Tax implications for Indian residents investing in the US stock market (FY 2025-26)
More Indian investors are exploring the US stock markets to diversify their portfolios. Popular US stocks like Apple, Tesla, and Microsoft offer growth potential beyond Indian markets. However, understanding tax implications for Indian residents investing in the US stock market is crucial for maximising returns and staying compliant.
The rise of digital investment platforms has made US stock investing accessible to retail investors. Yet many investors overlook the complex tax implications that come with cross-border investing. This oversight can lead to unnecessary tax payments or compliance issues with Indian tax authorities.
This complete guide covers US and Indian tax rules, double taxation relief, RBI regulations, and ITR filing requirements for FY 2025-26. Understanding these rules helps you make informed investment decisions while optimising your tax obligations.
Types of income from US stocks
When you invest in US stocks, you earn two distinct types of income that face different tax treatment. Dividends represent regular payments that companies make to shareholders from their profits. These payments typically occur quarterly and provide a steady income to investors. Capital gains, on the other hand, represent the profit you make when selling shares at a higher price than your purchase cost.
The distinction between these income types matters significantly for tax planning. Dividends face immediate tax obligations in both countries, while capital gains only trigger tax when you actually sell the shares. This timing difference gives you more control over when to realise capital gains for tax optimisation.
Understanding these income types helps you plan your investment strategy better. Some investors prefer dividend-paying stocks for regular income, while growth investors focus on capital appreciation. Your choice affects your overall tax liability and cash flow patterns.
US taxation on Indian investors
The United States has specific tax rules for foreign investors that generally favour non-residents. These rules stem from the country's desire to attract foreign capital while ensuring some tax collection on US-sourced income.
Dividend taxation in US
The US government withholds 25% tax on dividends paid to Indian residents under the India-US Double Taxation Avoidance Agreement (DTAA). This preferential rate applies because of the tax treaty between the two countries. Without this treaty, foreign investors would face a 30% withholding rate.
The withholding happens automatically at the source. When a US company declares a dividend, the paying agent deducts the tax before crediting the amount to your account. This process ensures the US government collects its share without requiring you to file a US tax return.
Here's how dividend taxation works in practice: You receive $100 in dividends from Apple stock. The US automatically withholds $25 as tax. Your brokerage account shows a credit of $75. The $25 withheld gets reported to the IRS on your behalf through forms like 1042-S.
This withholding applies to all dividend payments, including those automatically reinvested in additional shares through dividend reinvestment plans. Many investors overlook this detail when calculating their actual returns from US dividend stocks.
Capital gains taxation in the US
The US follows a territorial approach to capital gains taxation for non-residents. This means the US does not tax capital gains for Indian residents on US stock sales, provided you don't meet the substantial presence test for US tax residency.
This favourable treatment makes US stocks attractive for Indian investors focused on capital appreciation. You can buy and sell US stocks multiple times without worrying about US capital gains tax. This advantage becomes significant for active traders who might otherwise face substantial tax bills.
However, this benefit only applies to portfolio investments. If you're engaged in a US trade or business, different rules may apply. For most retail investors buying stocks through Indian brokers or US online platforms, the portfolio investment classification applies automatically.
The absence of US capital gains tax doesn't eliminate your tax obligations entirely. India taxes these gains based on your holding period and applicable rates, which we'll discuss in detail.
Indian taxation on US stock investments
India follows a residence-based taxation system that taxes global income for residents. This means you must pay Indian taxes on all your worldwide income, including earnings from US stocks. The Indian tax system treats different types of income differently, affecting your overall tax liability.
Dividend tax in India
Indian tax law treats dividends from US stocks as "income from other sources" in your tax return. You must add the gross dividend amount to your total income and pay tax at your applicable slab rate. This treatment aligns with India's taxation of all dividend income, whether domestic or foreign.
The gross dividend amount includes the portion withheld as US tax. So if you received $75 after US withholding from a $100 dividend, you still declare $100 as income in India. This approach ensures the Double Taxation Avoidance Agreement works correctly.
