Laila Keith
If you're an Indian resident with investments in the US, you may be wondering how your investments will be taxed and if there are any exemptions. In this paragraph, we will break down the tax implications of investing in US stocks, specifically focusing on how dividends and capital gains from US stocks will be taxed in both the US and India. Firstly, let's understand the types of income you may receive from US investments: capital gains on the sale of stocks and dividends distributed by US companies. When you sell US stocks for a profit, this is considered a capital gain, and unlike many other countries, the US does not impose a capital gains tax on non-residents. However, as an Indian resident, you must comply with Indian tax laws, which consider short-term capital gains (held for 24 months or less) as taxable income, while long-term capital gains (held for over 24 months) are taxed at a flat rate. Additionally, dividends from US stocks are taxed at a flat rate of 25% in the US, and while this income is also taxable in India, the Double Taxation Avoidance Agreement (DTAA) between the two countries allows you to offset the tax withheld in the US against your Indian tax liability.
What You'll Learn
Dividend income from US stocks
In the US, dividend income from US stocks is taxed at a rate of 25% as per the India-US DTAA. This is known as a withholding tax, meaning that 25% of the total dividend is deducted before you receive the remaining amount. For example, if a company declares a dividend payout of $100, you will receive $75.
In India, dividend income from US stocks is taxed at the applicable slab rate of the taxpayer. This means that the dividend income will be added to your total income and taxed at your income tax slab rate. However, you can claim a foreign tax credit for the tax already paid in the US by filing Form 67 before filing your Income Tax Return. This will reduce your Indian tax liability by the amount of tax you've already paid in the US.
It's important to note that there may be practical challenges when claiming tax credits due to differences in exchange rates and reporting periods between the US and India. For example, the US uses the calendar year, while India uses the financial year (April to March), which can lead to accounting and reporting difficulties. Additionally, the conversion of USD to INR for tax calculations can be complex due to fluctuating exchange rates. The Indian tax authorities use the SBI TT buying rate on the last day of the previous month to determine the conversion rate for dividend income.
In summary, while dividend income from US stocks is taxable in both the US and India, you can offset the tax liability in India by claiming a foreign tax credit for the tax withheld in the US. This helps to alleviate the impact of double taxation on your investment returns.
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Capital gains on US stocks
If you are an Indian resident investing in US stocks, you may be wondering how your investments will be taxed and if there are any exemptions.
The good news is that there is no capital gains tax in the US for non-residents. However, as a tax resident of India, you will have to pay taxes on this income in India.
Long-Term Capital Gains (LTCG) on US Stocks:
If you hold US stocks for more than 24 months, your gains on the sale of such stocks will be considered LTCG and will be taxed at 20% plus a surcharge and cess. With effect from 23 July 2024, LTCG from the sale of foreign stocks will be taxed at a flat rate of 12.5% without indexation.
Short-Term Capital Gains (STCG) on US Stocks:
If you hold US stocks for less than 24 months, your gains will be considered STCG and will be added to your taxable income. These gains will be taxed according to your income slab rate.
Double Taxation:
The dividend income from US stocks will be taxed in both the US and India, which seems like double taxation. However, due to the Double Tax Avoidance Agreement (DTAA) between India and the US, you can claim a foreign tax credit and offset the tax withheld in the US against your tax liability in India.
To summarise, while there is no capital gains tax in the US for non-residents, capital gains on US stocks are taxable in India. The rate of taxation depends on the period of holding, with LTCG taxed at a flat rate and STCG taxed according to the income slab rate.
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Double taxation on US investments
If you're an Indian resident investing in US stocks, you will be taxed on your investments in both the US and India. This is known as double taxation. However, there are ways to avoid this. Firstly, let's understand the types of income you may receive from US stocks:
Capital Gains on Sale
If you sell your stocks for a higher price than you bought them for, you will make a capital gain. There is no capital gains tax in the US for non-resident aliens. However, capital gains on US stocks are taxable in India. The rate of tax depends on how long you held the stocks:
- Long-Term Capital Gains (LTCG): If you hold US stocks for more than 24 months, your gains will be taxed at 20% plus surcharge and cess in India.
- Short-Term Capital Gains (STCG): If you hold US stocks for less than 24 months, your gains will be taxed according to your income slab rate in India.
Dividends
If a US company earns excess profits, it may distribute them to stockholders as dividends. Dividend income from US stocks is subject to a maximum of 25% tax in the US according to the India-US Double Taxation Avoidance Agreement (DTAA). This is lower than the standard tax rate for foreign investors in the US due to the tax treaty between the two countries. Dividend income is also taxable in India as per your income tax slab rate. This may seem like double taxation, but the DTAA allows you to claim a foreign tax credit and offset the tax withheld in the US against your tax liability in India.
