How To Calculate Capital Gains From U.S. Stocks

Taxation on the gains made from selling shares on American stock exchanges differs from the taxation of capital gains made from selling shares listed on Indian stock exchanges.

RBI allows investment in foreign companies by regulating them through many routes, such as the Liberalised Remittance Scheme (LRS) under the FEMA Act, Overseas Direct Investment (ODI), Income Tax Act 1961 compliances, etc. Investors investing in foreign stocks may have to comply with these regulations laid down by the Government of India.

Capital gains or Income from U.S. stocks need to be declared in India only by taxpayers with residential status-Resident and Ordinarily Residents.

Budget 2024 Latest Updates

Budget 2024 has passed the following amendments effective from FY 2024-25 - 

• For classifying assets into long-term and short-term, there will only be two holding periods: 12 months and 24 months. The 36-month holding period has been removed.
• The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months.
• The taxation of Short-Term Capital Gain for listed equity shares, a unit of an equity-oriented fund, and a unit of a business trust has been increased to 20% from 15%. Other financial and non-financial assets which are held for short term shall continue to attract the tax at slab rates.
• For the benefit of the lower and middle-income classes, the limit on the exemption of Long-Term Capital Gains on the transfer of equity shares or equity-oriented units or units of Business Trust has increased from Rs.1 Lakh to Rs.1.25 lakh per year. However, the rate at which it is taxed has increased from 10% to 12.5%. The exemption limit to Rs.1.25 lakhs has been increased for the whole of the year, whereas the tax rate changed on 23rd July 2024.
• The tax on other assets is reduced from 20% to 12.5% with effect from 23rd July 2024. On the other hand, the indexation benefit that previously was available on the sale of long-term assets has now been eliminated. However, the Government has given taxpayers an option to compute taxes on real estate transactions purchased before 23rd July 2024 either at 12.5% without indexation or at 20% with indexation. Thus, long-term capital gain from the sale of foreign stocks (not listed on the Indian exchange) will be leviable at the rate of 12.5% without the benefit of indexation.

Latest Update on LRS Limit for U.S. Stock Investment

As per Finance Act 2023 and clarification issued further, any outwards remittance by an individual for investing in U.S Stocks up to Rs 700,000, no Tax collected at source (TCS) will be levied. Outwards remittance exceeding Rs 700,000, TCS @ 20% will be charged. This tax collected will be reflected in your 26AS and can be claimed as a credit at the time of filing ITR.

Why Should You Invest In U.S. Stocks?

Investment in the U.S. or any other foreign country stocks offers diversity and stability in returns to investors due to geographical diversification. Investing in global companies which are attractive and scalable can offer massive returns over the long term. If you have heard of FAANG (Facebook, Apple, Amazon, Netflix, and Google), investment in these tech giant companies a decade ago would have given you outstanding returns. Suppose someone invested $10,000 in the FAANG portfolio in 2012; their investment in 2020 would amount to $2,06,506 with around 19.65% returns over eight years. Very few would have predicted these companies to have grown exponentially.

So if you are an avid investor, you should diversify your investments geographically. This article will help you understand the tax implications on investments in the U.S. or any foreign country’s stock investment.

Protection Against Devaluation In INR

Investment in U.S. stock not only provides a basket of high-growth companies but will also protect your portfolio against a fall in INR value against USD. The devaluation of INR is primarily offset as the investment is made in USD, which adds to the capital appreciation gained by the US equity. 

How To Invest In U.S Stocks?

You can invest in U.S. stock either by directly opening a stock account in the U.S. (which might be slightly cumbersome) or using an Indian Fintech platform that facilitates U.S. stock investment. Such a platform provides ease of outward remittance of funds.

Taxability Based On Residential Status 

On the tax front, the Income Tax Act has laid down residency rules that determine a taxpayer's residential status.
Firstly, let’s determine the residential status of the taxpayer to understand the tax implication on the gains from foreign investments. The Income Tax Act has laid down three categories of residential status of individuals, namely: 

• Resident and ordinarily resident (ROR) – For residents, global income is taxable in India.
• Resident not ordinarily resident (RNOR) – Taxability arises only when foreign income is received in India or accrued in India from a business or profession controlled or set up in India.
• Non-resident Indian (NRI) – Taxability same as RNOR.

The residential status mentioned above is to be derived based on the number of days an individual was present in India during the relevant year and previous years, as per the rules laid down in the Income Tax Act.
To know more about the residency rules, click here.

Thus, as per section 6 of the Income Tax Act, income from U.S. stocks will be taxable in India only if your status is Resident and ordinarily resident.