Your Indian tax rate on dividend income depends on your total income for the year. If you're in the 30% tax bracket, you'll pay 30% tax on the dividend income. However, you can claim credit for the 25% already paid in the US, reducing your net Indian tax to just 5% of the dividend amount.
This credit mechanism prevents double taxation while ensuring both countries collect appropriate taxes. The process requires proper documentation and forms, which many investors overlook. Failing to claim this credit means paying unnecessary additional tax.
Capital gains tax in India
India's capital gains taxation depends heavily on your holding period. The government encourages long-term investing by providing preferential tax rates for investments held longer than 24 months. This threshold applies specifically to unlisted foreign securities, which includes most US stocks.
Long-term capital gains (LTCG) apply when you hold US stocks for more than 24 months before selling. The tax rate stands at 20% plus applicable surcharge and cess. However, you get the benefit of indexation, which adjusts your purchase price for inflation. This adjustment reduces your taxable gain and overall tax liability.
Short-term capital gains (STCG) apply to stocks sold within 24 months of purchase. These gains get added to your regular income and taxed at your applicable slab rate. For high-income individuals, this can mean effective tax rates exceeding 30% plus surcharge and cess.
Detailed capital gains calculation example
Let's walk through a comprehensive example to illustrate the calculation process:
You bought 10 shares of Microsoft at $300 per share in January 2022 when the exchange rate was ₹75 per dollar. Total investment: $3,000 or ₹2,25,000.
You sold these shares in March 2025 at $400 per share when the exchange rate was ₹83 per dollar. Sale proceeds: $4,000 or ₹3,32,000.
Since you held the shares for more than 24 months, this qualifies as LTCG. For indexation, assume the cost inflation index increased from 317 in 2022-23 to 348 in 2024-25.
Indexed cost = ₹2,25,000 × (348/317) = ₹2,47,000 Taxable LTCG = ₹3,32,000 - ₹2,47,000 = ₹85,000 Tax at 20% = ₹17,000 plus applicable surcharge and cess
Without indexation, your gain would have been ₹1,07,000, resulting in ₹21,400 tax. The indexation benefit saved you ₹4,400 in taxes.
Claiming double taxation relief under DTAA
The India-US Double Taxation Avoidance Agreement prevents you from paying tax twice on the same income. However, claiming this relief requires following specific procedures that many investors miss. Understanding and implementing these procedures can result in substantial tax savings.
The DTAA relief works through a foreign tax credit mechanism. You pay the full Indian tax on your global income, then claim credit for taxes already paid in the US. The credit cannot exceed the Indian tax attributable to that specific income.
Step-by-step process for claiming DTAA relief:
First, you must file Form 67 on the income tax e-filing portal before submitting your ITR. This form requires details about your foreign income and taxes paid abroad. The form asks for specific information about the nature of income, amount earned, and tax deducted in the foreign country.
Second, maintain comprehensive documentation, including brokerage statements showing dividend payments and tax withholdings. US brokers typically provide Form 1042-S annually, which details dividends paid and taxes withheld. Keep these forms as primary evidence for claiming relief.
Third, declare the gross dividend amount in your Indian tax return under "income from other sources." Calculate your Indian tax liability on this gross amount. Then claim foreign tax credit equal to the US tax withheld, subject to the limitation that the credit cannot exceed the Indian tax on that income.
Practical DTAA example:
You received $2,000 in dividends during FY 2025-26. The US withheld $500 (25%) and you received $1,500. Your Indian tax slab is 30%.
You declare $2,000 as income in India. Indian tax on this amount: $2,000 × 30% = $600. You claim foreign tax credit of $500 for US tax already paid. Your additional tax liability in India becomes $600 - $500 = $100.
If your Indian slab rate were only 20%, your Indian tax would be $400. Since this is less than the $500 US tax paid, you can only claim credit up to $400. The remaining $100 US tax becomes a deadweight loss, which highlights the importance of tax planning.
