Taxation on US Stocks for Indian Investors

Investing in US stocks has become increasingly popular among Indian investors as they seek to diversify their portfolios and tap into the global market. However, it's important to understand the tax implications of investing in US stocks to avoid any surprises during tax season. This guide covers everything you need to know about taxation on US stocks for Indian residents, including dividends, capital gains, and how to navigate tax treaties between the two countries.

Taxation on US Stocks for Indian Investors

When investing in US stocks from India, taxes are levied in both the US and India. These taxes primarily fall under two categories: Dividends and Capital Gains. Let’s break them down:

1. Dividend Taxation

When you receive dividends from US companies, the following taxation rules apply:

• US Tax on Dividends: Dividends earned from US stocks are taxed at a flat rate of 25% in the United States. This tax is automatically deducted at source by the US government.
• Indian Tax on Dividends: In India, dividend income is also taxable as per your income tax slab. However, thanks to the Double Tax Avoidance Agreement (DTAA) between India and the US, you can claim a tax credit for the taxes paid in the US. This means that if you are in a higher tax bracket (say 30%), you'll only need to pay the difference (i.e., 5%) in taxes to the Indian government.

For example:

• Dividend earned: ₹10,000
• US tax deducted (25%): ₹2,500
• Indian tax (if you fall under the 30% bracket): ₹3,000
• Additional tax payable in India: ₹500 (after taking credit for US tax paid)

2. Capital Gains Taxation

Capital gains tax depends on the holding period of the US stocks:

• Short-Term Capital Gains (STCG): If you hold the stocks for less than 24 months, the profit earned will be considered short-term capital gains. These gains are taxed at your applicable income tax slab rates in India for each individual.
• Long-Term Capital Gains (LTCG): If the stocks are held for more than 24 months, any profit earned will be considered long-term capital gains. These are taxed at a flat rate of 12.5% in India after accounting for the benefit of indexation. The Budget 2024 has revised LTCG on US STocks investments from 20% to 12.5%

Example of Long-Term Capital Gains Taxation:

• Stock purchase price: ₹1,00,000
• Sale price after 2+ years: ₹1,50,000
• Capital gain: ₹50,000
• Tax at 12.5%: ₹6,250

Unlike dividends, there is no capital gains tax in the US on the sale of US stocks for non-resident Indians (NRIs). Hence, you only pay capital gains tax in India.

Reporting US Stock Income in India

As an Indian resident, all global income, including profits from US stocks, needs to be reported while filing your Indian income tax return. Make sure to report dividends under the "Income from Other Sources" section and capital gains under the "Capital Gains" section.

Taxation Scenarios: Examples

Let’s look at some examples to understand how US stock taxation works for an Indian investor:

Example 1: Dividend Income

• Investment in Apple: You earn ₹20,000 in dividends from Apple shares.
• US tax (25%): ₹5,000 is deducted at source in the US.
• Indian tax liability: If you fall under the 30% tax slab, your Indian tax on the dividend is ₹6,000.
• Tax credit: You can claim the ₹5,000 already paid in the US, and pay only the ₹1,000 difference in India.

Example 2: Long-Term Capital Gains

• Investment in Tesla: You buy Tesla shares for ₹3,00,000 and sell them for ₹4,50,000 after 3 years.
• Capital gain: ₹1,50,000.
• Tax payable: At a 12.5% rate, your tax liability is ₹18,750.

Conclusion

Understanding taxation on US stocks is crucial for maximizing your returns as an Indian investor. With dividends taxed at 25% in the US and capital gains taxed in India, it’s essential to take advantage of the DTAA to avoid double taxation. Keep your documents ready, report your global income correctly, and consult a tax advisor if needed.

By staying informed about tax rules and credits, you can make your investments in US stocks more tax-efficient and grow your wealth with minimal friction.