Yes, as an Indian resident investing in US stocks, you are generally liable to pay taxes on both dividends and capital gains in India. Due to India's tax laws, which tax global income, and the specific tax regulations in the US, you will need to account for these earnings in your Indian tax filings.
Understanding Taxation on US Stocks for Indian Investors
As an Indian resident, your global income, including any earnings from US stocks, is subject to taxation in India. This means that both the dividends you receive and the capital gains you realize from selling your US investments will be taxed in India. Additionally, certain taxes might be withheld in the US. The Double Taxation Avoidance Agreement (DTAA) between India and the USA plays a crucial role in preventing you from paying taxes twice on the same income.
Taxation on Dividends from US Stocks
Dividends received from your US stock holdings are subject to taxation in both the United States and India.
US Withholding Tax
In the US, dividends paid on your US stocks will typically face a withholding tax, often around 25% for non-residents. This tax is deducted at the source before the dividend is credited to your account.
Indian Taxation on Dividends
In India, dividends are treated as "income from other sources" and are taxed according to your applicable individual income tax slab rates.
- Foreign Tax Credit (FTC): To avoid double taxation, the India-US Double Taxation Avoidance Agreement (DTAA) allows you to claim a credit for the tax already withheld in the US against your Indian tax liability on the same dividend income. This ensures you are not taxed twice on the same income.
- Reporting: It is mandatory to declare all foreign dividends received in your Indian Income Tax Return (ITR).
Taxation on Capital Gains from US Stocks
When you sell your US stocks, any profit generated is considered a capital gain and is subject to taxation in India. The classification of this capital gain as short-term or long-term depends on your holding period.
Short-Term Capital Gains (STCG)
If you sell your US stocks within 24 months of their acquisition, the gains are classified as Short-Term Capital Gains (STCG).
- Tax Rate: STCG are added to your total income and taxed at your applicable individual income tax slab rates, similar to your regular income.
Long-Term Capital Gains (LTCG)
If you hold your US stocks for more than 24 months before selling them, the gains are classified as Long-Term Capital Gains (LTCG).
- Tax Rate: LTCG are generally taxed at a rate of 20% with the benefit of indexation. Alternatively, you can opt for a 10% tax rate without the indexation benefit, whichever proves more beneficial for your specific situation.
- Currency Fluctuation: It's important to note that any profits or losses arising from fluctuations in the currency exchange rate between the time of your investment and divestment are also considered part of the capital gains or losses.
Role of the India-US Double Taxation Avoidance Agreement (DTAA)
The DTAA between India and the USA is a crucial agreement designed to prevent taxpayers from paying taxes twice on the same income in both countries.
- Claiming Foreign Tax Credit (FTC): The DTAA allows you to claim a Foreign Tax Credit (FTC) in India for the taxes paid in the US (e.g., the withholding tax on dividends). This credit can be claimed by filing Form 67 along with your Indian Income Tax Return. This mechanism ensures that the total tax paid does not exceed the higher of the tax rates in either country.
- Tax Efficiency: Understanding how to correctly claim the FTC is vital for optimizing your overall tax liability and avoiding overpayment of taxes.
Reporting Foreign Assets and Income
As an Indian resident, it's mandatory to report your foreign assets and income in your Income Tax Return (ITR) to ensure compliance with Indian tax laws.
- Schedule FA: You must furnish comprehensive details of all your foreign investments, including US stocks, in Schedule FA (Foreign Assets) of your ITR.
- Liberalised Remittance Scheme (LRS): Your investments in US stocks fall under the Reserve Bank of India's (RBI) Liberalised Remittance Scheme (LRS). This scheme permits Indian residents to remit up to USD 250,000 per financial year for various purposes, including overseas investments.
Summary of Tax Implications
Here's a quick overview of how different types of income from US stocks are taxed for Indian residents:
| Income Type | US Tax (Withholding/Capital Gains) | Indian Tax Treatment | DTAA Benefit |
|---|---|---|---|
| Dividends | Approximately 25% Withholding Tax | Taxed at Indian income tax slab rates | Foreign Tax Credit (FTC) can be claimed via Form 67 |
| Short-Term Capital Gains (< 24 months) | Generally 0% for non-residents (for pure remote investment) | Taxed at Indian income tax slab rates | FTC applicable if US tax was actually paid. |
| Long-Term Capital Gains (> 24 months) | Generally 0% for non-residents (for pure remote investment) | 20% with indexation, or 10% without indexation | FTC applicable if US tax was actually paid. |
Key Takeaways
- Both dividends and capital gains from your US stock investments are taxable in India.
- The US withholding tax on dividends (e.g., 25%) can be claimed as a Foreign Tax Credit in India to prevent double taxation.
- The holding period of your US stocks determines whether your capital gains are classified as short-term or long-term for Indian tax purposes.
- Mandatory reporting of all foreign assets and income in Schedule FA of your Indian Income Tax Return is required.
- It is highly recommended to consult a qualified tax advisor for personalized guidance to ensure compliance and optimize your tax liabilities given the complexities of international taxation.