ITR filing and compliance requirements
Proper compliance with Indian tax filing requirements ensures you avoid penalties while claiming all available benefits. The process involves selecting the correct ITR form, accurate reporting of foreign income and assets, and meeting prescribed deadlines.
Choosing the correct ITR form
Most individual investors with US stock holdings should use ITR-2 for filing their returns. This form accommodates income from foreign sources and capital gains from foreign assets. The form includes specific schedules for reporting foreign income and claiming foreign tax credits.
If you have business or professional income alongside your investment income, ITR-3 becomes applicable. This form provides more comprehensive sections for different income types while still accommodating foreign investment income.
ITR-1 and ITR-4, the simplified forms, cannot be used if you have foreign income or assets. Many taxpayers mistakenly try using these forms and face rejection or compliance issues later.
Reporting foreign assets and income
Schedule FA (Foreign Assets) requires detailed disclosure of your US stock holdings. You must report the country, nature of asset, date of acquisition, peak balance during the year, and closing balance. This schedule applies even if you didn't earn any income from the assets during the year.
The reporting requires fair market value of assets as of the last date of the financial year. For US stocks, use the closing price on March 31st converted at the exchange rate prescribed by the Reserve Bank of India. Many investors use incorrect exchange rates, leading to discrepancies.
Schedule FSI (Foreign Source Income) captures income earned from foreign assets. Report dividend income and capital gains separately with appropriate details. This schedule links to Schedule FA and helps establish the source of foreign income.
Filing deadlines and penalties
The standard deadline for ITR filing remains July 31st of the assessment year. However, this deadline often gets extended by the government. Extended deadlines typically come with late filing fees, making timely filing more economical.
Late filing attracts penalties under Section 234F of the Income Tax Act. The penalty ranges from ₹1,000 to ₹10,000 depending on your income level and delay period. Beyond December 31st of the assessment year, the return becomes a belated return with additional compliance requirements.
Missing the filing deadline also prevents you from carrying forward capital losses, which can be valuable for future tax planning. This consequence makes timely filing crucial for active investors.
RBI and FEMA regulations
The Reserve Bank of India regulates foreign exchange transactions under the Foreign Exchange Management Act (FEMA). These regulations ensure proper monitoring of foreign investments while allowing legitimate investment opportunities for residents.
Liberalised Remittance Scheme details
The Liberalised Remittance Scheme (LRS) allows Indian residents to invest up to USD 250,000 annually in foreign assets. This limit covers all foreign investments including stocks, real estate, education, and other permitted transactions. The limit is per individual per financial year and doesn't carry forward to subsequent years.
The scheme covers various purposes including portfolio investments, direct investments, real estate purchases abroad, education expenses, and medical treatment. For stock investments, you must route the transaction through authorized dealer banks with proper documentation.
LRS transactions require Tax Collected at Source (TCS) at 5% on remittances exceeding ₹7 lakh annually for certain purposes. However, portfolio investments typically qualify for a higher threshold of ₹7 lakh per purpose. This TCS can be claimed as credit against your income tax liability.
Compliance and documentation requirements
All LRS transactions must be reported to the bank with Form A2. This form requires details about the purpose of remittance, beneficiary information, and nature of investment. Banks verify these details before processing the remittance.
You must also submit a Chartered Accountant certificate for remittances exceeding USD 25,000 for certain purposes. While this requirement doesn't typically apply to portfolio investments, some banks may request additional documentation for large amounts.
The RBI requires annual reporting of foreign assets exceeding specified thresholds. This reporting happens automatically through your ITR filing for most retail investors, but separate reporting may be required in some cases.
Disclaimer: This blog provides general information on US stock taxation for Indian investors and is not professional tax or legal advice. Please consult a qualified advisor for personalized guidance.
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.
Get paid globally. Keep more of it.
No FX markups. No GST. Funds in 1 day.
