Many investors want to explore the potential investment opportunity of the US Market. The New York Stock Exchange is the largest in the world, and its Market Capitalization is more than 27.7 Trillion Dollars as of Dec 2021, compared to this, the GDP of India in 2020-21 was 2.65 Trillion Dollars. So you can imagine the size of the US Equity Markets.
As an investor from India, if you are planning to invest in the US Stock Market, you should be aware of the US Stocks tax implications. The money that you’re going to earn will not be tax-free as you need to pay tax when you earn something. We don’t pay taxes on losses. So before understanding the tax implications, it is imperative to understand the type of gains from the investment in stock.
There are two types of gains from a stock:
- Capital Gains on sale
Let’s discuss the tax liability on each of them separately.
Companies generally roll out dividends on the stock in order to distribute profits. Therefore, if the stock invested in, pays a dividend, it is income in the hand of the investor. This income needs to be taxed, and hence it is taxed at a flat rate of 25%. Hence, if the company declares a dividend of $100, then you will receive $75. This is lower than the standard tax rate for foreign investors in the US due to the tax treaty between India and the USA.
Further, the dividend received as cash or reinvested is also taxed in India at the income tax slabs applicable by adding it to your current income. However, India and the USA have a double taxation avoidance agreement (DTAA) that allows you to use the tax withheld in the US to offset the tax liability in India.
Basically, if you are paying 25$ as taxes in the USA i.e. approximately INR 25*75 = INR 1875. In India, on the same dividend income, you have to pay taxes on the same dividend at 10% i.e. INR 750 (75*100*10%). You need not pay any taxes in India but you would get credit for the taxes you have paid in the USA. To claim this credit, you will have to submit certain documents such as TRC and file your ITR on time. It's best to consult a tax advisor or a CA when/if you earn this income.
Capital gains tax is another type of tax on stock trading in the US (basically you have to pay tax on any income you earn similar to capital gains tax in India). 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 $300. However, you will be liable to pay taxes on this gain in India on the said 300$.
As we know, in India, capital gains are taxed under two categories:
LTCG (Long Term Capital Gains)
When the stock is held for more than 24 months then the gains on the sale of the stock are long-term capital gains and will be taxed at 20% + applicable surcharge and fees. The exemption of Rs 1 lakh per year, which is available on long-term capital gains on the sale of shares and equity-oriented mutual funds in India, is not available on foreign stocks.
STCG (Short Term Capital Gains)
When the stocks are held for a period of less than 24 months then the gains on the sale of the stock are short-term capital gains that will be a part of the current income and will be taxed as per slab rates applicable to the investor. Gains made on employee stock options (ESOPs) and restricted stock units (RSUs) in foreign companies are also taxed in the same manner.
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 surcharge (20% tax rate).
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 income-tax slab.
Disclosing foreign assets in tax return
The most important thing to note is that if you are a tax resident of India, you are required to disclose all foreign assets and foreign income in your income tax return. Even if there is no income, the assets must be declared in the return. This reporting is required for assets held at any time during the year. Even if you have sold the asset and don’t own it as of 31 March of the financial year, you still have to declare the information about the asset (and any income earned from it) in your tax return.
Foreign assets you need to declare in the ITR
- Equity and debt instruments
- Depository accounts
- Custodian accounts
- Cash value insurance contract or annuity contract
- Financial interest in any entity
- Immovable property held
- Trusts where the taxpayer is a trustee, a beneficiary, or a settler
Also, note that filing of income tax return is mandatory for those who own foreign assets even if their total income from all sources is below the minimum exemption limit of Rs 2.5 lakh. These include assets that may have been held by you as a beneficial owner. Taxpayers who have foreign assets cannot file their returns using ITR-1. The details can only be reported in ITR-2 or ITR-3, as applicable.
TCS is payable when you transfer funds
Under the Liberalized Remittance Scheme, a resident Indian can transfer up to $2.5 lakh (approximately Rs 1.84 crore) abroad in a financial year. But there is a tax collected at source (TCS) if the amount exceeds Rs 7 lakh in a year. The TCS is 5% of the amount exceeding Rs 7 lakh and can be claimed as a refund when the taxpayer files his income tax return.
Understanding the US Stocks tax effect in detail will help you to make a wise decision whether to invest domestically or in the US Markets. It will give you realistic expectations from the investment. You may tend to stay away from international stocks since you are not aware and probably worried about the taxes and charges eating through your returns. However, we hope this article helped you understand the tax implications of investing in US stocks in a simpler way.