Tax implications of investing in US stocks

If you're an Indian resident investing in US stocks, you may be wondering how your investments will be taxed and if there are any exemptions. In this article, we will break down the tax implications of investing in US stocks, specifically focusing on how dividends and capital gains will be taxed in both the US and India. 
Firstly, let's understand the types of income you may receive from investing in US stocks: dividends and capital gains:

• Dividends
• Capital Gains on sale

Let us look at how these incomes will be taxed in both the countries

Tax in USA

Dividend

If a company distributes profits, they may offer dividends to stockholders. As an investor, this counts as income and will be subject to a 25% tax in the US according to the India-US DTAA. 

Capital Gains

The other gain that the investment in US stocks can generate is the capital gains on the sale of stocks that is when the stocks are sold at a price higher than the purchase price. The good news is that, there is no capital gains tax in the US for Non-Resident Alien.

Tax in India

Dividend

Dividend will be taxable in India as well. While filing ITR, the same income will be included in your total income and tax will be charged at normal slab rates. Isn't it double taxation? Yes, it is! However, due to the Double Tax Avoidance Agreement (DTAA), you can claim a foreign tax credit and offset the tax withheld in the US against your tax liability in India. However, there are practical challenges like:

• Differences in exchange rates may create a lot of complexities and
• In the US, the reporting period is based on the calendar year and in India, we follow the financial year (April to March), which can lead to accounting and reporting difficulties when claiming credits. 

To convert USD into INR, the SBI TT buying rate is used. You will need to check the rate as on the last day of the month immediately preceding the month in which the dividend is declared, distributed, or paid by the company. The same concept applies to capital gains. 
E.g.: For instance, if you received a dividend of USD 10 from Walmart stock on May 15, 2020, the SBI TT buying rate on April 30, 2020, would be used to convert it to INR.

Capital Gains

If your Residential Status as per the Income Tax Act is ‘Resident’, your worldwide income is taxable in India. This would mean that Capital Gains earned on US stocks will also be taxable in India. 

Have you held the stocks for more than 24 months

• If Yes, then LTCG will apply
• If No, then STCG will apply

1. LTCG (Long Term Capital Gains)
   If you hold US stocks for more than 24 months, your gains on sale will be considered Long Term Capital Gains and will be taxed at 20% + surcharge and fees.
    
2. STCG (Short Term Capital Gains)
   If you hold the US stocks for less than 24 months, they will be considered Short Term Capital Gains and will be taxed according to your income slab rate. To summarise:

E.g.: Neha bought US stock at a price of $110 on May 29, 2022 and later sold it on December 31, 2022, when the stock price was $150. 
Let's assume the SBI TT Buying rates are:

• 30 Apr 2022: USD 1 = INR 75
• 30 Nov 2022: USD 1 = INR 80

In India, short-term capital gains will be calculated as under:

Final Word

Dividend from US stocks will be subject to a 25% tax in the US according to the India-US DTAA. On the bright side, there is no capital gains tax in the US for Non-Resident Aliens.
However, dividends will still be taxable in India, which may seem like double taxation. But thanks to India-US DTAA, you can claim a foreign tax credit and offset the tax withheld in the US against your tax liability in India. 

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

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