Tax Implications for Indian Residents having Income from Investment in US Equity Market

If a person resident in India has invested in shares listed in the US equity market he will receive income from such investment in form of capital gains and dividends and therefore would be liable to pay tax. Income from those investments will be foreign income.

Since the income is from US, the investor has to pay the taxes in the US, and also because the investor is resident in India he will have to declare the foreign income in his ITR and pay taxes on it. If the investor wishes to avoid this double taxation it is very important to understand the tax treatment of foreign income.

What are the Tax Implications?

There are two types of taxes that can be levied on income form foreign equity shares:

  1. Tax on Dividends
  2. Capital Gains Tax

Tax on US Equity Dividends

Taxability of dividends in US: Income from investments received as dividend is taxable in US. It is taxable at a flat rate of 25%. For example, If a company declares 100$ as a dividend, an investor receives 75$, and 25$ will be withheld as an amount of tax.

Taxability of dividends in India: Dividend received from a Foreign Company is taxable income under the head Income From Other Sources at slab rates. If the assessee incurs the expense of remuneration or commission for the purpose of earning the dividend, he/she can claim it as an expense from dividend income.

However, India and the USA have a Double Taxation Avoidance Agreement (DTAA) that allows using the tax withheld in the US as a foreign tax credit to reduce the tax liability in India.

Therefore, if we consider the above example here, the tax liability in India would be calculated at $100. Suppose the tax liability in India is $27. Since the investor had already paid $25 in the US, he will have to pay only $3 in India.

Further, the rate of exchange for the calculation of dividend in rupees shall be the telegraphic transfer buying rate of such currency as on the last day of the month immediately preceding the month in which the company declares a dividend.

Capital Gains Tax on US Equity

Taxability of capital gains in US: When an investor earns capital gains on the sale of foreign shares there is no tax applicable in US.

Taxability of capital gains in India: Income from the sale of foreign shares is a Capital Gains Income as per the Income Tax Act and also it is taxable in India.

Tax on US equity capital gains in India depends on the period of holding of investment. If an investor sells an unlisted stock held for more than 24 months, gain or loss on such sales is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL). However, If an investor sells an unlisted stock held for up to 24 months, gain or loss on such sale is a Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL).

Moreover, If an investor has long-term capital gain it is taxable at a flat rate of 20% (after indexation benefit) and if an investor has short-term capital gain it is taxable at applicable slab rates.

Further, the rate of exchange for the calculation of capital gains in rupees shall be the telegraphic transfer buying rate of such currency as on the last day of the month immediately preceding the month in which the capital asset is transferred.

You can refer to this table below to understand the taxability of income in hands of resident Indian

Country Dividends Capital Gains
India Taxable Taxable
US Taxable Not Taxable

Disclosure in ITR

Apart from tax implications, an obligation to file a tax return in India also arises. The assessee has to furnish the complete details. In the case of individuals, having regard to the nature of income they can file ITR 2 (in case there is no business or professional income) or ITR 3 (in case there is business or professional income). 

Moreover, Assessee needs to disclose dividend in Schedule OS i.e Income from other sources, in case income is taxable at normal tax rates also in Schedule SI i.e Income chargeable to tax at special rates, if such income is taxable at special rates.

Details of income by way of capital gains need to be furnished in Schedule CG i.e Capital Gains depending on its nature (Short term or long-term). Further information is required to be furnished in Schedule SI, Income chargeable to tax at special rates, in case such income is taxable at special rates.

Further, If any resident is holding investments then such disclosure is mandatory in schedule FA i.e. Foreign Assets.

Furthermore, If resident is claiming any foreign tax credit then such disclosure is mandatory in schedule TR i.e. Taxes paid outside India.

FAQs

How to claim foreign tax credit?

Investor needs to file form 67 on Income tax e-filing website to claim foreign tax credit.

How do I report income from sale of shares of Foreign Company in the Income Tax Return?

