Tax implications on US Stocks in India | Fi.Money (2024)

US Stocks have witnessed major popularity in recent days. With brands like Microsoft, Apple, and Amazon winning the hearts of Indians — the younger generation is always on the lookout to invest in companies they connect with more. Let's say you're a big iPhone enthusiast and you believe iPhones are never going to get out of trend. So, you will always want to own a piece of that company. A true sense of ownership is what the younger generation seeks out of any investment.

But there is one problem — although most investors starting with US Stocks aren't very familiar with applicability and compliance on returns earned from such global investments.

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So, let us break down the tax implications on US Stocks and make your investment journey easier.

Double Taxation Avoidance Agreement

Before diving into the tax implications of the earnings you stand to make, you must understand the purpose of the DTAA tax treaty. This treaty has been signed between India and over 80 countries such that taxpayers can avoid having to pay taxes twice on the income they earn in the source country and the residence country.

New to the US Stock Market? Here is everything you need to know.

Tax implications of investing in US Stocks in India

It is important for Indians investing in US stocks from within India to be aware that any dividends or profits obtained from these investments are subject to taxation according to Indian tax regulations. Here is an overview of all you need to know.

Taxes Imposed on Dividends Drawn

When an Indian resident invests in a US stock that pays dividends, the dividend income is treated as taxable income according to the Indian Income Tax Act. Indian investors are subject to a flat tax rate of 25% on earnings from dividends of US stocks, which is comparatively lower than the tax treatment for other foreign investors due to the US-India tax treaty. US companies withhold this dividend tax, deducting 25% before paying the remaining 75% as dividends to the investor.

If the investor chooses to reinvest the dividend, it is added to their income and taxed at the regular income tax slab rates. The Double Tax Avoidance Agreement (DTAA) allows for the adjustment of US withholding tax against any tax liability in India, providing relief to Indian investors.

Let's say you invest in Google stocks, for which you receive a dividend income of $1,000. The company retains 25% or $250 out of this amount as tax. Thus, the net dividend comes up to $750.

During the financial year, you declare an income of $2,000 through an income tax return. This income will be taxed as per the applicable income tax slab. On your total taxable income, you can claim a credit for the dividend retained or $250 being tax withheld by Google. Hence, out of the total tax payable by you, $250 will be deducted, and the balance will be taxable.

Capital Gains: Long-Term & Short-Term

Long-Term Capital Gains

This applies if you’re in for the long haul and have held stocks for more than 24 months before selling them and drawing capital gains. Here, you will need to pay the US capital gains tax at a rate of 20 percent in addition to applicable fees and surcharges. For instance, I bought shares worth $100 and sold them at $150 ($50 profit), so my tax liability will be $10.

Short-Term Capital Gains

If you’ve held stocks for a period that falls below 24 months before selling them and earning capital gains, your gains will be added under your taxable income and taxed in accordance with your income tax slab. Continuing from the above example, if I sold the shares at $150, then the profit will be added to your current income and taxed as per the slabs.

Conclusion

US stocks have gained popularity among Indian investors, especially the younger generation who seek a sense of ownership in companies they connect with. Indian investors are subject to a flat tax rate of 25% on dividends from US stocks, with the tax withheld by US companies. Reinvested dividends are added to the investor's income and taxed accordingly. Capital gains from selling stocks are taxed as either long-term or short-term gains.

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Frequently Asked Questions

1. Do I have to pay tax on US stocks?

Yes, if you are investing in US stocks from India.

2. What are the tax implications of investing in US stocks?

Long-Term Capital Gains: This applies if you’ve held stocks for more than 24 months — a rate of 20% in addition to applicable fees & surcharges.

Short-Term Capital Gains: This applies if you’ve held stocks for less than 24 months before selling them and earning capital gains. Such gains will be added under your taxable income and taxed as per your income tax slab.