Bytes

Bytes - Your weekly dose of
investments, taxes, finance & more.

IT Portal 2.0
www.incometax.gov.in

IT Portal 2.0

Check out the latest videos explaining the various features of the new portal
www.incometax.gov.in
previous arrow
next arrow

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

author portrait

Laxmi Navlani

Income from Capital Gains
Income Tax
Tax on Income from US equity
Last updated on July 24th, 2021

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.