The investor should file ITR-2/ITR-3 and report income from the sale of Foreign Shares as Capital Gains.
Tax on sale of Foreign Shares is as follows:
LTCG – 20% without indexation
STCG – slab rates
Moreover, the investor shall declare details of Foreign Shares should in Schedule FA i.e. Schedule Foreign Assets of the ITR.

Is it mandatory to disclose foreign assets ITR?

Yes it is mandatory to to disclose foreign assets ITR.

How many methods are there to claim DTAA tax relief?

There are two methods to claim DTAA tax relief – exemption method and tax credit method.
– By exemption method, income is taxable in one country and exempt in another.
– In the tax credit method, where the income is taxable in both countries, tax relief is available in the country of residence.

I am an NRI. Do I need to pay tax in India on Income from Investment in US Equity Market?

No, If you are an NRI you need not to pay any tax in India on Income from Investment in US Equity Market in India.

Is it mandatory to file form 67 for claiming tax credit?

Yes it is mandatory to file form 67 for claiming tax credit.

Which rate of conversion I should use to convert capital gains amount in rupees?

It shall be the TTBR rate of such currency as on the last day of the previous month in which the capital asset is transferred.

Market Linked Debentures – Tax Benefits and Risks

Market Linked Debentures are debentures where the pay-off is not defined as in a regular coupon-bearing debenture, but linked to the movement in another security or index such as NSE Nifty index or 10-year government security (G-sec) yield. For example, a 30-month MLD would pay the investor a pre-defined IRR at the end of the tenure if Nifty 50 Index does not fall by more than 75%. Market-Linked Investments may provide full or partial market downside protection and/or enhanced return potential.

Why Market Linked Debentures (MLD)?

A market-linked debenture does not pay any coupon before maturity. On maturity, apart from the initial principal component, there is a pay-off, i.e., a return payable. The advantage is that you are getting the exposure and upside in other markets such as equity (NSE Nifty) or G-sec, without taking as much of a risk as in investing directly into that asset.
If you invest directly in the Nifty or gold and Nifty or gold value declines over the investment horizon, you would lose a part of the principal.

Benefits of MLD

  • Market-linked debentures can be designed in various forms and can be structured to provide different objectives under different conditions.
  • Taxation of this instrument is efficient. These are listed on the exchanges and capital gains from listed debentures, after a holding period of more than one year, are taxable at 10 per cent (plus surcharge and cess).
  • However, non-listed MLDs are not tax efficient.
  • The benefit that investors have in a structure like this is:
    • Principal protection as compared to a pure equity investment where there is risk of capital loss.
    • Superior return potential vs traditional fixed income on fulfillment of an underlying equity condition
    • Structure which is at a candy spot versus two traditional asset classes.
  • While the above example would be that of a simple structure, there are various other complicated structures like:
    • Principal protected with a participation rate linked to an underlying index,
    • Principal protected structures which gives a pay off if equity markets go down,
    • Less than 100% principal protection structures etc.
ITR for Capital Gains from Investment in Stocks
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Risks associated with Market Linked Debentures

  • Issuer’s Profile
    • Although a majority of structures are principal protected, the ability of the issuer to repay is of huge importance.
    • Investors may suffer a capital loss in case the issuer fails to repay on the obligation.
    • Thorough due diligence on the issuer’s underlying business, its diversification and key financial ratios should be undertaken before investing.
  • Fulfillment of the underlying market linked condition
    • Secondly, payment of coupon depends upon a certain market linked condition.
    • Investors need to determine a probability on the fulfillment of the underlying market condition.
  • Due to the complexity of structures and higher minimum allocation, these structures are suitable for HNI and UNHI clients who understand the nuances correctly
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FAQ

Are market-linked investments good?

Market-Linked Investments provide access to a wide variety of asset classes, including some not readily available to an individual investor. Further, these investements may provide full or partial market downside protection and/or enhanced return potential.

What is non convertible debentures?

Non-convertible debentures (NCD) are fixed-income instruments. They are usually issued by high-rated companies in the form of a public issue to accumulate long-term capital appreciation. They offer higher interest rates compared to convertible debentures.

