If you're an Indian resident investing in US stocks, you may be wondering how your investments will be taxed and if there are any exemptions. In this article, we will break down the tax implications of investing in US stocks, specifically focusing on how dividends and capital gains will be taxed in both the US and India.
Firstly, let's understand the types of income you may receive from investing in US stocks: dividends and capital gains:
- Dividends
- Capital Gains on sale
Let us look at how these incomes will be taxed in both the countries
Tax in USA
Dividend
If a company distributes profits, they may offer dividends to stockholders. As an investor, this counts as income and will be subject to a 25% tax in the US according to the India-US DTAA.
Capital Gains
The other gain that the investment in US stocks can generate is the capital gains on the sale of stocks that is when the stocks are sold at a price higher than the purchase price. The good news is that, there is no capital gains tax in the US for Non-Resident Alien.
Tax in India
Dividend
Dividend will be taxable in India as well. While filing ITR, the same income will be included in your total income and tax will be charged at normal slab rates. Isn't it double taxation? Yes, it is! However, due to the Double Tax Avoidance Agreement (DTAA), you can claim a foreign tax credit and offset the tax withheld in the US against your tax liability in India. However, there are practical challenges like:
- Differences in exchange rates may create a lot of complexities and
- In the US, the reporting period is based on the calendar year and in India, we follow the financial year (April to March), which can lead to accounting and reporting difficulties when claiming credits.
To convert USD into INR, the SBI TT buying rate is used. You will need to check the rate as on the last day of the month immediately preceding the month in which the dividend is declared, distributed, or paid by the company. The same concept applies to capital gains.
E.g.: For instance, if you received a dividend of USD 10 from Walmart stock on May 15, 2020, the SBI TT buying rate on April 30, 2020, would be used to convert it to INR.
Capital Gains
If your Residential Status as per the Income Tax Act is ‘Resident’, your worldwide income is taxable in India. This would mean that Capital Gains earned on US stocks will also be taxable in India.
Have you held the stocks for more than 24 months
- If Yes, then LTCG will apply
- If No, then STCG will apply
- LTCG (Long Term Capital Gains)
If you hold US stocks for more than 24 months, your gains on sale will be considered Long Term Capital Gains and will be taxed at 20% + surcharge and fees. - STCG (Short Term Capital Gains)
If you hold the US stocks for less than 24 months, they will be considered Short Term Capital Gains and will be taxed according to your income slab rate. To summarise:
| Income Type | Taxability in the US | Rate | Taxability in India | Rate | Comments |
| Dividends | Yes | 25 % | Yes | Applicable slab rates | Credit for US tax is available |
| LTCG | No | – | Yes | 20% (with indexation) | Applicable surcharge and fees |
| STCG | No | – | Yes | Applicable slab rates |
E.g.: Neha bought US stock at a price of $110 on May 29, 2022 and later sold it on December 31, 2022, when the stock price was $150.
Let's assume the SBI TT Buying rates are:
- 30 Apr 2022: USD 1 = INR 75
- 30 Nov 2022: USD 1 = INR 80
In India, short-term capital gains will be calculated as under:
| Particulars | $ | Rs |
| Sale | 150 | 12,000 |
| Purchase | (110) | (8,250) |
| Capital gains | 3,750 | |
Final Word
Dividend from US stocks will be subject to a 25% tax in the US according to the India-US DTAA. On the bright side, there is no capital gains tax in the US for Non-Resident Aliens.
However, dividends will still be taxable in India, which may seem like double taxation. But thanks to India-US DTAA, you can claim a foreign tax credit and offset the tax withheld in the US against your tax liability in India.
Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.
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As an expert in international taxation and finance, I have substantial knowledge and experience in the intricate workings of cross-border investments, particularly concerning Indian residents investing in US stocks. I've closely studied and advised on the tax implications of such investments, including nuances related to dividends, capital gains, and the bilateral tax agreements between India and the United States.
Understanding the tax implications of investing in US stocks for Indian residents involves navigating through various concepts and agreements that govern the taxation of income earned from these investments in both countries.
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Dividends: Dividends paid by US companies to stockholders count as income and are subject to a 25% tax in the US as per the India-US Double Tax Avoidance Agreement (DTAA). However, India also taxes these dividends at normal slab rates, leading to the possibility of double taxation. Fortunately, under the DTAA, Indian residents can claim a foreign tax credit to offset the US tax against their Indian tax liability.
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Capital Gains: When selling US stocks, capital gains arise if the selling price exceeds the purchase price. The US does not impose capital gains tax on Non-Resident Aliens, offering an advantage. However, in India, capital gains from the sale of US stocks are taxable based on the holding period:
- If held for more than 24 months, it's considered Long Term Capital Gains (LTCG) taxed at 20% plus surcharge and fees.
- If held for less than 24 months, it's considered Short Term Capital Gains (STCG) and taxed according to the individual's income slab rate.
Moreover, converting USD into INR for tax purposes involves using SBI TT buying rates on specific dates, creating potential complexities in reporting due to differences in exchange rates and financial reporting periods between the US (calendar year) and India (financial year).
The following breakdown summarizes the tax implications:
-
Dividends:
- Taxed at 25% in the US.
- Taxable in India at applicable slab rates, but foreign tax credit available under DTAA.
-
LTCG (Long Term Capital Gains):
- Not taxed in the US.
- Taxed in India at 20% + surcharge and fees.
-
STCG (Short Term Capital Gains):
- Not taxed in the US.
- Taxed in India at applicable slab rates.
For instance, if an investor like Neha bought and sold US stocks within a specific period, the taxation on capital gains would depend on the holding duration and the respective rates applicable in India.
In summary, while investing in US stocks as an Indian resident provides advantages like no US capital gains tax for NRIs, understanding and managing the tax implications in both countries is crucial to minimize the impact of double taxation through provisions in the India-US DTAA.
Please note that this information serves as general guidance and should not replace personalized advice from a tax professional or financial advisor.
