Dividend tax on US stocks: Understanding the 25% withholding
You just received your first U.S. stock dividend. However, only $75 was credited to your account. That missing $25 went straight to the U.S. government as withholding tax. For Indian investors buying Apple, Microsoft, or any dividend-paying U.S. stock, this 25% deduction is the starting point of a two-country tax journey. Understanding how it works can save you from paying more than you owe.
Why does the U.S.proper functioning of the withholds 25% on your dividends
The United States taxes all dividend payments made to foreign investors at source. Under domestic law (IRC §1441), the default withholding rate is a flat 30% on gross dividends. However, the India-US Double Taxation Avoidance Agreement (DTAA) reduces this rate for Indian residents.
Article 10(2) of the DTAA sets two rates.
For a broader overview, explore the complete tax implications for Indian residents investing in the U.S. stock market.
A 15% rate applies only when the beneficial owner is an Indian company holding at least 10% of the voting stock of the U.S. company. For every individual Indian investor — which covers nearly all retail participants — the applicable rate is 25% of the gross dividend.
The IRS Tax Treaty Table 1 confirms this distinction clearly. India's general dividend withholding rate is 25%, with the lower 15% reserved for qualifying corporate holdings. Many Indian financial websites incorrectly cite a 15% rate for individuals. That rate does not apply to you unless you own 10% or more of a U.S. company's voting shares through a corporate entity.
Without proper documentation, your broker withholds the full 30%. That extra 5% is entirely avoidable — and getting it right starts with one form.
How the W-8BEN form reduces your withholding from 30% to 25%
Form W-8BEN (Certificate of Foreign Status of Beneficial Owner) is the single document that unlocks DTAA treaty benefits. Filing the W-8BEN form for U.S. dividend tax purposes tells your broker you are a foreign investor entitled to a reduced withholding rate.
The current version remains Rev. October 2021, with no updates expected in 2026. Indian investors provide their PAN as the Foreign Tax Identifying Number on Line 6, declare India on Line 9, and cite Article 10(2)(b) with a 25% rate on Line 10. The form stays valid for three calendar years from the signing date. A form signed in March 2025 expires on December 31, 2028.
Every major Indian brokerage platform now handles W-8BEN digitally during onboarding. Winvesta pre-populates most fields and requires only your verification. Vested Finance processes it through VF Securities, their FINRA/SIPC member entity. INDmoney submits it during account opening via partner brokers DriveWealth and Alpaca Securities. Interactive Brokers requires an electronic W-8BEN during account application. You never mail anything to the IRS — the form goes to your withholding agent.
If your broker deducted 30% instead of 25%, your W-8BEN likely expired or was never filed. Check your account settings immediately and resubmit the form to restore the treaty rate for future dividends.
Gross-up: Why India taxes the full $100, not the $75 you received
Indian tax law requires you to report dividends at their full pre-tax value — the gross amount before U.S. withholding. This gross-up mechanism is essential to the Foreign Tax Credit (FTC) system. On a $100 US dividend with $25 withheld, you receive $75 in your brokerage account but declare the full $100 (converted to INR) as "Income from Other Sources" in India.
This might seem like double taxation, but it is not. India then grants you credit for the $25 already paid to the U.S. government. The gross-up dividend India tax mechanism ensures the credit offsets your Indian liability accurately. Without grossing up, your FTC claim would create a mismatch, and the credit computation would fail.
Currency conversion uses the SBI Telegraphic Transfer Buying Rate (TTBR) on the last day of the month preceding the month you received the dividend. For a dividend received in March 2026, you use the SBI TTBR as of February 28, 2026.
Foreign Tax Credit: How to avoid paying tax twice
The Foreign Tax Credit operates under Section 90 of the Income Tax Act (bilateral relief under DTAA) and Rule 128 of the Income Tax Rules. The FTC equals the lower of two amounts: the tax you paid in the U.S., or the Indian tax attributable to that foreign income.
Here is a worked example. Assume a $100 gross dividend, an exchange rate of ₹84/$, and you fall in India's 30% tax slab.
The U.S. withholds $25, which equals ₹2,100. Your Indian taxable income from this dividend is ₹8,400 (the full gross amount). Indian tax at 31.2% (including 4% health and education cess) comes to ₹2,621. The FTC available is ₹2,100 — the lower of ₹2,100 (U.S. tax) and ₹2,621 (Indian tax). You pay an additional ₹521 to India. Your total tax is ₹2,621, and your net dividend is ₹5,779. The effective rate equals 31.2%.
For investors in the 20% slab, the picture changes. Indian tax at 20.8% equals ₹1,747. The FTC is capped at ₹1,747 since it is the lower amount. The remaining ₹353 of U.S. tax becomes a deadweight loss — non-recoverable in either country. Your effective rate becomes 25% (the U.S. rate) because it exceeds your Indian rate.