How do we account for market linked debentures in books?

A market linked debenture is a loan taken by the company from the market with no provision of any fixed rate of interest. However, the return to the investors is dependent on some market index like Nifty or Sensex.

Tax and Legality of Bitcoin in India

Cryptocurrency is digital money. Cryptocurrency uses something called cryptography to secure its transactions. With the soaring prices, bitcoins have become a hot favorite amongst Indians lately. In this article, we will be discussing the tax on bitcoin. There are a number of cryptocurrencies that have been created some of which are:

  • Litecoin,
  • Ethereum,
  • Zcash,
  • Dash,
  • Ripple, etc.

What is Bitcoin?

Bitcoin often described as a cryptocurrency, a virtual currency, or a digital currency – is a type of money that is completely virtual. It’s like an online version of cash. The Bitcoin apps ensure you have a bitcoin wallet that helps in storing and selling bitcoins. The creation of wallets takes place when you sign in and create your account.

Balances of Bitcoin tokens are kept using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them.

Generation of Bitcoins

One can obtain the bitcoins in the following ways:

  • Mining
    • Even though bitcoin is a virtual currency, the production of it incurs real cost. One has to ‘mine’ bitcoins and this process consumes electricity.
    • Every Individual (called the “miner”) has to solve a complicated cryptographic problem and the miner is rewarded with a block of bitcoins.
    • People set up powerful computers just to try and get Bitcoins. This is known as mining.
    • So, mining is directly proportional to the expense. The competition of solving this complex problem can make the process even costlier.
  • Buying on an exchange against real Currency
    • You can buy bitcoins from bitcoin exchanges and store them in an online bitcoin wallet in digital form.
    • You can choose any of these Bitcoin exchange platforms – Coinsecure, Zebpay, UnoCoin, etc
    • Bitcoins are purchasable in consideration for real currency.
  • In consideration of goods and services
    • You can use bitcoins (instead of real currency) to buy products and services, but not many shops accept Bitcoin yet and some countries have banned it altogether.

Tax on Bitcoin & Legality in India?

Bitcoins, as of today, are not centrally administered or regulated by any specific body like the RBI which administers physical currency in India. Bitcoin, as a medium of payment, has neither been authorized nor been regulated by any central authority in India. Every single transaction is recorded in a public list called the blockchain. Bitcoins, as of now, have not been given the status of legal tender in India by RBI.

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Tax on Bitcoin in India

The government has not yet considered the tax on bitcoin in the statute books because bitcoins are quite new to Indian Markets. Since the regulatory framework regarding cryptocurrencies is uncertain, this article tries to analyze the taxation by considering them as both goods and currency. The holding period impacts the taxes on bitcoins. The tax treatment of bitcoins will depend upon its generation. Major approaches currently prevalent are as follows:

ITR for Gains from Cryptocurrency
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Tax on Bitcoin held as Investment

As per Sec 2(14) of the Income Tax Act, capital asset means “property of any kind held by the assessee whether or not connected with his business or profession”. The definition of ‘Capital Asset‘ provided is widest in itself and covers all kinds of property except those expressly excluded under the Act. Therefore, any gains arising out of the transfer of Bitcoins in exchange for real currency is considered as Income from Capital Gains, if they are held for investment. Tax on bitcoin will hence be 15% or 20% based upon the holding period.

Bitcoins will give rise to a Long-term capital gain or a short-term capital gain depending on the period of holding of the bitcoin.

Tax on Bitcoin held as Stock in Trade

The tax treatment of bitcoins when held as ‘stock in trade’ would give rise to income from business. Gain from the sale of bitcoin taxable as business income if traded frequently. Accordingly, the profits arising out of such business would be subject to tax as per the individual slab rates.

Bitcoins received as consideration on sale of goods and services

Bitcoins received as consideration of goods and services shall be treated on par with receipt of money. The receipt of bitcoin shall constitute income in the hands of the recipient. Further, since the recipient received this income out of a business or profession, he would be taxed, normally, under the head “Profits or gains from business or profession“. With regards to the disclosure requirement of bitcoin in the income tax return forms, there continues to be a lack of clarity.

