Think investing overseas will complicate your tax filing? Despite this common perception, the tax implications of investing in US stocks are actually quite straight forward. There are two types of ‘gains’ that you can have from your investments in stocks. Let’s discuss the tax liability on each of them separately.
For this discussion, we assume that you are an Indian resident and not a US citizen or permanent resident.
If you own stock of a company that pays a dividend, your tax liability in the US would be a flat 25% (lower than otherwise for a foreign investor due to the tax treaty between US and India). This tax will be withheld before you receive the dividend, which means that you will receive 75% of the dividend as a cash payout. The good news is that you will be able to offset the US tax withheld against your tax liability in India as the US and India have a Double Taxation Avoidance Agreement (DTAA). Hence the tax that you owe on the 100% dividend will get a foreign tax credit of 25% and you will be liable to pay only anything in excess of that 25% in India.
Let’s say you are invested in Apple (AAPL), and receive a USD 100 dividend. Out of the USD 100 dividend, USD 25 will be withheld by the broker dealer, and USD 75 will be credited to your account. When you file your taxes in India, the USD 100 dividend will be a part of your annual income for filing purposes. However, you will also be able to use USD 25 of foreign tax credits to reduce your tax liabilities in India.
There is no income tax on capital gains in the US for foreigners (hooray!). You will, however, have to pay capital gain tax in India, depending on which category it falls in:
Long Term Capital Gains: If you hold the shares of the foreign company for more than 24 months, your capital gains will be taxed at LTCG rate of 20% (plus any applicable surcharge and cess fee).
Short Term Capital Gain: If you liquidate any stock investment before 24 months of holding it, it will fall under the STCG category, and will be taxed like ordinary income in India. The tax rate will depend on the tax bracket that you fall in the year of realizing the gain.
Let’s say bought Amazon shares for USD 500, and sell them for USD 700 to realize a USD 200 profit. While there will be no tax implications in the US for this gain, you will be liable to pay taxes in India on the USD 200 capital gain. If you had held the stock for more than 24 months, the tax would be USD 40+ surcharge and cess fee if applicable. In case you sold the stock after holding it for less than 24 months, USD 200 would be added to your income for the financial year and taxed based on the tax bracket you fall under for the year