Investing in US stocks has become increasingly popular among Indian investors looking to diversify their portfolios and gain exposure to global markets through online trading platforms. However, what is evident with this opportunity is the fact that it must come with several challenges, specifically in the tax context. In this blog post, the author tries to explain the following points about Indian Investors paying taxes on investments made in US stocks: Capital gains, Dividends, Forex translation, and competence of Indian tax laws followed in the USA.
Capital Gains Tax
The taxes commonly applied to the equities include the capital gains taxes charged on the profit made from the disposal of any asset. Foreign investors, specifically Indian investors, need to report their capital gains from US stocks, and these gains depend on the holding period in terms of taxes.
Short-Term Capital Gains (STCG):
It is important to note that if the stocks in the US are disposed of after 24 months, then the profits are considered short-term. These gains are arrived at through addition to the investor‘s total income and taxed under the Income Tax Act at the relevant slab rate applicable to the income. For instance, if an investor is in the 30 per cent tax slab, his gains from `F&O’ trading on US stocks would be taxed at 30 per cent plus the applicable surcharge and cess.
Long-Term Capital Gains (LTCG):
Stock capital gains that are realised after at least 24 months of holding form long-term gains. The current tax rates for long-term capital gains are set at 20% plus a surcharge and cess where applicable.
Dividend Tax
Dividends from US stocks are another source of income to investors But that income is statutory subject to tax in the US as well as in India.
US Taxation:
Dividends received by Indian residents from American sources are taxed at source at the rate of 25 per cent under the DTAA between India and the United States. It is paid at the time of source before the shareholders are credited with the amount of the dividends.
Indian Taxation:
These dividends received in India are then required to be included in the total income of the investor recipient and to be charged to tax under the tax rate that applies under the income tax bands. But, that tax paid in the US can be utilised for the credit against the tax liability in India because of the DTAA. This mechanism is important in avoiding dual taxation, so in the case of the income figure, investors are not liable to tax on the same income twice.
Foreign Exchange Fluctuations
Trading equities in the US market involves conversion to the currency used in those markets which is the US dollar. Further, the exchange rate which varies between USD and INR can also greatly affect the value of your investments as well as the returns it generates.
Capital Gains and Losses:
This is because all of the revenue and expenses resulting from movements of the exchange rates about specified currencies are included in the tax computation. For instance, the investor earns a profit on the sale of shares in US-based organizations; however, during the period in which he/she invested and realized the profit, the INR has strengthened against the USD and hence the profits if realized in INR may be less. On the same note and in contrast to the above perception, when the INR is lower, the increase in INR terms might be greater. These fluctuations are taken into consideration when determining the capital gains or losses on the back of the proceeds while converting them into INR.
Dividend Income:
In the same manner, it applies to the dividend income as well; Indeed, these are the two most common types of income that are easily distinguished with clear-cut classifications. It relates to those dividends which are received in another currency other than INR, namely US dollars and therefore their value needs to be converted at the current rate of exchange in operation on the date of receipt of dividends. This fluctuation impacts the amount of dividends that will be taxed in INR: dividends translated back to INR from the currency of the subsidiary in which they were paid may be larger or smaller than the body of the message due to the change in exchange rate.
Compliance and Reporting Requirements
In its current form, Indian residents intending to invest in US stocks incredibly come into various reporting provisions under the Indian tax laws.
Foreign Assets Disclosure:
The Indian government has implemented the FEMA policy outlining foreign exchange management and requires people with foreign assets, such as investments in US stocks, to report such holdings in income tax returns. This comprises of the stocks that they possessed and in which they had invested or purchased during the financial year, the dividends they received and the capital appreciation they earned on the investments made during the year.
Tax Returns Filing:
Whilst the income earned from other sources in other countries, such as capital gains, or dividends, has also been made reportable in the Indian tax return forms by the investors. That is why it is unlawful not to report such incomes and there can be certain penalties attending this unlawful action. Besides they must also take into account the requirements imposed by the Foreign Account Tax Compliance Act (FATCA) – rules concerning the declaration of foreign financial assets and income.
Double Taxation Avoidance Agreement (DTAA):
The DTAA between India and the US is an important factor in the Indian venture. This way they can have the right to take up the tax credit in India for taxes paid in the US, and hence avoid paying twice. It would be imperative for investors to be acquainted with the provisions of the Double Taxation Avoidance Agreements to fully benefit from their tax shields. For example, the tax on dividends received from the US is less than the tax on dividends received from the domestic source but it can be credited against the tax payable on income in India and thus avoid additional taxes.
Practical Tips for Indian Investors
Keep Detailed Records:
Keep all records of all purchases and sales transactions in chronological order, by date of purchase or sale, price and foreign exchange rates as well. These records are quite helpful in tax matters as they guide organizations in filing the correct returns and meeting tax requirements.
Consult Tax Professionals:
Considering the high importance of international taxation issues and their multifaceted character, it is desirable to consult a specialist in the given sphere. Professional tax consultants are also necessary in cases where tax treaties exist, lost income tax credit has to be claimed and or when filing tax returns is complicated.
Stay Updated:
One of the aspects regarding taxes is that the laws and regulations governing them may be altered. , assessing the feasibility of utilising international tax treaties, the current withholding rates and reporting requirements make a great deal when it comes to good tax planning.
Use Tax-Efficient Investment Accounts:
Using certain tax-preferred accounts where available should be considered. For instance, specific kinds of United States investment accounts such as Individual Retirement Accounts or IRA, and 401(k) have some tax advantages, which must make a fascinating proposition to Indians.
Strategize Currency Management:
You should also consider exchange rate fluctuation factors. Mitigate the risk of unfavourable exchange rate shifts, and manage risks associated with fluctuations in the value of such investments, through the use of hedging mechanisms that seek to provide stability to returns on investment made in the US markets.
Conclusion
Holding American stocks gives the Indian investor a way around having a diversified portfolio and getting value out of some of the most promising corporates in the world. Nevertheless, this very feature also poses the issue of accounting for and handling taxes. Through an understanding of capital gains and dividends, foreign exchange fluctuation, compliance, and utilization of DTAA, the taxation costs can be minimized so that the returns on investment can be maximum. Getting professional guidance and being up-to-date on the current laws of taxation is essential in making successful investments in the United States stocks from India.
A well-informed investor will therefore need to factor in how to invest in the global market to effectively diversify the portfolio without having to deal with the common pitfalls that many inexperienced investors encounter while investing in the international market.
