ITR Filing 2023-24: How are capital gains and dividends earned from foreign stocks taxed?

Indian investors have been diversifying their domestic stocks portfolio by investing in US stocks. Some of the top favourite stocks of Indian investors include Amazon, Apple, Tesla, Microsoft, and Google. In fact, Facebook (Meta is the parent company), Apple, Amazon, Netflix, and Google (Alphabet is the parent company) collectively called FAANG stocks are hugely popular US-listed stocks for Indian investors.

When an investor in India invests in the shares listed in the US equity market, he or she will earn income in the form of dividends and capital gains on the sale of shares. The investor is liable to pay tax on such foreign income in India and also needs to report any foreign assets in the Income Tax Return. All taxpayers who are residents in India for tax purposes are compulsorily required to file Income Tax Returns and report foreign income and assets.

When a taxpayer has income from foreign investments, the tax treatment in India would depend upon the residential status. ITR filing last date for AY 2023-24 is July 31 so one needs to hurry up to complete the tax filing process by the deadline.

Archit Gupta, Founder and CEO, Clear touch upon all the major tax aspects a taxpayer investing in foreign assets need to know.

Capital Gain Income From Foreign Shares

Tax on Capital Gain in the US – As per US taxation, capital gain on the sale of shares is not taxable.

Tax on Capital Gain in India – Foreign Shares are not listed on any recognized stock exchange in India. Therefore the period of holding is 24 months, i.e. since these are not listed in India these are treated like unlisted shares.

LTCG on sale of foreign shares (listed or unlisted) is taxable at 20% under Section 112 with the benefit of indexation.

STCG on the sale of foreign shares (listed or unlisted) is taxable at slab rates.

The rate of exchange for the calculation of capital gains in rupees shall be the telegraphic transfer buying rate of such currency as on the last day of the month immediately preceding the month in which the taxpayer transfers the capital asset.

Other Income From Foreign Shares

Tax on Dividends in the US – Income from investments received as dividend is taxable in the US at a flat rate of 25%.

Tax on Dividend in India – A dividend received from a Foreign Company is taxable income under the head Income From Other Sources at slab rates.

Claim Foreign Tax Credit as per DTAA – The dividend income from shares held in the US equity market is taxable income in both India and US. To avoid double taxation, the taxpayer can claim credit of the tax paid in the US as a foreign tax credit to reduce the tax liability in India as per the provisions of the (DTAA).

The taxpayer can claim the foreign tax credit by filing Form 67 on the income tax website. Further, the rate of exchange for the calculation of dividend in rupees shall be the telegraphic transfer buying rate of such currency as on the last day of the month immediately preceding the month in which the dividend is earned.

Carry Forward Loss On Sale Of Foreign Shares

The investor can set off Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). They can carry forward the remaining loss for 8 years and set off against STCG and LTCG only.

The investor can set off Long Term Capital Loss (LTCL) against Long Term Capital Gain (LTCG) only. They can carry forward the remaining loss for 8 years and set off against LTCG only.

Tax on US Equity & Investments – Disclosure in ITR

The Assessee should file ITR-2 since the income from the sale of foreign shares is Capital Gains.

Dividend Income on foreign shares should also be reported.

Capital Gains on the sale of foreign shares should be reported under Schedule CG.

Investments held by the taxpayer in the US market must be disclosed under Schedule FA i.e. Foreign Assets.

To claim foreign tax credit, details must be reported in Schedule TR i.e. Tax Relief to claim relief of taxes paid outside India.

The taxpayer should file Form 67 with the ITR to claim foreign tax credit before the end of the Assessment year.