Understanding the Double Taxation Avoidance Agreement (DTAA)
The DTAA is a treaty signed between two countries to protect their citizens from double taxation and make the countries more attractive destinations for trade and investment. The DTAA between India and the US ensures that Indian investors don't end up paying tax on their investment income twice. The relief from double taxation can be provided in two ways:
- Exemption: The entire income earned in one country is exempt from tax in the other country.
- Credit: The amount of tax already paid in one country is provided as a credit against the tax liability in the other country.
To claim DTAA benefits, individuals or businesses must follow a clear process, including determining eligibility, choosing the correct forms, gathering supporting documentation, completing and submitting the forms, and maintaining records. It's important to stay up-to-date with the tax regulations and requirements in both countries to ensure full compliance when claiming DTAA benefits.
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Tax residency in India
An individual's residential status for tax purposes is usually based on the period of stay in India during a financial year. To qualify as an Indian tax resident, an individual must be present in India for at least 182 days during the relevant year. However, in certain cases, even a cumulative period of 60 or 120 days in a single financial year can make an individual an Indian tax resident, provided other conditions are met.
The Union Budget of 2020 introduced a new residency rule that came into effect from the financial year 2020-2021. This rule applies specifically to Indian citizens with income from Indian sources exceeding Rs 15 lakh in a financial year. These citizens are considered "deemed residents" and are taxed based on their citizenship rather than their residence or period of stay in India.
Under the new provisions, an Indian citizen will be treated as a resident for tax purposes, even if they do not meet the physical stay requirements, if their total income in India and from Indian sources exceeds Rs 15 lakh during the year, and they are not liable to pay tax in any other country based on their physical stay or domicile. It is important to note that such "deemed residents" will be treated as residents but not ordinary residents (RNOR), meaning they will not be taxed on their entire global income. Only income accruing or arising in India or from a business controlled in India or a profession set up in India will be taxable.
The implications of being a deemed resident include the inability to avail benefits under the Double Tax Avoidance Agreement (DTAA) that India has with other countries. However, if tax has already been paid on income outside India, credit can be claimed for such taxes against the tax liability in India.
In addition to the residency rules, it is important to understand the types of taxes that may apply to investment income in India. These include tax on dividends/interest and tax on capital gains. Dividends from stocks and interest from investments are added to the individual's total income for the relevant financial year and taxed according to the applicable income tax slab rate. Capital gains are taxed differently depending on the type of investment and the holding period.
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Tax treaties between India and the US
The Double Taxation Avoidance Agreement (DTAA) is a treaty between India and the US to prevent double taxation for NRIs. The treaty does not mean NRIs can avoid taxes entirely, but it does reduce the burden.
The DTAA applies to residents of India and the US who earn an income in one or both countries. It covers the Federal Income Tax imposed by the US Internal Revenue Code, but not the following taxes:
- Accumulated Earnings Tax
- Personal Holding Company Tax
- Social Security Taxes
- Exercise taxes imposed on insurance premiums and with respect to private foundations
The DTAA also covers income from immovable property. For example, if a US resident earns rental income from a property in India, that income will be taxed in India.
Dividend income is also covered by the treaty. Dividends paid by a US company to an Indian resident shareholder are liable to tax in India. The US company also has the right to tax the dividend in the US, but the tax charged must not exceed 15% or 25% of the gross amount of the dividend.
Interest income is treated similarly. Interest arising in India and paid to a US resident may be taxed in the US. However, such interest may also be liable to tax in India. If the beneficial owner of the interest is a US resident, the tax charged in India shall not exceed 10% or 15% of the gross amount of interest.
Capital gains are generally subject to tax based on the domestic laws of the country. For example, if a US resident sells an Indian property, it is liable to tax in India.
The DTAA also provides relief from double taxation. If an Indian resident's income is taxed in the US, India will allow an amount equal to the income tax paid in the US as a deduction.
To claim tax relief under the DTAA, Indian residents must disclose foreign income and assets in their Income Tax Return. They must also file Form 67 before filing their Income Tax Return.
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Frequently asked questions
Yes, you have to pay tax on foreign stocks in India. The percentage of tax will depend on the duration and nature of income, and whether or not India has a tax treaty with the country in question.
US investments are taxed in India in two ways: tax on dividends and tax on capital gains. For dividend income, the US company deducts a 25% tax. This is because, in the US, dividends are treated as income arising from the US. However, you can offset this tax on dividends paid in the US against your tax liability in India due to the Double Taxation Avoidance Agreement (DTAA) between the two countries.
For capital gains, you don't have to pay any tax in the US. However, you do in India. Capital gains on US stocks held for 24 months or less are considered short-term capital gains and taxed according to your income tax slab rate. Capital gains on US stocks held for over 24 months are considered long-term capital gains and are taxed at a rate of 20% plus any applicable fees and surcharges.
To claim the tax already paid in the US, you must submit Form 67 (to claim the credit for tax paid in the US on profits/incomes from US stocks) along with your Income Tax Return.
