How are your US stock market investments taxed? All You Need to Know
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 post earning any gain. There are two important considerations to keep in mind with regard to gains: Long term gains and Short term gains. Once you are aware of the tax implications with regards to 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 Stocks investments taxed?
Tax on investment gains:
You have to pay tax if you made a profit on your investments. This profit is taxable in India and not in the US. Based on how long you hold your investment, you will be taxed in the following manner:
- Long-Term Capital Gains - If the shares are held for more than 24 months and the ETFs are held for more than 36 months, the gain from these investments will be taxed at a long-term capital gains tax rate of 20%.
- Short Term Capital Gains - If the shares are held for less than 24 months and the ETFs are held for less than 36 months, the gain from these investments will be treated as normal income and will be taxed according to your tax slabs
All you need to remember is 24 months for US stocks and 36 months for ETFs.
Let’s say you gained USD 100 from selling a US stock after holding it for 30 months, it becomes a long-term capital gain and you are liable to pay USD 20 plus cess and surcharges applicable.
If you gained USD 100 after holding the stock for 20 months, it becomes a short-term capital gain and you are liable to pay the tax as per the income tax slab you fall under.
How are US stocks' dividends taxed?
Dividends over US Stocks Investments are taxed at source at a flat rate of 25%. The company deducts 25% of the dividend being allotted and distributes the remaining dividend to the users.
Thankfully, a Double Taxation Avoidance Agreement (DTAA) between the US and India allows taxpayers to deduct income tax already paid in the US. You are eligible to use the 25% tax you already paid in the US as a foreign tax credit to reduce the amount of income tax you need to pay in India
Are there any additional charges?
There could be applicable surcharges and cess as per the dynamic rules regulated by the Income Tax Department.
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.
From 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 on this income
- Schedule TR contains your Capital Gains/Losses on Long term investments, Short term investments, and Dividend based income
- Schedule FSI contains the Tax relief applicable as per the TDS deducted against the Dividend based inco
Where will I get my US Stocks 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.
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GST Charges on Currency Exchange
When you convert Indian rupees into US dollars for purchasing US stocks, you are subject to Goods and Services Tax (GST) charges. Banks charge GST on service charges and exchange mark-ups associated with currency conversion. The current GST rate for these charges is 18%. However, please note that there is a minimum GST charge of ₹45 or 18% of the service costs, whichever is higher. This amount is deducted from the rupees you transfer for the currency exchange.
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.
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.
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, GST charges on currency exchange, and the concept of double taxation. By being aware of these tax rules, Indian investors can make informed investment decisions and optimize their tax liabilities effectively.
Remember to consult with a tax advisor or professional for personalized guidance based on your specific circumstances.