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What are the tax implications of investments in global securities? Find out

The dividend income earned by an individual gets added to overall income, and the investor receives foreign credit to the extent of tax deducted by the US company.

foreign investment tax, NRI investors, Falling Rupee Value, Income tax return filing, tax slab, Taxation,
Short-term capital gain from the sale of foreign stocks is added to the total income and taxed at the individuals’ tax slab rate.

Just about 3 per cent of the global market cap is represented by Indian equities. Hence, significant investment opportunities also exist outside India.

In recent times, international investing has picked up substantially in India. According to industry reports, in the last 3 years, the assets under management (AUM) of international funds have grown about 15x. 

One of the main benefits of international investing is a great diversification opportunity for an investor. As it usually tends to have a low correlation with Indian equity, it offers a diversification opportunity to investors. 

Having said that, global investing is also associated with additional risk factors like country risks and currency. Sharp currency fluctuations can have an adverse impact on returns. Along with that, another aspect to consider is the capital gain tax on investments in global securities

Tax Implications on investments in global securities; 

Equity and ETFs

How is capital gain taxed on investments in global securities?

According to experts, as per India-US Double Taxation Avoidance Agreement (DTAA), dividend income is taxed at 25 per cent by the US companies. 

Kumarpal Jain, AVP, Product – Fintso, explains, “The dividend income earned by an individual gets added to overall income, and the investor receives foreign credit to the extent of tax deducted by the US company.”

For capital gain taxation, shares held for more than 24 months are considered long-term, and a tax of 20 per cent is applicable. For investments held for less than 24 months, “short-term capital gain from the sale of foreign stocks is added to the total income and taxed at per the individuals’ tax slab rate,” explains Jain. 

Mutual Funds

Taxation of offshore funds is similar to debt funds. Investments in mutual funds held for more than three years are considered long-term, and gains are taxed at the rate of 20 per cent with an indexation benefit. 

Jain adds, “Capital gains from funds redeemed within three years are considered short-term and taxed based on individuals’ tax slab rate.”

Key Takeaways

Industry experts say, investors who have a long-term investment horizon and are looking to leverage opportunities should consider investing in global markets. 

“Returns from investments in the home country and foreign country are not correlated and provide diversification benefits. A comparison of the returns between the domestic market and global market would be a futile exercise given that different factors impact different markets,” points out Jain. 

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