Income tax on foreign shares is required to be reported while filing returns in India. If you have received dividends from foreign shares or booked capital gains or losses, they have to be accordingly reported to the tax authorities. Here is what Anshu Khanna, Partner-US Corridor, Nangia Andersen LLP says about the taxation of foreign income for Indian individual taxpayers.
Disclosing foreign investments
Gain or loss happening on the sale of investments is reported in ITR 2 under the category ‘Capital Gains or Loss”. Income in the form of dividend from investments need to be reported under the category “Other Sources”. Schedule FA of the ITR-2 is for disclosing foreign investments.
Which ITR Form
A taxpayer, who makes investments in US Stocks or any other foreign asset, cannot file ITR-1 (SAHAJ). Resultantly, he/ she shall file in ITR-2/ ITR-3/ ITR-5/ITR-6 and ITR-7 depending upon applicability to it.
How taxation of Indian stocks differs from that of foreign stocks
TDS provision U/S 194 shall not come into the picture in case of foreign stock, whereas Indian companies are mandatorily required to deduct TDS @ 10% on dividend paid by it.
The taxpayer may not be able to take benefits of Section 111A/ 112A, which provides a concessional rate of Capital gain tax on Shares or stock.
However, tax implications for dividend income remain almost identical.
Holding period for the calculation of capital gains
The period of holding for foreign stocks is the same as that for Unlisted Indian stocks. If the holding period of stock is less than 24 months, it shall classify as ‘Short-term capital Gain’. Whereas if such period is more than 24 months, it shall be treated as ‘Long-term capital gain’.
Rate of capital gain tax
Long-term capital gain from the sale of foreign stocks (not listed on the Indian exchange) will be leviable at the flat rate of 20% plus health and education cess (plus surcharge, if applicable). The short-term capital gain from the sale of foreign shares will be added to total income and taxable at the individual’s slab rate.
Set off and Carry Forward
Set-off: Short-term (ST) loss can be set off with the balance of gains available in ST/ LT gains. Whereas, Long term (LT) gains can only be set off with LT gains only.
Carry Forward: Short-term/ Long-term losses booked on account of the transfer of such shares can be carried forward (c/f) to 8 Assessment years.