When an investor in India invests into the shares listed in the US equity market, he/she will earn income in form of dividends and capital gains on sale of shares. The investor is liable to pay tax on such foreign income in India and also needs to report any foreign assets in the Income Tax Return. Since the income arises in US, it is also liable to tax as per US taxation rules. Thus, the same income will be taxable in both the countries. To avoid such double taxation, the taxpayer can claim credit of tax paid in the foreign country. Let us understand the tax on US equity for an indian taxpayer.
Tax in India on Income from Foreign Investments
When a taxpayer has income from foreign investments, the tax treatment in India would depend upon the residential status. The taxpayer should determine residential status based on the number of days of their stay in India during the financial year and in the previous years too. Below is the tax treatment of income from foreign investments based on the residential status:
|Residential Status||Meaning||Tax Treatment|
|Resident in India||Resident and Ordinarily Resident (ROR)||Global Income taxable in India|
|Not Ordinary Resident||Resident but Not Ordinarily Resident (RNOR)||* Taxable if foreign income is received in India
* Taxable if foreign income is accrued in India from a business or profession controlled in India
|Non Resident||Non-Resident in India (NRI)|
Let us understand the tax treatment for income from investment in the US equity market.
Tax on US Equity Dividends
The dividend issued by the US companies to its investors is a taxable income both in India and US. Let us understand the tax treatment in both the countries.
Tax on Dividend in US – Income from investments received as dividend is taxable in the US 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.
Tax on Dividend in India – Tax on Dividend Income in India is at slab rates. Dividend from a foreign company is a taxable income under the head Income From Other Sources. If the taxpayers 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.
Claim Foreign Tax Credit as per DTAA
The dividend income from shares held in the US equity market is a taxable income in both India and US. To avoid double taxation, the taxpayer can claim credit of the tax paid in US as a foreign tax credit to reduce the tax liability in India as per the provisions of the Double Taxation Avoidance Agreement (DTAA). The taxpayer can claim the foreign tax credit by filing Form 67 on the income tax website.
Therefore, if we consider the above example here, the tax liability in India would be $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
When the taxpayer sells the shares held in US equity market, it is as an income from capital gains. Let us understand the tax treatment in both the countries.
Tax on Capital Gain in US – As per the US taxation, capital gain on sale of shares is not taxable. Thus, when an investor sells the shares held in the US equity market, there is no tax liability on such capital gains.
Tax on Capital Gain in India – When a taxpayer sells shares held in US equity market, it is a transfer of asset and taxable as capital gains in India. If the foreign share is sold within 24 months from purchase, it is a Short Term Capital Gain i.e. STCG while if the foreign share is sold after 24 months from purchase, it is a Long Term Capital Gain i.e. LTCG.
Below is the tax treatment for capital gains on sale of foreign shares in India:
|Type of Security||Period of Holding||Capital Gain||Tax Rate|
|Foreign Share||More than 24 months||Long Term Capital Gain (LTCG) u/s 112||20% with Indexation|
|Foreign Share||Up to 24 months||Short Term Capital Gain (STCG)||Slab Rates|
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.
Tax on US Equity & Investments – Disclosure in ITR
The taxpayer needs to report income from investments in the US market in the Income Tax Return in India.
- Dividend Income on foreign shares should be reported under Schedule IFOS
- Capital Gains on sale of foreign shares should be reported under Schedule CG
- Investments held by the taxpayer in the US market must be disclosed under Schedule FA i.e. Foreign Assets
- To claim foreign tax credit, details must be reported in Schedule TR i.e. Tax Relief to claim relief of taxes paid outside India
Investor needs to file form 67 on Income tax e-filing website to claim foreign tax credit.
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.
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.
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.
It shall be the TTBR rate i.e. telegraphic transfer buying rate of such currency as on the last day of the previous month in which the capital asset is transferred.