Tax Implications of Investing in US Stocks for Indian Investors

One of the key things to consider when making any investment decision is the tax implication. It might be overwhelming for Indian investors who invest in international shares to deal with the taxes and the related charges after earning any gain. There are two important considerations to keep in mind: long-term gains and short-term gains. Once you are aware of the tax implications for the above gains, it helps to ascertain the net effect on your investments and in turn make better decisions. So, let’s dive right in!

How are US stock investments taxed?

If you are investing in US stocks, first you need to understand the concept of capital gains. 

If you sell US stocks at a profit then you have to pay a tax on the profit made which is the capital gains tax. For example, if you buy a US stock for $100, and sell it for $500, then you have to pay a capital gains tax on $400. The profit you make is taxable only in India and there is no tax liability in the US. 

There are two types of capital gains tax based on your holding period:

Short-term Capital Gains Tax

If you sell your US stocks before 24 months, then any gains made are subject to short-term capital gains tax. These gains will be taxed per your income tax slab. 

Example of Short-term Capital Gains

Let’s assume you buy shares for $1,000 and sell them after 10 months for $1,500. Hence, you earn capital gains of $500 which will be taxable based on your current tax slab.

Since there has been no change in the short-term capital gains, your tax outgo will remain the same. 

Long-term Capital Gains Tax

Budget 2024 has proposed changes to the long-term capital gains made from US stocks. 

Under the old rule, long-term capital gains tax applicable on US stocks was at a 20% tax rate, plus a surcharge, cess, and an indexation benefit on the cost. 

But after Budget 2024, US stocks will attract a long-term capital gains tax of 12.5%, plus a surcharge, cess without any indexation benefit on the cost.

Example of Long-term Capital Gains Tax

Let’s assume an Indian investor puts ₹7 lakhs ($8,383) in the S&P 500 index every year for the past 5 years. His investment would have grown by 15% CAGR. 

Here’s a look at how the tax computation would change under old and new long-term tax rates.

Under the new slab for long-term capital gains, investors stand to save taxes of ₹70,983 in this scenario, which is 23% less than earlier.

We made the following assumptions for calculation:

• Cost inflation index increases at 5% for simplicity
• Cess and surcharges are not being considered
• Investment of ₹7L per annum over 5 years
• $1 is equal to ₹83.5

Changes To Capital Gains Taxation for US Stocks

Here’s a look at changes to capital gains tax for foreign equities:

(Note: Changes are applicable from July 23, 2024)

Tax on Dividends from US Stocks

If an Indian resident investing in US stocks earns a dividend from a US company, it is subject to a tax of 25% in the US. As per a tax agreement between India and the US, this rate is lower than the standard tax rate applicable to foreign investors in the US. Moreover, the dividend income is also taxable in India according to the individual’s tax slab. 

But you might be wondering if this is a case of double taxation. So, to fix this, the Indian government has signed a Double Tax Avoidance Agreement (DTAA) with the US. Under current procedures, you can claim a foreign tax credit to offset US tax withheld against your tax liability in India.

Where can I get my Taxation Report?

You can avail your yearly Tax reports using the steps below:

• Go to the US Stocks section within the INDmoney app
• Click on the Manage button
• Scroll down to find the Tax Documents header
• Click on the Financial Year for which you want the Taxation Report
• The Excel sheet contains all the gains/losses as well as the post-tax dividend incomes that you have received over the mentioned period.

Where can I get the information available on Form 67, Schedule TR, and Schedule FSI?

These details can be derived from the CG Statements already being shared over the app:

• Form 67 contains the Dividend income and the tax applied to this income
• Schedule TR contains your Capital Gains/Losses on Long-term investments, Short-term investments, and dividend income
• Schedule FSI contains the Tax relief applicable as per the TDS deducted against the dividend-based income

Where will I get my US stock dividend?

Your US stocks dividend (if issued by the company against the stocks you hold on the date of issue) will be credited back to your US stocks a/c after deducting the applicable 25% TDS.

Avoiding Double Taxation

Many investors are concerned about potential double taxation on their US stock investments, assuming they have to pay taxes in both India and the US. However, Indian investors can breathe a sigh of relief as they are exempt from double taxation, thanks to the tax treaty between India and the US. 

Under this treaty, only India has the right to tax your gains from US stocks, eliminating the need to pay taxes in the US. This ensures that you are liable to pay taxes only in India, reducing the complexity and potential financial burden associated with dual taxation.

Reporting Requirements

When investing in US stocks, it's crucial to be aware of the reporting requirements imposed by Indian regulatory authorities. The Reserve Bank of India (RBI) and the Income Tax Department require you to report your overseas investments, including US stocks, in your annual income tax filings. Failure to disclose these investments can lead to penalties and legal complications. 

Make sure to accurately report your US stock holdings, capital gains, and dividends in the appropriate sections of your income tax returns. It's advisable to consult with a tax professional or seek guidance from the Income Tax Department for any specific reporting obligations or forms related to foreign investments.

Conclusion

Investing in US stocks can be a lucrative opportunity for Indian investors. However, it is crucial to understand the tax implications to ensure compliance and avoid any unnecessary financial burdens. 

In this blog post, we discussed the various aspects of taxation on US stocks, including short-term and long-term capital gains, taxation on dividends and the concept of double taxation. By being aware of these tax rules, Indian investors can make informed investment decisions and optimise their tax liabilities effectively. 

Remember to consult with a tax advisor or professional for personalised guidance based on your specific circumstances.