Tax implications for Indian residents investing in the US stock market (FY 2025-26)
More Indian investors are exploring the US stock markets to diversify their portfolios. Popular US stocks like Apple, Tesla, and Microsoft offer growth potential beyond Indian markets. However, understanding tax implications for Indian residents investing in the US stock market is crucial for maximising returns and staying compliant.
The rise of digital investment platforms has made US stock investing accessible to retail investors. Yet many investors overlook the complex tax implications that come with cross-border investing. This oversight can lead to unnecessary tax payments or compliance issues with Indian tax authorities.
This complete guide covers US and Indian tax rules, double taxation relief, RBI regulations, and ITR filing requirements for FY 2025-26. Understanding these rules helps you make informed investment decisions while optimising your tax obligations.
Types of income from US stocks
When you invest in US stocks, you earn two distinct types of income that face different tax treatment. Dividends represent regular payments that companies make to shareholders from their profits. These payments typically occur quarterly and provide a steady income to investors. Capital gains, on the other hand, represent the profit you make when selling shares at a higher price than your purchase cost.
The distinction between these income types matters significantly for tax planning. Dividends face immediate tax obligations in both countries, while capital gains only trigger tax when you actually sell the shares. This timing difference gives you more control over when to realise capital gains for tax optimisation.
Understanding these income types helps you plan your investment strategy better. Some investors prefer dividend-paying stocks for regular income, while growth investors focus on capital appreciation. Your choice affects your overall tax liability and cash flow patterns.
US taxation on Indian investors
The United States has specific tax rules for foreign investors that generally favour non-residents. These rules stem from the country's desire to attract foreign capital while ensuring some tax collection on US-sourced income.
Dividend taxation in US
The US government withholds 25% tax on dividends paid to Indian residents under the India-US Double Taxation Avoidance Agreement (DTAA). This preferential rate applies because of the tax treaty between the two countries. Without this treaty, foreign investors would face a 30% withholding rate.
The withholding happens automatically at the source. When a US company declares a dividend, the paying agent deducts the tax before crediting the amount to your account. This process ensures the US government collects its share without requiring you to file a US tax return.
Here's how dividend taxation works in practice: You receive $100 in dividends from Apple stock. The US automatically withholds $25 as tax. Your brokerage account shows a credit of $75. The $25 withheld gets reported to the IRS on your behalf through forms like 1042-S.
This withholding applies to all dividend payments, including those automatically reinvested in additional shares through dividend reinvestment plans. Many investors overlook this detail when calculating their actual returns from US dividend stocks.
Capital gains taxation in the US
The US follows a territorial approach to capital gains taxation for non-residents. This means the US does not tax capital gains for Indian residents on US stock sales, provided you don't meet the substantial presence test for US tax residency.
This favourable treatment makes US stocks attractive for Indian investors focused on capital appreciation. You can buy and sell US stocks multiple times without worrying about US capital gains tax. This advantage becomes significant for active traders who might otherwise face substantial tax bills.
However, this benefit only applies to portfolio investments. If you're engaged in a US trade or business, different rules may apply. For most retail investors buying stocks through Indian brokers or US online platforms, the portfolio investment classification applies automatically.
The absence of US capital gains tax doesn't eliminate your tax obligations entirely. India taxes these gains based on your holding period and applicable rates, which we'll discuss in detail.
Indian taxation on US stock investments
India follows a residence-based taxation system that taxes global income for residents. This means you must pay Indian taxes on all your worldwide income, including earnings from US stocks. The Indian tax system treats different types of income differently, affecting your overall tax liability.
Dividend tax in India
Indian tax law treats dividends from US stocks as "income from other sources" in your tax return. You must add the gross dividend amount to your total income and pay tax at your applicable slab rate. This treatment aligns with India's taxation of all dividend income, whether domestic or foreign.
The gross dividend amount includes the portion withheld as US tax. So if you received $75 after US withholding from a $100 dividend, you still declare $100 as income in India. This approach ensures the Double Taxation Avoidance Agreement works correctly.
