Investment in US stocks is subject to tax for resident Indians and foreign earnings have to be reported while filing one’s income tax return (ITR). You could have earned dividend income or capital gains or could have incurred capital loss while investing in the US stocks. There are specific rules to deal with them and have to be correctly reported in ITR in order to avoid any income tax notice.
There is no capital gain tax in the US, which means gains made from selling US stocks are tax-free under the US tax laws. However, those gains are subject to tax under Indian tax laws. Sujit Bangar, Founder of TaxBuddy.com, provides a bird’s eye view of the tax structure on foreign income arising out of stock investments.
Taxation of US stocks
The resident tax-payers investing in US stocks need to declare such investments in their ITR and also pay applicable taxes on the income earned on such investments. Such investments yield two kinds of income – dividend income and capital gains on sale of stocks. The tax rules are different for both kinds of income. The India – US double taxation avoidance agreement (DTAA) ensures income is not taxed at two places. Thus, you don’t need to pay tax on the same income in India as in the US.
Dividend Income from US Stocks
The dividend income on investment in US stocks is taxable in the U.S. at 25%. This tax is withheld and you are paid a dividend net of tax. Suppose, you have earned $500 in dividend, out of this $125 (25%) is withheld as income tax and only $375 is credited to your account. In India this dividend income is taxed as income from other sources and at applicable tax slab rates. Hence, the amount of $500 (converted in Rs.) needs to be declared as dividend income. Then the tax on the total income (including dividend income) is to be computed and against this, the tax paid in US of $125 can be claimed as foreign tax credit. This is as per Article 25 of India-US DTAA. Thus, you don’t need to pay tax at two places on the same income. However, income needs to be declared in India, even if your tax liability comes to zero.
Capital Gains from US Stocks
The income from capital gains is accrued when the US stocks are sold or transferred. This income is long term capital gains (LTCG) if the shares are held for more than 24 months otherwise it is short term capital gains (STCG). Presently, there is no tax on capital gains income in the US. Hence, the entire tax is to be paid in India without claiming any foreign tax credit. The income from capital gains is to be computed in a manner identical to the computation for Indian stocks and declared accordingly. The tax exemption available for LTCG income upto Rs. 1 lakh in case of Indian stocks is not available in case of foreign stocks. The rate of tax for LTCG on foreign stocks is 20% and the same for STCG is at the applicable slab rates.
If one incurs loss on sale of US stocks, then short term capital loss can be set off against LTCG or LTCG, but long term capital loss can be set off against LTCG only.
The tax-payers (non-business cases) who have invested in foreign stocks (assets) have to mandatorily file ITR in ITR-2 since they have to report such foreign investments in Schedule FA of the ITR-2. This schedule needs to be filled up carefully. In this schedule, not only the details of assets but also the income accruing from such assets also needs to be declared.