Juggling US’ IRS and India’s I-T dept: How Indians investing in US stocks are taxed

Know the tax rules for investing in US stocks

The American dream isn't limited to immigration anymore. With global markets at our fingertips, thousands of Indians are investing in US giants like Apple, Microsoft and Tesla. But before you dive into Wall Street, there's a critical question: how do you navigate the tax maze spanning two continents?

As an Indian resident investing in US stocks, an investor ought to know how to comply with taxation requirements in both the US and in India. Understanding tax-related nuances help you avoid hefty penalties and ensure you maximise your returns legally.

The golden rule: you're taxed where you live
Here's the fundamental principle: as a resident Indian, you pay taxes on your global income in India. This means whether you earn from Indian companies or American tech stocks, you have to pay taxes in India as per the Income-tax Act, 1961. Your residential status is determined by your physical presence in India—typically, if you stay in India for 182 days or more in a financial year, you are considered a resident.

Capital gains: understanding the holding periods
When you sell US stocks for a profit, the tax treatment depends entirely on how long you held them.

Long-term capital gains
If you hold US stocks for more than 24 months, your gains are taxed at a favourable 12.5 percent rate (plus applicable surcharge and cess). This rate was reduced from 20 percent in Budget 2024, making long-term investing more attractive.

Short-term capital gains
Held stocks for less than 24 months? Your gains will be added to your total income and taxed according to your income tax slab, which could be as high as 30 percent for high earners.

Also read: Foreign Affairs: Overseas stocks that Indian mutual funds are embracing and rejecting

The currency conversion challenge
For tax purposes, you must convert your dollar gains to Indian rupees using the State Bank of India's (SBI) telegraphic transfer (TT) buying rate from the last day of the month before your sale. This means currency fluctuations can significantly impact your tax liability, creating an additional layer of complexity in your investment calculations.

The dividend dilemma: double taxation reality
Dividends from US stocks face a more complex scenario. The US withholds 25 percent tax on dividend payouts to Indian investors under the India-US Double Taxation Avoidance Agreement (DTAA). So if Apple declares a $100 dividend, you receive only $75 in your account.

But here's the catch—you still owe Indian taxes on the full $100. The dividend income is treated as "income from other sources" and taxed at your applicable slab rate. This creates apparent double taxation, but there's relief available.

DTAA, your shield against double taxation
The tax treaty between India and the US allows you to claim foreign tax credit and offset the tax withheld in the US against your tax liability in India. This prevents you from paying tax twice on the same income.

For capital gains, the treaty is investor-friendly—since the US doesn't tax capital gains for non-residents, you only pay tax in India.

Also read: Planning to buy US stocks? Know the LRS limits and tax rules first

Form 67: your key to tax relief
Form 67 is your gateway to claiming foreign tax credit for any foreign tax paid. This form must be filed before the due date of filing your income tax return (ITR).

The form requires information about your foreign income, taxes paid abroad, and the credit you're claiming. It's crucial that the details in Form 67 match exactly with the Schedule FSI (foreign source income) information you will fill in your ITR, as mismatches can lead to denial of credit.

ITR filing process
As an Indian resident with US investments, you will use ITR-2 (for salary and investment income) or ITR-3 (if you have business income) and fill additional schedules to disclose your foreign assets.

●     Schedule FSI: Report foreign source income, including capital gains and dividends

●     Schedule FA: Disclose foreign assets, including US stocks you hold

●     Schedule TR: Claim tax relief for foreign taxes paid

●     Form 67: Claim foreign tax credit for withholding taxes

Remember, you must report foreign assets even if you haven't sold them or earned any income. Failure to disclose can result in penalties under the Black Money Act.

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How to ensure smooth sailing
Recent updates have made the compliance process more streamlined. Budget 2024 introduced provisions allowing salaried employees to offset TCS (tax collected at source) with TDS (tax deducted at source) more easily. Form 67 filing requirements have been clarified, with defined deadlines for credit claims.

• Maintain detailed records of all transactions with dollar amounts and rupee conversions
• File Form 67 well before your ITR due date
• Use the correct SBI TT buying rates for currency conversion (or rely on platforms that do it for you)
• Consider consulting a tax advisor for complex situations
• Don't forget to report assets even if you haven't earned income

The key is staying organised, understanding the rules and seeking professional help when needed. With the right approach, you can enjoy the benefits of global diversification while staying on the right side of tax authorities in both countries. After all, the goal is to build wealth, not give it all away in penalties and interest!

Remember: tax laws are complex and subject to change. Always consult a qualified tax professional for advice specific to your situation.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with a financial advisor before taking any decisions.