Bitcoin Mining

On taxability of bitcoins earned during the ‘mining’ process, it is said that, Bitcoins generated during the ‘mining’ process are classifiable as self-generated capital assets.

The sale of such bitcoins would, in the ordinary course, give rise to capital gains. However, the cost of acquisition of a bitcoin cannot be determined as it is a self-generated asset. Furthermore, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961 which specifically defines the cost of acquisition of certain self-generated assets. The capital gains computation mechanism fails following the Supreme Court decision in the case of B.C.Srinivasa Shetty. Hence, no capital gains tax would arise on the mining of bitcoins.

Note: There is a possibility that the department may not consider bitcoins as capital assets at all. Hence, the provisions of capital gains would not apply at all. However, the treatment is not yet clear under Indian law which makes it difficult to conclude how it may be taxed.

FAQ

How to set-up Bitcoin Wallet?

The Bitcoin applications ensure you have a bitcoin wallet that helps in storing and selling bitcoins. The creation of wallets takes place when you sign in and create your account.

What is the minimum amount of bitcoins that you can buy?

One bitcoin today might cost you up to INR 26 lakh but you don’t need to buy a whole bitcoin in the beginning. You can start with as low as INR 500 and buy a tiny portion of a bitcoin. However, there is a maximum limit to the number of bitcoins that you can buy.

How can you buy bitcoins in India?

Buying bitcoins in India is easy. You can choose any of these platforms – Coinsecure, Zebpay, and UnoCoin – which are widely trusted in the world of cryptocurrency.

How did the value of bitcoin increase so dramatically?

Mining is directly proportional to the expense. The competition of solving this complex problem can make the process even costlier. The limited availability of bitcoin has also increased its demand. The limited supply has fueled the bitcoin hype, which has led to a sharp increase in its price.

Can we use bitcoins only in India?

Bitcoins can be used anywhere across the globe because it is digital and is termed to be ‘globally accepted’.

Section 115QA – Tax on Buyback of Shares

What is Buyback of Shares?

In simple terms, buyback of shares is when a company repurchases the shares issued by it from the existing shareholders. The company buys back its shares usually at market value or higher. Companies use buy back as a means to return cash to shareholders and regain ownership. Tax on buyback of shares in India is now regulated by Section 115QA of the Income Tax Act, 1961.

Why do Companies Buyback shares?

As per recent trends, one can observe an increasing use of buy back as means of capital restructuring by Indian companies. The following are certain objectives a company aims to achieve when it undertakes buyback:

  • Share buybacks reduce the number of shareholders of the company, thus enhancing the EPS (Earning per share) to shareholders in the long run. 
  • Management may feel the market has undervalued its share price too sharply, hence a buyback may result in fairer valuation of the company’s stock price.
  • Helps improve key financial ratios like return on net worth, return on assets etc. over a period of time.
  • Serves as a positive sign for investors about the confidence of the management in the business. 
  • Provide exit to investors in times of volatility

Income Tax on Buyback of Shares under Section 115QA

Earlier, the amount distributed as buy-back of shares was chargeable to capital gains in the hands of the shareholders and not charged to the company. As a result, income tax was payable at lower rates on buyback of shares. In order to avoid the tax, companies started resorting to buyback of shares as an attractive way to distribute surplus income amongst stakeholders. As an anti-tax avoidance measure, the government introduced Section 115QA under the Income Tax Act vide the Finance Act, 2013.

Initially, section 115QA was applicable only to unlisted companies. However, the Union Budget 2019 announced the said section to be applicable to the listed companies as well. The amendment is effective for all buybacks post July 5, 2019, vide Finance Act (No.2) 2019.

What does Section 115QA say?

