Indian investors are increasingly showing keen interest in diversification through investment in global stocks, with a special focus on US stocks. Stocks of some of the US tech giants listed on US stock exchanges have attracted a significant number of Indian investors in recent years. Since most investors are only starting their global investment journey with investment in some of the top US stocks, there is very limited awareness on the tax applicability and compliance on returns earned from such avenues.
Whether it is an experienced investor or someone who has just started out with US stock market exposure, it is important for Indian residents to comply with Indian tax laws. Here, we will demystify the tax applicability on US stock investments for Indian residents.
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What are the taxation norms that Indian residents investing in US stocks should know?
Indian residents who invest in US stocks must note that any returns generated through dividends or sale attract tax as per Indian taxation rules. Here are the details.
Taxation of dividends from US stocks
A company that earns substantial profits in a given year may distribute some portion of the same as dividends on the stock to stockholders. If an Indian resident has invested in a US stock that pays a dividend, it is treated as income in the hands of the investor as per the Income Tax Act of India. Here are some of the important points to note on taxation of dividend income:
- Any earnings made by Indian investors through dividends from US stock investments is taxable at a flat rate of 25%.
- Due to the presence of a tax treaty between the US and India, the tax rate applicable on such income made by Indian investors is comparatively lower than tax treatment for other foreign investors.
- Such tax on dividend is withheld by the US companies whose stocks are owned by the investor. After deducting 25%, the balance 75% is paid as a dividend to the Indian investor.
- If an Indian investor has received a dividend but chooses to reinvest the same, it will be added to his/her income and taxed as per the normal income tax slab rates.
- Due to the presence of Double Tax Avoidance Agreement (DTAA), any tax that is withheld in the US can be adjusted against any tax liability arising in India.
Example: Ms. Nisha has invested in Amazon stocks, for which she receives a dividend income of $500. The company retains 25% or $125 out of this amount as tax. Thus, the net dividend in the hands of Ms. Nisha will be $375.
During the financial year, she declares an income of $ 1,000 through income tax return. This income will be taxed as per the applicable income tax slab. On her total taxable income, Ms. Nisha can claim a credit for the dividend retained or $125 being tax withheld by Amazon. Hence, out of the total tax payable by Ms. Nisha, $125 will be deducted and the balance will be taxable.
Taxation of capital gains from US stocks
Apart from dividends, investors can also earn capital gains by investing in US stocks. Capital gains are essentially the profits or benefits gained from selling of stocks at a price that is higher than the purchase price.
Every Indian resident who has invested in US stocks and has earned capital gains from the same during a financial year must abide by the Indian tax laws. The following will be the tax implications in India:
Long-term capital gains (LTCG):
- If capital gains are generated from US stocks that have been held for more than 24 months, these are called Long term capital gains.
- Such gains are taxable at 20% plus applicable surcharge and fees.
Short-term capital gains (STCG):
- If capital gains are generated from US stocks that have been held for less than or equal to 24 months, these are called Short term capital gains.
- Such gains are considered to be a part of the investor’s taxable income and are taxed as per applicable income tax slab rates.
A major relief for Indian investors investing in US stock markets is that if they make profits from sale of their investment, no tax will be applied in the US on such gains.
Let’s taken an example to understand capital gains tax:
Suppose Ms. Nisha, who had bought Amazon shares for $500, decides to sell them at a price of $700. This earns her a profit of $200. Although no tax will be applicable on such profit as per the US tax laws, she is liable to pay taxes in India on the profit or capital gain.
- If she has retained the stocks for more than 24 months, the tax is $40+ surcharge and cess fee as applicable.
- If she sold the stocks within 24 months of owning them, the profit of $200 is added to her taxable income for the financial year. Her net income will be taxable as per the tax slab that her income falls under for the given financial year.
Tax withholding procedures for US stocks
As of 2023, an individual investing in foreign stocks will be charged with 20% TCS (Tax Collected at Source) which can be claimed when filing for Income tax returns. The tax rate on dividends received from US stocks is 25% for Indian investors.
Tax withholding: The US company withholds 25% tax on dividends paid to Indian investors. Net payout: After tax withholding, Indian investors receive 75% of the dividend amount. Due to the presence of a tax treaty between the US and India, the tax rate applicable on such income made by Indian investors is comparatively lower than tax treatment for other foreign investors.
Strategies for tax-efficient investments in US stocks
Here are some strategies for tax-efficient investments in US stocks for Indian investors as of 2023:
- Benefit from Tax Credits for Foreign Taxes Paid: Thanks to the Double Tax Avoidance Agreement (DTAA), investors can utilize tax credits for taxes paid abroad, ensuring they are not taxed twice on the same income.
- Explore the Potential of ETFs: Exchange-traded funds (ETFs) provide an excellent opportunity to invest in US stocks while sidestepping concerns about the tax implications associated with investing in individual stocks.
- Leverage the Advantages of ADRs: American Depository Receipts (ADRs) offer a convenient avenue for investing in US stocks without the need to worry about the tax implications typically associated with investing in individual stocks.
- Tap into Mutual Funds for US Stock Investments: Mutual funds serve as another attractive option for investing in US stocks while alleviating concerns about the tax implications typically associated with investing in individual stocks.
Conclusion
Investing in the US stock markets can bring diversity to the portfolios of Indian investors. While investing in these, it is important to know the risks involved, the gains that can be enjoyed, and also the tax implications. Knowing aspects like what will be the tax implication, how will the investment be taxed, are there are any exemptions, etc will help Indian investors gain more clarity and understand the net profits that can be made after tax.
FAQs
Yes, you can invest in US stocks from India via direct investment or indirect investment mode. If opting for direct investment, you will have to open a trading account and a US bank account by seeking assistance from a broker. Indirect investment in US stocks can be made through mutual funds or ETFs.
The maximum investment that can be made by Indian investors in US stocks is Rs. 1.9 crores per financial year as per RBI’s Liberalized Revenue Scheme.
US indices are known to be less volatile as compared to Indian indices, thereby offering stability to investors. Apart from diversification benefits, some of the top US stocks can also allow investors to gain exposure to innovation driven growth.
Since US stock investment attracts higher charges in terms of commission and fees, these are considered more expensive than Indian stocks, especially if an investor has a shorter investment horizon.
While investing in US stocks, Indian investors must take note of the US regulatory framework, foreign exchange related risks, taxation, charges, and limitations applicable on the same.