The critical insight is this: for high-bracket investors, filing Form W-8BEN does not change total tax liability but significantly improves cash flow. For low-bracket investors, the 25% U.S. withholding creates an irrecoverable excess, making W-8BEN filing even more important to minimise deadweight loss.
Net dividend calculation across tax brackets
Let us calculate the net dividend for each common scenario. Assume a $100 dividend at ₹84/$.
In the 30% bracket with a W-8BEN on file, U.S. tax is ₹2,100. Indian tax is ₹2,621. FTC offsets ₹2,100. Additional Indian payment is ₹521. Net dividend received is ₹5,779. The effective rate is 31.2%.
In the 20% bracket with a W-8BEN on file, U.S. tax is ₹2,100. Indian tax is ₹1,747. FTC offsets ₹1,747. The ₹353 excess is permanently lost. Net dividend is ₹6,300. The effective rate is 25%.
Without W-8BEN in the 30% bracket, U.S. tax jumps to ₹2,520 (30%). Indian tax is still ₹2,621. FTC offsets ₹2,520. Additional Indian tax is just ₹101. But you received only $70 upfront instead of $75 — worse cash flow for the same total tax. The total tax remains ₹2,621 because India's rate still caps the outcome.
Dividend reinvestment tax in India: DRIP does not mean tax-free
Dividend Reinvestment Plans (DRIPs) create a dangerous misconception. Many investors believe that reinvested dividends are tax-free because no cash is deposited into their bank account. This is incorrect. Dividend reinvestment: In India, DRIP dividends are treated the same ascash dividends.
The U.S. withholds 25% before reinvestment occurs—a $100 dividend results in $75 worth of new shares purchased through the DRIP. For Indian tax purposes, you must report the full $100 gross dividend as income. The cost basis of DRIP-acquired shares equals the fair market value at the time of reinvestment. Each DRIP purchase creates a separate tax lot with its own acquisition date and cost basis.
When you eventually sell these DRIP-acquired shares, the holding period starts from each purchase date. Long-term capital gains treatment at 12.5% applies only after 24 months from the acquisition date of each lot. Meticulous record-keeping is essential for DRIP investors.
For capital gains rules specific to US-listed stocks, read our guide on the tax treatment of NASDAQ investments in India.
Form 1042-S dividend reporting and Indian filing requirements
On the U.S. side, your broker issues Form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding) annually by mid-March. This document records all dividends paid and taxes withheld for the calendar year. For tax year 2025, the due date is March 16, 2026. Form 1042-S dividend reporting has been updated for 2025-2026, including a new Box 7d for qualified intermediary revisions and a mandatory transition from the legacy FIRE e-filing system to the IRS IRIS system.
On the Indian side, filing requirements span multiple schedules. You must use ITR-2 (or ITR-3 if you have business income), since ITR-1 and ITR-4 cannot accommodate foreign income. Schedule OS captures the gross dividend as "Income from Other Sources." Schedule FSI details foreign-source income by country, income type, and tax paid. Schedule TR summarises the FTC claimed under Section 90. Schedule FA mandates disclosure of all foreign assets — U.S. brokerage accounts, stocks held, their quantities, and peak values — even if you earned no income during the year.
Form 67 must be filed separately on the income tax e-filing portal with supporting documents before submitting your ITR. Multiple ITAT benches have held that Form 67 filing is directory rather than mandatory. Foreign Tax Credit cannot be denied solely because you filed Form 67 late, provided taxes were actually paid abroad. However, timely filing prevents unnecessary disputes and processing delays.
What changed in 2025-26 for dividend taxation
India's new Income Tax Act, 2025, takes effect on April 1, 2026. The CBDT released Draft Income Tax Rules, 2026, in early February 2026. Rule 128 is replaced by Draft Rule 76, and Form 67 gives way to Form 44. A new requirement proposes mandatory Chartered Accountant verification for FTC claims where foreign tax paid exceeds ₹1 lakh.
The Union Budget 2026-27 removed the interest expense deduction against dividend income starting FY 2026-27. This increases the effective tax on foreign dividends for investors who borrowed to invest. The US-India DTAA itself has not been renegotiated. The 25% individual investor rate and the treaty's overall framework remain unchanged since the 2000 protocol amendment.
For tax-efficient investors, the Ireland-domiciled accumulating UCITS ETF route deserves attention. These face only 15% fund-level withholding under the Ireland-US treaty and are exempt from annual Indian dividend taxation. Over a long holding period, this structure is materially more tax-efficient than holding individual U.S. dividend stocks directly.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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Table of Contents
You just received your first U.S. stock dividend. However, only $75 was credited to your account. That missing $25 went straight to the U.S. government as withholding tax. For Indian investors buying Apple, Microsoft, or any dividend-paying U.S. stock, this 25% deduction is the starting point of a two-country tax journey. Understanding how it works can save you from paying more than you owe.
