Since globalization, the investing patterns within the subcontinent have changed a lot. The citizens have started understanding the potential of investment opportunities in the international markets as they offer various aspects to the investor that diversifies their portfolio manifold and enhance the quality of their holdings. One sync international market that has attracted Indian investors over time is the US stock market.
When investing abroad, the common misconception is that it will complicate the investor’s tax filing. To clear this doubt, it is stated that the tax implications of investing in US stocks are quite simply put and straightforward. There are essentially two categories of gains that can be taken on from investment in US stocks, namely dividends and capital gains. Let’s have a look at each of them to understand the tax liability imposed on the investor under the regulations that have been put forward by the regulatory authorities.
Capital Gains
If the investor owns a stock that is listed in the US market, he/she can generate profit or benefit on the sale of stocks that is actually when the stock held is sold at a price that is higher than the price it was purchased at. The point to focus on here is that if the profit were to be taxed in the US, that would amount to zero but since the resident is Indian, he/she has to abide by the laws on tax that have been laid down for the country’s citizens. This is a tax implication that cannot be avoided and is only valid if held for more than months in continuity. If held for more than 24 months, it qualifies as long-term capital gain ( LTCG) otherwise it will be taxed under short-term capital gains ( STCG).
Long-term capital gains are taxed 20% to an additional surcharge and fees on the transaction. However, short-term capital gains are taxed as per the slab rates that apply to the investor according to the categorization of the regulatory body.
Sample to understand the capital gains calculation of tax
Shares worth $50 are bought and sold at $75 after being held for 27 months. Hence the tax implication would be $25 and would come to $5 plus cess and surcharges.
Shares worth $850 are bought and sold for $925 after being held for 17 months. It qualifies under STCG and would be taxed based on the applicable income-tax slab.
Tax implication on dividends
The dividend is to be taxed at a flat rate of 25%. Hence if a company announces a dividend of $80, the investor receives $60. It is lower than the standard tax rate for foreign investors because of the tax treaty between India and the USA. To add on, the dividend received in cash or reinvestment is also taxed according to the applicable income tax. The Double Taxation Avoidance Agreement (DTAA) has been put in place that allows the tax withheld in the US to offset tax liability in India.
To sum up, it is vital to understand the taxation of foreign shares in India to have realistic expectations from one’s investment. Many are suffering loss or barely making any net profit due to the misconceptions they have about such implications that include surcharges decreasing their returns unknowingly.
