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Tax liability on the earnings from the US stock by Indian investors depends upon two factors. One is the nature of earning and the second is the residential status in India. Photo: Bloomberg
Tax liability on the earnings from the US stock by Indian investors depends upon two factors. One is the nature of earning and the second is the residential status in India. Photo: Bloomberg

Income tax implications for Indian investors investing in the US stock market

  • There is no capital gain tax in the US for foreigners
  • But you will still be liable to pay tax on the capital gains in India

By Swastik Nigam & Saakar Yadav

Indian investors are now proactively looking to diversify their portfolios overseas. We have seen the resilience and the outperformance of the US markets and we want in. However, many of us are unaware or confused about the tax implications of investing in US stocks. The good news is that in most cases, the tax implications are actually quite straight forward.

Tax liability on the earnings from the US stock by Indian investors depends upon two factors. One is the nature of earning and the second is the residential status in India.

Let’s discuss the tax liability based on each of the factors separately.

Nature of Earning

There are two types of ‘income’ that you can make from your investments in US stocks.

Dividends: If you own stock or ETF listed in the US that pays a dividend, your tax liability in the US would be a flat 25% (lower than otherwise for a foreign investor due to the tax treaty between US and India). This tax will be withheld before you receive the dividend, which means that you will receive 75% of the dividend as a cash payout.

You will also have to pay taxes on such dividend income in India. From FY 2020-21, you have to pay tax on any dividend income earned by you. Such dividend income will be added to your total income for the year and will be taxed at the applicable slab rate.

The good news is that you will be able to offset the US tax withheld against your tax liability in India as US and India have a Double Taxation Avoidance Agreement (DTAA). This allows you to take credit for the tax withheld in the US and adjust it with the tax liability in India.

Capital Gains: When you sell any holdings in the US, you earn capital gains. The gain amount will be the 'Sale Price - Acquisition Cost' of the security. Fortunately, there is no capital gain tax in the US for foreigners. However, you will still be liable to pay tax on the capital gains in India and your tax liability depends upon the category that the capital gains fall in.

  • Long Term Capital Gain: If you hold the shares for more than 24 months before selling them, the gain will be categorized as long term capital gains and will be taxed at 20% (plus applicable cess and surcharge) after indexation of cost.
  • Short Term Capital Gain: If you hold the shares for up to 24 months before selling them, the gain will be categorized as short term capital gains and will be added to your normal income to be taxed at the slab rate applicable to you.

How will your dividends and capital gains from investing in US stocks taxed?
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How will your dividends and capital gains from investing in US stocks taxed?

Residential Status

In the Indian income tax context, the residential status of an individual is divided into three different categories. The taxes applicable to them are discussed below.

Resident & Ordinarily Resident (ROR): For RORs, global income is taxed in India. Thus, you have to pay taxes on all of your earnings from US stock holdings in India.

Resident but Not Ordinarily Resident (RNOR) & Non-Resident (NRI): For RNORs & NRIs, foreign income is taxable only if

  • it is received in India, or
  • is accrued in India from a business controlled in or a profession set-up in India

Thus, if you are an RNOR or an NRI, you have to pay taxes on only those earnings from US stocks which is received in India or which is from a business controlled in or set-up in India like Infosys, Tata Motors etc.

In light of the points above, we can see that the tax implications for investing in the US stock market are quite simple and straightforward. Tax worries should not stop an Indian from investing in the US markets.

(The article is co-authored by Swastik Nigam, Founder & CEO, Winvesta and Saakar Yadav, Managing Director, myITreturn.com)

(Views expressed by the author is his own.)

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