The primary sources of income from foreign investments can be dividend income, capital gains from foreign stocks or capital gains from U.S. mutual funds.

Let us see the tax implications on U.S. equity investments.

Capital Gains On Foreign Stocks

The capital gain would arise on U.S. stocks when they are sold at a price higher than the purchase price. The good news is that if the investment is sold at a profit, there will be no tax implication in the U.S. on this gain. This is because there is no tax implication or tax withholding in the U.S. on capital gains incurred by Non-Resident of U.S.

However, as a tax resident of India, you have to abide by the tax laws of the country, and hence the following will be the implications :

• Long-term capital gain
• Short-term capital gain

Any gains arising on stocks not listed in India shall be treated similarly to unlisted shares. Accordingly, the gains will be treated as long-term or short-term depending on the holding period of investment.

Long-term Capital Gains On U.S Stocks

If the shares are held for more than 24 months before selling, it will be considered a long-term capital gain.

Long-term capital gain from the sale of foreign stocks (not listed on the Indian exchange) will be leviable at the flat rate of 20%(plus health and education cess (plus surcharge, if applicable). Also, the indexation benefit will be available at the cost of the investment. However, as per Budget 2024, with effect from 23rd July 2024, long-term capital gain from the sale of foreign stocks (not listed on the Indian exchange) will be leviable at the flat rate of 12.5%(plus health and education cess (plus surcharge, if applicable) without the benefit of indexation.

Short-term Capital Gain On U.S Stocks

If the shares are held for less than 24 months before selling, they will be considered as short-term capital gains. 
Whereas short-term capital gain from the sale of foreign shares will be added to total income and taxable at the individual’s slab rate.

Summary of the above is as follows;

Double Tax Avoidance Agreement

The Indian Government has entered into the Double Tax Avoidance Agreement (DTAA) with almost 100 countries, which helps claim the tax credit in case of double taxation.

DTAA provides clarity on those transactions where Income is accrued in one country, and the recipient is a tax resident in another country. In such scenario, taxation can be levied on the same income under the source rule by the originating country and as per resident rule by the recipient country.

The provision of DTAA is more relevant with respect to those income which are taxed in both the countries and also for availing beneficial tax rates in the source country.

1. Capital Gains from U.S Stocks

In case of capital gains from U.S stocks, such capital gain will be taxable in the hands of Indian tax resident (ROR) only in India. Thus Indian tax residents with status - ROR are not liable to pay any taxes in the U.S on accrued gains. They are liable to pay the taxes only in India. This DTAA is not of much relevance in this case.

2. Dividend Income from U.S Stocks

As per Article 10 of the India - U.S. DTAA , U.S has the right to charge 25% tax withholding on the dividend declared by U.S Companies. Now in this case for Indian Tax resident (ROR) such dividend income is taxable both in the U.S (Source country) and in India (Resident Country). 

However, such taxpayers can claim relief as per Section 90 of the Income-tax Act read with Article 25 - Relief from double taxation of India - U.S DTAA. Tax which was withheld by the U.S. can be claimed as a credit against the income tax liability in India. However, this relief is limited to average Indian tax rates. To claim DTAA relief, you will have to file Form 67 before filing the ITR.

For example: Mr A tax resident (ROR) in India has received capital gains of $2000 in the Short-term and dividend income of $1000 from a U.S company. There is a 25% tax withholding, i.e. $250, and a withholding tax certificate in form 1042-S was issued. Mr A is in 30% tax slab compute the tax liability in India

ITR Filing Compliance In Case Of U.S. Investments

• It should also be noted that if you have invested in foreign stocks or hold a financial interest in an offshore entity, you will have to mandatorily file a tax return in India, even if your income is below the basic exemption limit taxable in India.
• Schedule FA - Foreign asset disclosure : If you have have invested in U.S stocks, have U.S bank account or investment in immovable property then it is mandatory for tax resident (ROR) to declare such details in this schedule

• Schedule FSI - Foreign source of income: If you have any income subject to double taxation and you want to claim relief under section 90, Then you will have to fill in the details in this schedule along with filing of Form 67 before filing ITR The disclosure of details like a list of foreign assets, bank account, income earned from foreign investments, foreign taxes paid and tax credit claimed under respective DTAA, etc., is to be provided to the income tax department.

• Individuals can file ITR-2 or ITR-3 based on the nature of income earned.

Read More:

• How to file ITR if you invest in US stocks?
• What is DTAA?
• DTAA between India and USA