Why does the U.S.proper functioning of the withholds 25% on your dividends
The United States taxes all dividend payments made to foreign investors at source. Under domestic law (IRC §1441), the default withholding rate is a flat 30% on gross dividends. However, the India-US Double Taxation Avoidance Agreement (DTAA) reduces this rate for Indian residents.
Article 10(2) of the DTAA sets two rates.
For a broader overview, explore the complete tax implications for Indian residents investing in the U.S. stock market.
A 15% rate applies only when the beneficial owner is an Indian company holding at least 10% of the voting stock of the U.S. company. For every individual Indian investor — which covers nearly all retail participants — the applicable rate is 25% of the gross dividend.
The IRS Tax Treaty Table 1 confirms this distinction clearly. India's general dividend withholding rate is 25%, with the lower 15% reserved for qualifying corporate holdings. Many Indian financial websites incorrectly cite a 15% rate for individuals. That rate does not apply to you unless you own 10% or more of a U.S. company's voting shares through a corporate entity.
Without proper documentation, your broker withholds the full 30%. That extra 5% is entirely avoidable — and getting it right starts with one form.
How the W-8BEN form reduces your withholding from 30% to 25%
Form W-8BEN (Certificate of Foreign Status of Beneficial Owner) is the single document that unlocks DTAA treaty benefits. Filing the W-8BEN form for U.S. dividend tax purposes tells your broker you are a foreign investor entitled to a reduced withholding rate.
The current version remains Rev. October 2021, with no updates expected in 2026. Indian investors provide their PAN as the Foreign Tax Identifying Number on Line 6, declare India on Line 9, and cite Article 10(2)(b) with a 25% rate on Line 10. The form stays valid for three calendar years from the signing date. A form signed in March 2025 expires on December 31, 2028.
Every major Indian brokerage platform now handles W-8BEN digitally during onboarding. Winvesta pre-populates most fields and requires only your verification. Vested Finance processes it through VF Securities, their FINRA/SIPC member entity. INDmoney submits it during account opening via partner brokers DriveWealth and Alpaca Securities. Interactive Brokers requires an electronic W-8BEN during account application. You never mail anything to the IRS — the form goes to your withholding agent.
If your broker deducted 30% instead of 25%, your W-8BEN likely expired or was never filed. Check your account settings immediately and resubmit the form to restore the treaty rate for future dividends.
Gross-up: Why India taxes the full $100, not the $75 you received
Indian tax law requires you to report dividends at their full pre-tax value — the gross amount before U.S. withholding. This gross-up mechanism is essential to the Foreign Tax Credit (FTC) system. On a $100 US dividend with $25 withheld, you receive $75 in your brokerage account but declare the full $100 (converted to INR) as "Income from Other Sources" in India.
This might seem like double taxation, but it is not. India then grants you credit for the $25 already paid to the U.S. government. The gross-up dividend India tax mechanism ensures the credit offsets your Indian liability accurately. Without grossing up, your FTC claim would create a mismatch, and the credit computation would fail.
Currency conversion uses the SBI Telegraphic Transfer Buying Rate (TTBR) on the last day of the month preceding the month you received the dividend. For a dividend received in March 2026, you use the SBI TTBR as of February 28, 2026.
Foreign Tax Credit: How to avoid paying tax twice
The Foreign Tax Credit operates under Section 90 of the Income Tax Act (bilateral relief under DTAA) and Rule 128 of the Income Tax Rules. The FTC equals the lower of two amounts: the tax you paid in the U.S., or the Indian tax attributable to that foreign income.
Here is a worked example. Assume a $100 gross dividend, an exchange rate of ₹84/$, and you fall in India's 30% tax slab.
The U.S. withholds $25, which equals ₹2,100. Your Indian taxable income from this dividend is ₹8,400 (the full gross amount). Indian tax at 31.2% (including 4% health and education cess) comes to ₹2,621. The FTC available is ₹2,100 — the lower of ₹2,100 (U.S. tax) and ₹2,621 (Indian tax). You pay an additional ₹521 to India. Your total tax is ₹2,621, and your net dividend is ₹5,779. The effective rate equals 31.2%.
For investors in the 20% slab, the picture changes. Indian tax at 20.8% equals ₹1,747. The FTC is capped at ₹1,747 since it is the lower amount. The remaining ₹353 of U.S. tax becomes a deadweight loss — non-recoverable in either country. Your effective rate becomes 25% (the U.S. rate) because it exceeds your Indian rate.