  • Both listed and unlisted companies are liable to pay additional income tax on the amount of distributed income on buyback of shares from shareholders. 
  • The tax on distributed income (i.e. buy-back) is payable by the company even if such company is not liable to pay income tax.
  • The company is liable to pay tax at 20% plus surcharge at 12% plus applicable cess.
  • The company is liable to pay the tax within a period of 14 days from the date of payment to the shareholders on the buyback.
  • The tax on buyback shall be treated as final payment of tax. No further credit shall be claimed either by the company or any other person in respect to the tax so paid.
  • As companies are now liable to pay tax on buyback of shares. Furthermore, shareholders do not have to pay any tax on any income arising from the buyback.

When are the provisions of Section 115QA not applicable?

The provision of Section 115QA is not applicable under all of the situations below:

  • The company is listed on the recognized stock exchange; and
  • The company has announced buyback of its shares; and
  • The public announcement took place before July 5, 2019; and was in accordance with the provisions of the Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018.

Illustration

A company repurchased 100 shares in January 2019 at the market price of INR 50. The issue price for the same is INR 10.

Tax Liability Prior to Amendment Post Amendment
Company No tax liability The company is now liable for a buyback tax of 20% on the distributed income that is Rs. 40, the difference between market price and issue price (50-10).
Individual shareholder Individual shareholders must pay capital gains tax (long term or short term) depending on the holding period of shares on the difference amount (Market price – Issue Price) that is Rs. 50– Rs. 10 = Rs. 40. No tax liability

Implications to individual shareholders

Generally, a company which has distributable surplus has two options to return cash to its shareholders: 

  • Declare dividend
  • Buyback its shares

Earlier, the declared dividend was chargeable as Dividend Distribution Tax (DDT) to the company and not the shareholder. Whereas the amount distributed as buy-back of shares was chargeable to the shareholder and not the company. The rationale for the introduction of Sec 115 QA was that companies would resort to buyback of shares in order to avoid dividend distribution tax. However, under budget 2020, DDT on dividends was abolished and the company is no longer liable to pay tax on dividends. Instead, dividends would be taxable in the hands of the shareholder (as per applicable slab rates). From the shareholder’s perspective, this means that income from buybacks is now more tax efficient compared to income from dividend.

FAQs

I am an employee and my company recently announced an ESOPs buyback, do I have to pay tax on income received through through these ESOPs sales?

No, when it comes to buyback of shares, the provisions under sections 10(34A) and 115QA of the Income Tax Act shall intervene. As per section 10(34A), any income arising to a shareholder (including ESOP-shares) on account of buyback of shares by the company shall be exempt in the hands of such shareholders. Further, as per section 115QA, the tax @ 20% shall be paid by the unlisted company on the buyback of its shares.

Can tax credit be claimed for tax paid on buyback of shares?

The tax on distributed income paid/ payable by the company shall be treated as final payment of tax. No further credit shall be claimed either by the company or any other person in respect of the amount of tax so paid. Further, income charged under section 115QA shall not be allowed any deduction under any other provisions of the Act either to the company or shareholders.

CAMS – Consolidated Capital Gains Statement

When an investment (e.g. Stocks, Bonds, Mutual Funds, Real estate), is sold, the profit part of the sale value is called Capital Gains. In such a situation, capital gains are taxable in the year they are realized or in the financial year when you made the sale.

Therefore, in order to assess the tax liability and file the tax returns correctly, the taxpayer needs to know about their earnings from the capital gains during the financial year.

This information is generally contained in a Capital Gains statement for their investments. If you are investing in Mutual Funds in a non-Demat form there are multiple ways to get your Capital Gains statement for the financial year. In this case, we will discuss the method to get the consolidated capital gains report from CAMS.

Investors investing via more than two platforms and/or investing offline as well can make use of the consolidated Capital Gains statement mailback service provided by RTAs like CAMS and KARVY.

What are RTAs

SEBI approves intermediaries such as The Registrar and Transfer Agents. They handle the back-office operations of Mutual Funds so that Mutual Funds can focus on the investment management and other avenues.