Your Indian tax rate on dividend income depends on your total income for the year. If you're in the 30% tax bracket, you'll pay 30% tax on the dividend income. However, you can claim credit for the 25% already paid in the US, reducing your net Indian tax to just 5% of the dividend amount.
This credit mechanism prevents double taxation while ensuring both countries collect appropriate taxes. The process requires proper documentation and forms, which many investors overlook. Failing to claim this credit means paying unnecessary additional tax.
Capital gains tax in India
India's capital gains taxation depends heavily on your holding period. The government encourages long-term investing by providing preferential tax rates for investments held longer than 24 months. This threshold applies specifically to unlisted foreign securities, which includes most US stocks.
Long-term capital gains (LTCG) apply when you hold US stocks for more than 24 months before selling. The tax rate stands at 20% plus applicable surcharge and cess. However, you get the benefit of indexation, which adjusts your purchase price for inflation. This adjustment reduces your taxable gain and overall tax liability.
Short-term capital gains (STCG) apply to stocks sold within 24 months of purchase. These gains get added to your regular income and taxed at your applicable slab rate. For high-income individuals, this can mean effective tax rates exceeding 30% plus surcharge and cess.
Detailed capital gains calculation example
Let's walk through a comprehensive example to illustrate the calculation process:
You bought 10 shares of Microsoft at $300 per share in January 2022 when the exchange rate was ₹75 per dollar. Total investment: $3,000 or ₹2,25,000.
You sold these shares in March 2025 at $400 per share when the exchange rate was ₹83 per dollar. Sale proceeds: $4,000 or ₹3,32,000.
Since you held the shares for more than 24 months, this qualifies as LTCG. For indexation, assume the cost inflation index increased from 317 in 2022-23 to 348 in 2024-25.
Indexed cost = ₹2,25,000 × (348/317) = ₹2,47,000 Taxable LTCG = ₹3,32,000 - ₹2,47,000 = ₹85,000 Tax at 20% = ₹17,000 plus applicable surcharge and cess
Without indexation, your gain would have been ₹1,07,000, resulting in ₹21,400 tax. The indexation benefit saved you ₹4,400 in taxes.
Claiming double taxation relief under DTAA
The India-US Double Taxation Avoidance Agreement prevents you from paying tax twice on the same income. However, claiming this relief requires following specific procedures that many investors miss. Understanding and implementing these procedures can result in substantial tax savings.
The DTAA relief works through a foreign tax credit mechanism. You pay the full Indian tax on your global income, then claim credit for taxes already paid in the US. The credit cannot exceed the Indian tax attributable to that specific income.
Step-by-step process for claiming DTAA relief:
First, you must file Form 67 on the income tax e-filing portal before submitting your ITR. This form requires details about your foreign income and taxes paid abroad. The form asks for specific information about the nature of income, amount earned, and tax deducted in the foreign country.
Second, maintain comprehensive documentation, including brokerage statements showing dividend payments and tax withholdings. US brokers typically provide Form 1042-S annually, which details dividends paid and taxes withheld. Keep these forms as primary evidence for claiming relief.
Third, declare the gross dividend amount in your Indian tax return under "income from other sources." Calculate your Indian tax liability on this gross amount. Then claim foreign tax credit equal to the US tax withheld, subject to the limitation that the credit cannot exceed the Indian tax on that income.
Practical DTAA example:
You received $2,000 in dividends during FY 2025-26. The US withheld $500 (25%) and you received $1,500. Your Indian tax slab is 30%.
You declare $2,000 as income in India. Indian tax on this amount: $2,000 × 30% = $600. You claim foreign tax credit of $500 for US tax already paid. Your additional tax liability in India becomes $600 - $500 = $100.
If your Indian slab rate were only 20%, your Indian tax would be $400. Since this is less than the $500 US tax paid, you can only claim credit up to $400. The remaining $100 US tax becomes a deadweight loss, which highlights the importance of tax planning.
