A Detailed Guide on Taxation on US Stocks and the Implications for Indian Investors

Many investors want to explore the potential investment opportunity of the US Market. The US market is considered to be the strongest financial market. The New York Stock Exchange is the largest in the world, and its Market Capitalization is more than 24.4 Trillion Dollars as of May 2021, compared to this, the GDP of India in 2019 was 2.87 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. So, 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.

You need to pay tax when you earn something. We don’t pay taxes on losses. So before understanding the tax implications of US Stock Markets, let’s understand the different earning opportunities from a stock. 

There are two types of gains from a stock:

• Dividends
• Capital Gains on Sale of the Stock

Dividends

A dividend is the share of profit that the company plans to share with the shareholders. So, as your investment is earning a profit, you need to pay tax on the dividend received. A company doesn’t need to pay dividends, but most Blue Chip companies pay regular dividends to maintain goodwill.

Capital Gains on Sale of the Stock

When you plan to sell a stock, you can either make a profit or loss. There is no tax charged if you incur a loss, but if you make a profit, then you need to pay Capital Gains Tax on the profit earned. The rate of Capital Gains tax depends on the holding period of the stock. Let’s learn the tax implications in detail.

US Stock Market Taxation

When you plan to invest in the US Stock market, you should understand the Tax system of the US. It is not at all complicated and will not complicate your Tax filing system.

As discussed earlier, there are two types of gains from stock. One is dividend and the other Capital Gains. Let’s understand the tax system of each type in detail.

• Tax on Dividends

There is a Tax Treaty between the US and India. Due to this, the tax liability on any dividend received by an Indian is at a flat rate of 25%. This rate is much lower than any other foreign investor’s tax rate that invests in the US. 

The tax is deducted at the source and you will receive 75% of the dividend value after deduction. But there is a Double Taxation Avoidance Agreement between the US and India, which will be a relief for you. This agreement prevents you from paying double tax (both in the US and India). As you have already paid 25% tax in the US, you will get a foreign tax credit of 25% and you need to pay tax above the 25% rate in India.

• Tax on Capital Gains

Want to hear the good news? There is no Capital Gains Tax on the US Stocks for foreigners in the US. But you need to pay tax in India as per India’s Capital Gains Tax regime. 

There are two types of Capital Gains. One is Long Term Capital Gain and the other is Short term Capital Gain. 

a)Tax Rate on Long Term Capital Gain

If you are holding the stock for more than 24 months, then the gain from selling the stock will fall under the Long Term Capital Gains rate in India. The Long Term Capital Gains rate is 20% (plus any additional surcharge and cess fee). 

b)Tax Rate on short Term Capital Gain

If you sell the stock before 24 months, it will be considered as ordinary income, and the tax rate will be applicable depending on your tax bracket. 

Types of Gains from Stock

Now, let’s understand the long and short-term capital gain in detail. You gain from stock when your selling price of the stock is more than your buying price. The tax is charged on the gain that you earned from the stock. Let’s understand Long Term and Short Term Capital gains in detail

• Short Term Capital Gain

If you buy a stock and hold it for less than 24 months, then the tenure is short-term. So any gain that you generated from this stock will be taxed under the ordinary tax rate in India. 

Eg: Mr. A bought shares of XYZ company from the New York Stock Exchange on 1st January 2020. The price of the share at the time of the purchase was $500. XYZ is a pharmaceutical company and is engaged in the discovery of vaccines and other life-saving drugs. After the coronavirus pandemic, the company started researching the possibilities to prevent the virus from spreading and developed a life-saving vaccine. This discovery was a big success for the company and the share prices rose and broke all previous records of the company. Mr. A thought that this was the best opportunity and he sold the stock after 13 months at $1300. 

The net gain of Mr. A from the stock was $800. There is no capital gain tax charged by the US Government for Indian Investors. So the whole profit of $800 will be taxed in India as ordinary Income. If Mr. A belongs to a 30% tax bracket, then the short-term capital gain tax will be 30%. So the income from short-term capital gain gets added to our normal income and increases your taxable income.

• Long Term Capital Gain

When you hold a stock for more than 24 months, it is considered a Long term Investment. All the gains from a long-term investment are charged under the Long Term Capital Gains tax rate. The long-term capital gain tax rate in India is 20%. 

Eg: Mr. B works for an IT company in India. During his service period, he was interested in the American stock market, so he invested a part of his capital in the American stock market and bought stocks of Amazon, 5 years ago at $769. He is retiring next year and wants to sell the shares to build his retirement corpus. The current share price of Amazon is $3,327. His net profit from the stock is $2,558. So, as there is no capital gain tax for Indian residents in the US Market, the gain from the stock sale will be taxed in India. 

The holding period for the stock is 5 years, which is more than 24 months. So the gain will be taxed under the Long Term Capital Gain tax bracket. The Long Term capital gain tax rate in India is 20%. So the Long Term Capital Gain tax that Mr. B will have to pay is (20% * 2,558) $511. 

Tax implications of US investors in India

India is a developing country and becoming more attractive day by day in terms of investment. Nifty has increased from 8,083 in April 2020 to 15,700 in July 2021. That is nearly double in just 15 months. So, a lot of US investors are becoming interested in the Indian Stock Market. 

If you are a US investor and planning to invest in India, you should be familiar with the different taxes charged in India. The different taxes charged on the gain of stock are:

• Dividend Tax

Domestic companies that pay dividends are subject to a distribution tax rate of 17% on the dividend amount that is distributed. So, if you are a US investor and planning to invest in India, you need to pay a rate of 17% on the dividend income from the stock.

• Short Term Capital Gain Tax

If you hold a stock for less than 12 months and gain from the sale of the stock, then that is termed as Short Term Capital Gain. The short-term capital gain will be taxed at 15%.

• Long Term Capital Gain

Any capital investment that you hold for 12 months or more is termed a long-term capital investment. If the gain from the sale of long-term investment is INR 1,00,000 or more, then the tax rate is 10%. But, if the capital gain is less than INR 1,00,000, the gain is exempted from tax.

Conclusion

The Financial Market is growing and becoming more secure. All the different financial markets across different countries are getting linked. Investments in different markets are becoming easy and reliable. So, planning to invest in any developed or growing economy has never been easier than now. 

INDmoney is a financial app that helps you invest money in any financial security globally. So, if you are planning to invest in the US stock market to enjoy the potential growth opportunity, you can easily do it through INDmoney. All the tax-related information is present in the app and you can easily invest in the US market without paying any commission for the transactions.