Indian investors can invest in the US stock market. For Indian investors, proactively looking for overseas stock market investment opportunities to diversify a portfolio, tax implications remain a major concern. But the number of Indian investors is growing in the US stock market, and hence, we feel that it needs a detailed discussion on the tax obligations that you need to meet.
For Indian investors seeking overseas investment opportunities, the tax policies are relatively straightforward. Tax liabilities for Indian investors in the US stock market depend on two factors – the nature of the earning and secondly, residential status in India. We will discuss the tax implications for each category separately.
Nature of Earning
Earning from stock investment arises from two sources – dividend earning and capital gain from the selling of stocks. Here is how taxes will impact your final return from investing in the US stock market.
Dividend tax: There are two parts of the tax – one is in the US and the other in India. In the US, if you invest in stocks or ETFs that pay a dividend, you will have to pay dividend tax at 25% flat rate. India and the US have a tax treaty under which Indian investors need to pay a lower tax rate compared to foreign investors. It also prevents double taxation under the Double Taxation Avoidance Agreement (DTAA) between India and the US.
The tax is withheld at the source, meaning you will receive 75 percent as cash pay-out. The dividend becomes taxable in India under dividend tax policy, which became applicable to all types of dividend earnings in India from FY 2020-21.
However, because of the DTAA agreement, you can avoid double taxation and adjust the tax paid in the US with tax liability in India.
The second type of tax that you need to concern yourself with is the capital gain tax. In India, a capital gain arising from the sales of any asset is subject to capital gain tax – long-term and short-term, depending on the duration of the investment period. A capital gain tax also arises from trading of stocks in the US.
Capital gain tax: When you sell stocks, ETFs or any other form of assets in the US market, it generates capital gain for you. It is the residual value of sales price minus acquisition cost. Luckily, there is no capital gain tax in the USA. But it becomes taxable in India.
Capital gain tax is of two types,
Long-term capital gain tax: If you hold an investment in a foreign company for more than 24 months, it becomes eligible for long-term capital gain tax at the rate of 20 percent.
Short-term capital gain: If you liquidate stocks before 24 months it will fall under the category of short-term capital gain in India. The tax amount will depend on your income tax bracket.
Let’s see the situation with the help of an example.
Suppose you have purchased stocks of company ABC in the US for USD 600 and sold them at USD 800. If you sell the shares after 24 months, a long-term capital gain tax of 20 percent will impose on USD (800 – 600) or USD 200. In case you sell the asset before 24 months, the capital gain will get added to your income and charged according to income tax slabs for the year.
Taxes Based On Residential Status
If you are a non-redient Indian, your tax implications will not be the same as an ordinary residential Indian.
Based on your residential status, you can fall under the categories of resident and ordinarily resident (ROR), resident but not ordinarily resident (RNOR), and non-resident Indians (NRI). Accordingly, tax implications will also vary.
For ROR or ordinary residents, global income, including earning from stock investment in the US, is subject to tax as per the Income Tax Act.
If you belong to the RNOR or NRI category, your overseas income is taxable only if you receive the payment in India or if it arises from a business controlled by an Indian corporation.
So, you can see that it is not difficult to understand the income tax implications of investing in US stocks for Indians. But because of a lack of discussions on the issue, many investors prefer to stay away from overseas investments.
You can diversify your portfolio by investing in the US stock market. We hope the above discussion will clear your doubts regarding US stock market investment.