The two exceptions to CAMS and KARVY are Franklin MF and Sundaram MF who have their own RTAs. Instead of getting the Capital Gains report from individual Mutual Fund companies, you can also get reports from the RTAs which will contain information of Capital Gains of all the Mutual Fund companies they work with respectively.

If you don’t have any investments with Franklin or Sundaram, you only need to get the Capital Gains report from two places – CAMS and KARVY.

Steps to Download Consolidated Capital Gains Statement from CAMS

  1. Go to CAMS Investor Mailback Services  

    Go to the CAMS online webpage. Click on the option to accept T&Cs and then click on “Proceed.”

  2. Realized Gain Statement

    Click on the realized gain statement option.

  3. Enter the required details

    In the case of the time period – choose the default option of the current FY and previous FY.
    Enter the e-mail ID registered in the investment folios.
    Moreover, PAN is optional but if you provide your PAN number then it will also include those investments under your PAN where you may have not registered your email id.
    Lastly, select “All Funds” and “e-mail an encrypted attachment” for the delivery option.

  4. Consolidated Capital Gains Statement

    Enter the password for encrypting the mail. It’ll take approximately 30 minutes until you receive the mail once you submit the form.

You will receive two Capital Gains Statement files in the mail. One for the current FY and one for the previous FY. Typically you would use the previous FY statement since you would be filing returns in June/July for the previous FY. Moreover, both the files can be opened with the same password you had set in earlier.

Sample CAMS – Capital Gains Statement

FAQs

What are the pre- requisites for using myCAMS?

– Common email id registered across investor’s Mutual Fund investments, serviced by CAMS
– High-speed internet connection in your PC or hand held devices.

Can I change my address, contact numbers and bank mandate on myCAMS?

No. Due to investor data security reasons such facilities are not offered on myCAMS mobile App. Investor need
to submit a request written request at the CAMS Investor Service Center for the same.

What are the upcoming features in myCAMS?

– Notifications messages on transaction confirmations, KYC verifications, etc
– Alerts on Corporate Actions, forthcoming Dividend declarations, current NFOs

Download Consolidated Capital Gains Statement from KARVY

When an investment (e.g. Stocks, Bonds, Mutual Funds, Real estate), is sold, the profit part of the sale value is called Capital Gains. In such a situation, capital gains are taxable in the year they are realized or in the financial year when you made the sale.

Therefore, in order to assess the tax liability and file the tax returns correctly, the taxpayer needs to know about their earnings from the capital gains during the financial year.

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This information is generally contained in a Capital Gains statement for their investments. If you are investing in Mutual Funds in a non-Demat form there are multiple ways to get your Capital Gains statement for the financial year. In this case, we will discuss the method to get the consolidated capital gains report from KARVY.

Investors investing via more than two platforms and/or investing offline as well can make use of the consolidated Capital Gains statement mailback service provided by RTAs like CAMS and KARVY.

Steps to Download Consolidated Capital Gains Statement from KARVY

  1. KARVY Online

    Visit the KARVY investor mail-back service for the capital gains website.

  2. After KARVY Login

    After logging in, scroll down and click on the Investor Service tab.

  3. Capital Gain Mail Option

    Moreover, click on the capital gain by mail option.

  4. Enter the required details

    Enter the e-mail ID registered in your investment folios.
    Password – This is the password for opening the attachment. You can set it to anything you want.
    Choose 1st April 2018 from the date picker and for To Date chooses 31st March 2019 to get the Capital Gains statement for the previous Financial Year

Once the form is filled, click on the option to submit. Contrary to the situation with CAMS, you will instantly receive the statement in your mail.

Sample KARVY – Capital Gains Statement

FAQs

Can I invest on online instead of offline?

Yes, once you register with your PAN, all your existing investments done through Karvy will be visible on this platform. However, you will not be able to edit/redeem the offline investments through this account.

Can I invest in direct plans of mutual funds through this account?

No, you can invest only in regular plans of mutual funds through this online investment account.

Do I have to register e-mandate separately for all the transaction I do on the KARVY platform?

No, this is a one time process. This process is linked to bank account.