Indian residents holding international shares must file ITR revealing global income

By Kumarmanglam Vijay

While India already has ample investment opportunities, a growing number of Indians are looking at investing in foreign stocks to diversify their portfolio by investing in giant companies such as Google, Facebook, Tesla, etc. Investing in foreign stocks also provides exposure to international markets and an opportunity to hedge against depreciating Indian Rupee. ESOPs issued by foreign companies are also a growing avenue of investment by employees of Indian subsidiaries of companies listed outside India.

Importance of Net of Tax Returns

For any investor, the net of tax returns ought to be analyzed while evaluating an investment. Here are some key tax issues to consider when investing in securities listed outside India:

Taxability of Global Income in case of Indian tax residents

The global income of residents of India is taxable in India. An Individual is considered as a resident of India for a financial year (FY) if he stays in India for 182 days or more in that FY. In other words, if you ordinarily live in India and take a few foreign trips every year, you are likely to be a resident and your global income including income from foreign stocks would be subject to tax in India.

Liberalised Remittance Scheme (LRS)

The Liberalised Remittance Scheme is a mechanism that allows resident individuals to remit up to USD 250,000 (approx. INR 2 crores assuming 1 USD = 83.3 INR) to foreign countries for various purposes such as investment in foreign stocks, bonds, and other securities and other permitted purposes such as education, medical etc.

If the aggregate remittances by an Individual under the LRS in any FY exceeds INR 7 Lakhs, then such payments will be subject to a tax to be collected by the Bank @20% (TCS). This is not a cost for investors, as they would be able to claim a refund/ credit of such TCS upon filing their tax return for that respective FY.

Types of Income from Foreign Stocks

Investors derive two types of income from foreign stocks – gains or profits from the sale of investments and Dividends. Gains or profits from the sale of investments could be taxed as ‘capital gains’ or as ‘business income’, depending on the facts of each case, and the rules for taxation are different for both. However, for the sake of simplicity, we have only dealt with capital gains taxation in the present article.

Rates of taxation vary depending on the holding period and the nature of the instrument i.e. shares and securities. If the shares are held for more than 24 months, their sale will result in long-term capital gain (LTCG). Other assets such as ETFs and mutual funds would be considered as held for the long term if held for more than 36 months before their disposal. LTCG is subject to tax @20% plus applicable surcharge and cess.

If the shares / ETFs / mutual funds are sold before 24/ 36 months respectively, the gain will be a short-term capital gain (STCG) and be taxable at the slab rates applicable to individuals. It is critical to note that gains on the disposal of foreign stock and securities do not enjoy the preferred tax rates applicable to shares and securities listed on Indian stock exchanges.

Losses incurred on the sale of foreign shares can be set off from capital gains income, be it from India or foreign.

Dividends received from these companies will be included in the income of the investor and will be taxed in the head “income from other sources” at applicable slab rates.

Foreign Tax Rules and Treaties

Indian investors must be mindful of the tax rules of the foreign country where they invest. If the foreign country also taxes capital gains and dividends, then the investor will need to seek advice on the benefits available under India’s tax treaty with such country to examine the implications. Tax treaties contain provisions to give relief to investors either through exempting the income or allowing credit in the home country for taxes paid in a foreign country.

Disclosure Requirements for Foreign Assets

The Indian investors will need to file Form 67 and their tax return in India accurately to properly disclose foreign investments and claim appropriate tax credits.

Lastly, if an Indian resident holds any foreign asset, including shares of a foreign company, they are mandatorily required to file their tax return in India disclosing all their foreign assets in it to avoid any unpleasant surprises.

(Author is Partner and Head of Direct Tax, JSA and Shivek Arora, Consultant – Direct tax at JSA)