward loss of $5,000 against the capital gain of $10,000, thereby reducing their taxable capital gain to $5,000.
Here’s a comprehensive table for better understanding:
| Loss Type | Set-off Against | Carried Forward Period | Set-off Against (Carried Forward) |
| Short Term Capital Loss (STCL) | Short Term Capital Gain (STCG) and Long-Term Capital Gain (LTCG) | Up to 8 years | STCG and LTCG only |
| Long Term Capital Loss (LTCL) | Long Term Capital Gain (LTCG) | Up to 8 years | LTCG only |
To Conclude….
The US stock market is HUGE! and by huge, I mean more than 40.5 trillion USD, and still growing and upholding the title of ‘The Land of Opportunities’. When it comes to investing in US stocks, Indian investors need to be mindful of the tax implications on dividends and capital gains. But fear not, with a little bit of knowledge, investors can make informed decisions to minimize their tax liability. Remember, taxes are inevitable, but with the right strategy, investors can keep more of their hard-earned money in their pockets. So, keep investing and keep learning!
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Hi,
Can long term gains from sale of USA stocks be offset against long term losses from sale of indian stocks?