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When Indian residents invest in the stock markets in India, they are well aware of the tax implications. However, when the investment is made in the stock markets of the US, what will be the tax implication? How will it be taxed and will there be any exemptions.

To understand tax implications, it is imperative to understand the type of gains from the investment in stock. There are the following gains:

  • Dividends
  • Capital Gains on sale
  • Dividends
  • Capital Gains
  • LTCG (Long Term Capital Gains)
  • STCG (Short Term Capital Gains)
  • Dividends

    Companies generally roll out dividends on the stock in order to distribute profits. Hence if the stock invested in, pays a dividend, it is income in the hand of the investor. This income needs to be taxed, and hence it is taxed at a flat rate of 25%. The rate applicable to Indian investors is much lower as compared to other foreign investors as there is a tax treaty between the US and India.The amount of taxation will be withheld by the US companies, and only the balance 75% will be paid as a dividend.

    The dividend received by the Indian investor in cash or reinvested will be added to the income of the resident and charged at the normal slab rates. However, due to the Double Tax Avoidance Agreement (DTAA), the tax withheld in the US can be set off against the tax liability in India.

    Illustration
    Mr. Bharat invested in the stocks of Amazon. He receives a dividend of $ 200. The company withholds a tax of $50 that is 25% of $200. The net payout of the dividend is $ 150. Mr. Bharat declares an income of $ 200 in his income tax return. The income is taxed as per the applicable tax slabs. Mr. Bharat can claim a credit of $50 that is the tax withheld by the US company. Therefore from the total tax payable by Mr. Bharat, an amount of $50 will be deducted, and only the balance will be payable.

    Capital Gains

    The other gain that the investment in stocks in US markets can generate is the profit or benefit generated 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 if the investment is sold at a profit, there will be no tax implication in the US on the gain.

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

    Have you held the stocks for more than 24 months

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

    LTCG (Long Term Capital Gains)

    When the stock is held for more than 24 months then the gains on the sale of the stock are long term capital gains and will be taxed at 20% + applicable surcharge and fees.

    STCG (Short Term Capital Gains)

    When the stocks are held for a period less than 24 months then the gains on the sale of the stock is short term capital gains and will be a part of the current income and will be taxed as per slab rates applicable to the investor.

    To summarise:

    Income Type

    Taxability in the US 

    Rate

    Taxability in India

    Rate

    Comments

    Dividends

    Yes

    25 %

    Yes

    Applicable slab rates

    Credit for US taxation available 

    LTCG

    No

    Yes

    20%

    Applicable surcharge and fees

    STCG

    No

    Yes

    Applicable slab rates

     

    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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