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 arising from the US stocks 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
• Capital Gains on sale

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

Tax in USA

Dividend

If a US company earns excess profits, then it may offer to distribute it profits by dividends to stockholders. As and when the Indian Investor earns this dividend incomes from a US Company, it is treated as income arised from US and will be subject to a maximum of 25% tax in the US according to the India-US DTAA. (DTAA is a treaty entered between the countries to avoid the double taxation on the persons having dealings in both the countries)

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

Such dividend income will be taxable in India as well (as in case of tax residents of India, global income is taxable). 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. The exchange rate that needs to be applied is 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 for conversion of capital gains arising from sale of stocks of US Companies. 
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 for the purpose of Indian Income tax.

Capital Gains

As already mentioned above if the Residential Status of a person as per the Income Tax Act is ‘Resident’, then worldwide income of that person is taxable in India. This would mean that Capital Gains earned on US stocks will also be taxable in India. The rate of tax on capital gains depends on the period of holding:

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 of such US Stocks will be considered as Long-Term Capital Gains and will be taxed at 20% + surcharge and cess.
2. STCG (Short Term Capital Gains)
   If you hold the US stocks for less than 24 months, they will be considered as Short-Term Capital Gains and will be taxed according to your income slab rate based on the regime opted for.  

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. 

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