ITR filing and compliance requirements
Proper compliance with Indian tax filing requirements ensures you avoid penalties while claiming all available benefits. The process involves selecting the correct ITR form, accurate reporting of foreign income and assets, and meeting prescribed deadlines.
Choosing the correct ITR form
Most individual investors with US stock holdings should use ITR-2 for filing their returns. This form accommodates income from foreign sources and capital gains from foreign assets. The form includes specific schedules for reporting foreign income and claiming foreign tax credits.
If you have business or professional income alongside your investment income, ITR-3 becomes applicable. This form provides more comprehensive sections for different income types while still accommodating foreign investment income.
ITR-1 and ITR-4, the simplified forms, cannot be used if you have foreign income or assets. Many taxpayers mistakenly try using these forms and face rejection or compliance issues later.
Reporting foreign assets and income
Schedule FA (Foreign Assets) requires detailed disclosure of your US stock holdings. You must report the country, nature of asset, date of acquisition, peak balance during the year, and closing balance. This schedule applies even if you didn't earn any income from the assets during the year.
The reporting requires fair market value of assets as of the last date of the financial year. For US stocks, use the closing price on March 31st converted at the exchange rate prescribed by the Reserve Bank of India. Many investors use incorrect exchange rates, leading to discrepancies.
Schedule FSI (Foreign Source Income) captures income earned from foreign assets. Report dividend income and capital gains separately with appropriate details. This schedule links to Schedule FA and helps establish the source of foreign income.
Filing deadlines and penalties
The standard deadline for ITR filing remains July 31st of the assessment year. However, this deadline often gets extended by the government. Extended deadlines typically come with late filing fees, making timely filing more economical.
Late filing attracts penalties under Section 234F of the Income Tax Act. The penalty ranges from ₹1,000 to ₹10,000 depending on your income level and delay period. Beyond December 31st of the assessment year, the return becomes a belated return with additional compliance requirements.
Missing the filing deadline also prevents you from carrying forward capital losses, which can be valuable for future tax planning. This consequence makes timely filing crucial for active investors.
RBI and FEMA regulations
The Reserve Bank of India regulates foreign exchange transactions under the Foreign Exchange Management Act (FEMA). These regulations ensure proper monitoring of foreign investments while allowing legitimate investment opportunities for residents.
Liberalised Remittance Scheme details
The Liberalised Remittance Scheme (LRS) allows Indian residents to invest up to USD 250,000 annually in foreign assets. This limit covers all foreign investments including stocks, real estate, education, and other permitted transactions. The limit is per individual per financial year and doesn't carry forward to subsequent years.
The scheme covers various purposes including portfolio investments, direct investments, real estate purchases abroad, education expenses, and medical treatment. For stock investments, you must route the transaction through authorized dealer banks with proper documentation.
LRS transactions require Tax Collected at Source (TCS) at 5% on remittances exceeding ₹7 lakh annually for certain purposes. However, portfolio investments typically qualify for a higher threshold of ₹7 lakh per purpose. This TCS can be claimed as credit against your income tax liability.
Compliance and documentation requirements
All LRS transactions must be reported to the bank with Form A2. This form requires details about the purpose of remittance, beneficiary information, and nature of investment. Banks verify these details before processing the remittance.
You must also submit a Chartered Accountant certificate for remittances exceeding USD 25,000 for certain purposes. While this requirement doesn't typically apply to portfolio investments, some banks may request additional documentation for large amounts.
The RBI requires annual reporting of foreign assets exceeding specified thresholds. This reporting happens automatically through your ITR filing for most retail investors, but separate reporting may be required in some cases.
Disclaimer: This blog provides general information on US stock taxation for Indian investors and is not professional tax or legal advice. Please consult a qualified advisor for personalized guidance.
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.
Get paid globally. Keep more of it.
No FX markups. No GST. Funds in 1 day.