How are capital gains, dividends from foreign stocks and international mutual funds taxed | The Financial Express

How are capital gains, dividends from foreign stocks and international mutual funds taxed

Capital Gains Tax on equity-oriented mutual funds investing in US stocks would be classified into long term or short-term depending on the period of the holding of such investment.

How are capital gains, dividends from foreign stocks and international mutual funds taxed
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As per the provisions of income tax laws, on direct investments, the tax treatment of foreign stocks is similar to that of unlisted equity shares in India. As per the provisions of section 2(42A) of the Income Tax Act, if a US stock is held for up to 24 months then the gains derived from such stocks would be treated as short-term capital gains, otherwise, such gains would be long-term in nature.

Accordingly, as per the provisions of section 112 of the IT Act, the long-term capital gains derived from US stocks would be taxable @ 20% (with indexation benefit) whereas, the short-term capital gains would be taxed as per the slab rates applicable to the Indian investor. The base tax rate would be further increased by the applicable cess and surcharge if any.

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On Equity-oriented Indian Mutual Funds investing in Foreign Stocks

Capital Gains Tax on equity-oriented mutual funds investing in US stocks would be classified into long-term or short-term depending on the period of the holding of such investment. In simpler terms, if the period of holding is up to 12 months, then the gains would be categorized as short-term capital gains otherwise it will be treated as long-term capital gains.

Thus, as per the provisions of section 112A of the IT Act, Long term capital gains would be taxed @ 10% (benefit of indexation is not available) plus applicable surcharge and cess on gains exceeding Rs. 1 lakh. On the other hand, short-term capital gains will be taxed @ 15% (plus surcharge and cess) u/s 111A of the IT Act. It is pertinent to note that “STT” is an important factor that brings equity-oriented mutual funds under a special tax bracket.

Capital gains arising from the investments made in stocks that are listed on any recognized stock exchange in an IFSC where the consideration is paid in foreign currency under LRS route will be taxed in the same manner as detailed above.

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On International Mutual Funds

Gains from International Mutual Funds are treated in the same manner as those of Debt mutual funds invested in India. This implies that where the units of these funds are disposed of or sold after 3 years from the date of its acquisition, it will lead to long-term capital gains, otherwise the same would be categorized as short-term in nature.

Long-term and short-term capital gains on such units are leviable to tax @ 20% (with indexation benefit) u/s 112 of the IT Act and as per the investor’s applicable slab rate, respectively.

Tax on Income earned from such Investments (Dividends)

Foreign Stocks

Indian investors deriving dividends from US stocks would be liable to tax in accordance with the slab rates applicable to them, as increased by the applicable rate of Surcharge (if any) and Education cess (4% of tax plus surcharge) and will be categorized as “Income from Other Sources”.

Mutual Funds

The type of option that an investor opts for in a Mutual Fund Scheme determines the tax implications of dividends derived from such funds.

Growth Option: In the growth option, no dividend is paid to the investors but is re-invested in the mutual fund plan itself. Therefore, no tax arises on such dividends as the re-invested amount ultimately forms part of the capital gains taxation.

Dividend Option: Under this option, Mutual funds make a dividend payout to the investors. Thus, this forms part of “other source” income in the hands of the investor and is taxed as per the marginal slab rates applicable to them.

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First published on: 18-11-2022 at 08:46:00 pm
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