The critical insight is this: for high-bracket investors, filing Form W-8BEN does not change total tax liability but significantly improves cash flow. For low-bracket investors, the 25% U.S. withholding creates an irrecoverable excess, making W-8BEN filing even more important to minimise deadweight loss.
Net dividend calculation across tax brackets
Let us calculate the net dividend for each common scenario. Assume a $100 dividend at ₹84/$.
In the 30% bracket with a W-8BEN on file, U.S. tax is ₹2,100. Indian tax is ₹2,621. FTC offsets ₹2,100. Additional Indian payment is ₹521. Net dividend received is ₹5,779. The effective rate is 31.2%.
In the 20% bracket with a W-8BEN on file, U.S. tax is ₹2,100. Indian tax is ₹1,747. FTC offsets ₹1,747. The ₹353 excess is permanently lost. Net dividend is ₹6,300. The effective rate is 25%.
Without W-8BEN in the 30% bracket, U.S. tax jumps to ₹2,520 (30%). Indian tax is still ₹2,621. FTC offsets ₹2,520. Additional Indian tax is just ₹101. But you received only $70 upfront instead of $75 — worse cash flow for the same total tax. The total tax remains ₹2,621 because India's rate still caps the outcome.
Dividend reinvestment tax in India: DRIP does not mean tax-free
Dividend Reinvestment Plans (DRIPs) create a dangerous misconception. Many investors believe that reinvested dividends are tax-free because no cash is deposited into their bank account. This is incorrect. Dividend reinvestment: In India, DRIP dividends are treated the same ascash dividends.
The U.S. withholds 25% before reinvestment occurs—a $100 dividend results in $75 worth of new shares purchased through the DRIP. For Indian tax purposes, you must report the full $100 gross dividend as income. The cost basis of DRIP-acquired shares equals the fair market value at the time of reinvestment. Each DRIP purchase creates a separate tax lot with its own acquisition date and cost basis.
When you eventually sell these DRIP-acquired shares, the holding period starts from each purchase date. Long-term capital gains treatment at 12.5% applies only after 24 months from the acquisition date of each lot. Meticulous record-keeping is essential for DRIP investors.
For capital gains rules specific to US-listed stocks, read our guide on the tax treatment of NASDAQ investments in India.
Form 1042-S dividend reporting and Indian filing requirements
On the U.S. side, your broker issues Form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding) annually by mid-March. This document records all dividends paid and taxes withheld for the calendar year. For tax year 2025, the due date is March 16, 2026. Form 1042-S dividend reporting has been updated for 2025-2026, including a new Box 7d for qualified intermediary revisions and a mandatory transition from the legacy FIRE e-filing system to the IRS IRIS system.
On the Indian side, filing requirements span multiple schedules. You must use ITR-2 (or ITR-3 if you have business income), since ITR-1 and ITR-4 cannot accommodate foreign income. Schedule OS captures the gross dividend as "Income from Other Sources." Schedule FSI details foreign-source income by country, income type, and tax paid. Schedule TR summarises the FTC claimed under Section 90. Schedule FA mandates disclosure of all foreign assets — U.S. brokerage accounts, stocks held, their quantities, and peak values — even if you earned no income during the year.
Form 67 must be filed separately on the income tax e-filing portal with supporting documents before submitting your ITR. Multiple ITAT benches have held that Form 67 filing is directory rather than mandatory. Foreign Tax Credit cannot be denied solely because you filed Form 67 late, provided taxes were actually paid abroad. However, timely filing prevents unnecessary disputes and processing delays.
What changed in 2025-26 for dividend taxation
India's new Income Tax Act, 2025, takes effect on April 1, 2026. The CBDT released Draft Income Tax Rules, 2026, in early February 2026. Rule 128 is replaced by Draft Rule 76, and Form 67 gives way to Form 44. A new requirement proposes mandatory Chartered Accountant verification for FTC claims where foreign tax paid exceeds ₹1 lakh.
The Union Budget 2026-27 removed the interest expense deduction against dividend income starting FY 2026-27. This increases the effective tax on foreign dividends for investors who borrowed to invest. The US-India DTAA itself has not been renegotiated. The 25% individual investor rate and the treaty's overall framework remain unchanged since the 2000 protocol amendment.
For tax-efficient investors, the Ireland-domiciled accumulating UCITS ETF route deserves attention. These face only 15% fund-level withholding under the Ireland-US treaty and are exempt from annual Indian dividend taxation. Over a long holding period, this structure is materially more tax-efficient than holding individual U.S. dividend stocks directly.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
Ready to earn on every trade?
Invest in 11,000+ US stocks & ETFs
