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Tax implication for Indians who invest in US stocks

Had you purchased Netflix shares worth $990 at the issue price of its initial public offering in 2002, the value would be more than $500,000 in 2022. We are looking at over 50,000% appreciation here. Over a period of two decades, many companies have given exorbitant returns in the U.S. stock market, and each year, an increasing number of global investors are investing in U.S. based companies. Since the Reserve Bank of India has opened doors for Indians to buy stocks of U.S. companies via the Liberalized Remittance Scheme (LRS), many domestic investors have taken advantage of it. 

As per the LRS, all Indian residents can freely remit up to $250,000 in each financial year for current or capital account transactions. This remittance can be utilized for any permissible purpose such as purchasing financial assets like shares, ETFs, bonds, or acquiring immovable property,  except those remittances that are specifically prohibited like winnings from lottery, or income from racing, etc. Since investing in the stock market worldwide is a permitted expenditure, you can start investing your money in the US stock market by opening an account with Stockal to get higher returns. So, investing in U.S. stocks from India is sorted, but what is the implication of tax on foreign investment in India?

Let’s find out.

Income from U.S. Stocks in India

Apart from the trading costs, tax on income earned from the stock market is a major factor that concerns the investors. Whether the income is earned from Indian stocks or U.S. stocks, an Indian investor must pay tax on both. So is there a difference between the tax on income from Indian stocks compared to that from U.S. stocks? Well, yes, there is a slight difference. But before that, we need to understand the types of income earned from U.S. stocks.

Income earned from U.S. stocks in India can be divided into (i) Capital Appreciation and (ii) Dividends. Let’s take a look at these two types of earnings.

  • Capital Appreciation: An investor primarily buys a stock with the intention to make gains by way of capital appreciation. When you buy a stock for, say, $100 and sell it for $150, the gain of $50 is called capital appreciation. This income is taxed as a capital gain. We will look at the tax implication of capital gains shortly.
  • Dividend Income: The second type of income earned from stocks is dividends. The dividend is the amount generally given out of the company’s net profit to its shareholders. Suppose the company whose shares you purchased for $100 and sold off for $150 also declares a dividend of $2 for the year, then that income is taxed differently than capital appreciation.

Now let’s see how these incomes are taxed.

Tax Implications on Capital Gains

As discussed earlier, capital gains are appreciation in the stock’s original purchase price. Continuing with the same example above, the capital gain of $50 earned by selling $100 stock for $150 is not taxed in the U.S. However, you will be liable to pay tax on this $50 in India. Since there is a Double Taxation Avoidance Agreement (DTAA) between the U.S. and India, the same income is not taxed twice.

So now that you are aware of this let’s move forward to the rate at which this income will be taxed here. The tax rate on this capital gain depends on the period of holding of shares. The magic number here is 24. If you hold the shares for a period of 24 months before selling them, the capital gains earned from them are marked as long-term. Contrarily, if you sell the shares before the expiry of 24 months from the date of purchase, then the capital gains are marked as short-term.

Let’s further decode long-term and short-term capital gains.

  • Long-term Capital Gains (LTCG) on U.S. Stocks in India

Capital gains from U.S. stocks held for more than 24 months are taxed in India at a flat rate of 20%. An investor will also be liable to pay the applicable surcharge and fees in addition to that. The LTCG on Indian stocks is taxed at a flat rate of 20% + the applicable cess.

For instance, if you had invested $250 in U.S. stocks in March 2019 and sold them for $850 in January 2022, your capital gain of $600 will be considered long-term. This LTCG of $600 shall be tax-free in the U.S. but will be taxed at 20% in India. So, your tax liability in India would be $120, plus applicable surcharge and fees.

  • Short-term Capital Gains (STCG) on U.S. Stocks in India

On the other hand, capital gains from U.S. stocks sold before 24 months from the date of purchase are taxed as per the tax slab applicable to the investor. In the case of STCG, it is taxed at a flat rate of 15%, irrespective of the slab rate.

For example, if you invested $500 in U.S. stocks in January 2021 and sold them for $700 in February 2022, your short-term capital gain will be $200 since the investment duration is less than 24 months. This STCG of $200 will then be added to the other income you earned in India, and based on that, your total income will be taxed as per the applicable tax slab.

Tax Implications on Dividends

As discussed above, a dividend is declared by the company as a share of its net profits. If the company you invested in pays a dividend of, for instance, $100, then the tax of 25% is deducted in the U.S. As a result, you will receive only $75. Unlike capital gains, which are not taxed in the U.S., tax on dividends is deducted before reaching your hands. However, this tax rate is lower than the rate applicable to other foreign investors in the U.S. on account of the tax treaty signed between India and the U.S.

Moreover, this dividend is taxed in India as well. You must add it to your total income, and the tax is paid as per the applicable tax slab. So is this dividend income getting taxed twice, in the U.S. and India? Well, yes! But since there is a double tax avoidance agreement (DTAA) between the two countries, you get the tax credit of $25 you paid on a $100 dividend income.

Let’s look at some numbers to grasp this. Suppose, after adding this income of $100 to your total income in India, your tax liability arrives at $40. Since you get a tax credit of $25, you can utilize it to reduce your Indian tax liability and pay only the balance of $15.

The table below summarizes tax implications on dividends as well as capital gains on U.S. stocks as they are taxed in the hands of Indian investors.

Should you invest in U.S. Stocks?

All the concerns of Indian investors planning to invest globally boil down to taxability and stock selection. While the tax implication on foreign investments might seem higher compared to local investing, the potential that global markets offer is much superior.

The example of Netflix growing its shareholders’ wealth by 50,000% in 20 years is right in front of us.

Fundamentally strong U.S. companies and giant conglomerates can be preferred for novice investors. The world’s top companies like Google, Amazon, Disney, Facebook, Netflix, Tesla, Uber, Coca-cola, Apple, etc., are listed in the U.S. stock markets and are watched by Warren Buffett, Peter Lynch, Jesse Livermore to name a few. The important factor to note here is – fundamentally strong companies.

To sum it up

For a resident of India, the income earned from any foreign country is taxable as per the Income Tax Act. However, income earned from countries with which India has a tax treaty or double taxation avoidance agreement (DTAA), like the U.S., the taxability is liberal. It is important to note that, for any resident of India having an off-shore source of income or investment, it is mandatory to file an income tax return.

To make the most out of investing in the U.S. stock market from India, you can open an account with Stockal that not only offers an investment platform but also provides world-class research details. With no minimum investment limit and an easy onboarding process, you can begin to unlock the potential of global investing with Stockal.

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