Tax Implications for Indian Residents Investing in the US Stock Market

When an Indian investor thinks about buying international stocks, one of the first concerns on his mind is the tax on selling foreign shares in India.

Understanding the charges and taxes are important to ensure that the net returns are worth the effort.

Today, we are going to talk about the tax on US stocks in India in detail to offer a clear perspective and debunk any myths surrounding it. Read On to know more about capital gains tax on shares sold outside India.

1. Tax on Dividends
2. Capital Gains Tax

1. Tax on Dividends

When calculating the tax on US stocks in India, you have to take into account dividends earned from US stocks as well. This amount is taxable at the rate of flat 25%. Hence, if the company declares a dividend of $100, then you will receive $75. This is lower than the standard tax rate for foreign investors in the US due to the tax treaty between India and the USA.

Further, the dividend received as cash or reinvested is also taxed in India at the income tax slabs applicable by adding it to your current income. However, India and the USA have a Double Taxation Avoidance Agreement (DTAA) that allows you to use the tax withheld in the US to offset the tax liability in India. 

Therefore, if the company had declared a $100 dividend pay-out, then you would receive $75. However, the tax liability in India would be calculated on $100. Let’s say that the tax liability in India is $30. Since you have already paid $25 in the US, you will have to pay only $5 in India. Remember, this is a representational example. The real-life calculation will need more work as you will have to add $100 to your taxable income and assess your tax liability based on the slab applicable to you.

2. Capital Gains Tax

Capital gains tax is another type of tax on stock trading in US. When you earn capital gains, there is no tax applicable in the US. Hence, if you buy shares worth say $500 and sell them for say $800, then there will be no tax liability in the US on the capital gain of $300. However, you will be liable to pay taxes on this gain in India.

Calculating Capital Gains on Foreign Shares:

As we know, in India, capital gains are taxed based on two categories:

1. Long-Term Capital Gains (LTCG) – The magic number to remember here is 24 months. If you have held the stocks for more than 24 months before selling them and earning capital gains, then you will be liable to pay a capital gains tax at the rate of 20% plus all applicable fees and surcharges.
   
   
2. Short-Term Capital Gains (STCG) – On the other hand, if you have held stocks for less than 24 months before selling them and earning capital gains, then the said gains will be added to your taxable income and taxed as per the income-tax slab applicable to you.

Examples

You buy shares worth $500 and sell them for $800 after 30 months. Hence, you earn long-term capital gains of $300. The tax liability will be $60 plus cess and surcharges.

You buy shares worth $500 and sell them for $800 after 20 months. Hence, you earn short-term capital gains of $300. This will be added to your current income and taxed based on the applicable income-tax slab.

The simplest way to understand the tax on selling US stocks in India is to divide it between the US tax liability and Indian tax liability. The tax on your current taxable income (including dividend and short-term capital gains) will be calculated using the tax slabs based on the prevalent income-tax rates.