Buying and Selling Foreign Stocks: Reporting Gains in ITR-2
- Rashmita Choudhary
- Jul 24
- 9 min read
With the growing globalization of investments, many taxpayers in India are now holding foreign stocks as part of their portfolios. The taxation of gains from foreign stocks has become a significant concern for Indian taxpayers, especially with the complexity of the tax rules and regulations surrounding international investments. Whether you are selling foreign stocks or receiving dividends, understanding how to report your income from these sources accurately in the Income Tax Return (ITR) is crucial to avoid penalties and ensure compliance with tax laws.
In India, foreign stock investments fall under the category of capital gains or income from other sources, depending on the nature of the transaction. Reporting such gains accurately in your tax filings is essential to avoid unnecessary scrutiny or tax notices. For those filing under ITR-2, the process of reporting capital gains, dividends, and other income from foreign stocks requires attention to detail.
Table of Contents
Taxation of Gains from Foreign Stocks
The taxation of gains from foreign stocks depends on the nature of the investment and the holding period of the stocks. Here’s a breakdown of how different types of gains are taxed:
Short-Term Capital Gains (STCG): If foreign stocks are held for less than 24 months before being sold, the gains are considered short-term capital gains (STCG). STCG from foreign stocks is taxable at the individual’s applicable income tax slab rate, as these gains do not qualify for the concessional 15% rate under Section 111A because:
Section 111A's 15% STCG rate applies only to equity shares listed on Indian stock exchanges where Securities Transaction Tax (STT) is paid.
Foreign stocks are not subject to STT and hence are taxed at slab rates for STCG.
Long-Term Capital Gains (LTCG): If foreign stocks are held for more than 24 months, the gains are classified as long-term capital gains (LTCG). LTCG on foreign stocks is now taxed at a flat rate of 12.5% without the benefit of indexation. Indexation benefits, which previously allowed adjustment of the acquisition cost for inflation to reduce taxable gains, have been discontinued under the current tax regime.
Additionally, the holding period for classifying gains as long-term has been reduced from 36 months to 24 months, and the earlier 20% LTCG tax rate with indexation does not apply anymore.
Dividends: Dividends received from foreign stocks are subject to tax under "Income from Other Sources" and are taxed at applicable income tax slab rates. Additionally, tax is deducted at source (TDS) by the foreign country, and you may be eligible to claim a foreign tax credit for the TDS paid in the foreign jurisdiction, provided there is a Double Taxation Avoidance Agreement (DTAA) between India and that country.
To summarize:
Holding period > 24 months: LTCG taxed at 12.5% flat rate, no indexation
Holding period ≤ 24 months: Short-term capital gains taxed at your applicable income tax slab rates
Reporting in ITR-2
For individuals holding foreign stocks, reporting capital gains and dividends in the Income Tax Return is done through ITR-2. This form is designed for individuals and Hindu Undivided Families (HUFs) who have income from sources such as capital gains, foreign assets, or income from more than one house property.
Capital Gains: Foreign stocks’ capital gains should be reported under the 'Capital Gains' section of ITR-2. You need to provide details such as the name of the stock, the number of shares sold, the date of acquisition, the sale price, and the capital gain amount. Remember to specify whether the gain is short-term or long-term, as the tax rates differ.
Dividends: Any dividends received from foreign stocks need to be reported under the 'Income from Other Sources' section. You will need to mention the foreign dividends in this section, along with the TDS details, if applicable.
Foreign Tax Credit (FTC): If tax has been deducted in the foreign country on dividends or capital gains, you can claim a Foreign Tax Credit to avoid double taxation. The credit is claimed under the 'Foreign Tax Credit' section, and the amount should be reduced from your overall tax liability.
Disclosure Requirements and Penalties
When reporting foreign income, the Income Tax Department requires full disclosure of foreign assets, including stocks, bank accounts, and other investments. Failing to do so can result in penalties and scrutiny from the tax authorities. Non-disclosure of foreign income or foreign assets is considered tax evasion, and the penalties can be severe.
Penalty for Non-Disclosure: Penalties for non-disclosure of foreign income or foreign assets can range from a fine of up to 30% of the undisclosed income to imprisonment in cases of willful concealment. The tax department has the authority to conduct detailed investigations into undeclared foreign income.
Tax Audit: If your foreign income exceeds a certain threshold, or if the foreign income is significant in comparison to your total income, you may be required to undergo a tax audit. Failing to comply with the tax audit requirements can result in further penalties.
Step-by-Step: How to Report in ITR-2
Filing ITR-2 with foreign income requires a detailed approach to ensure all aspects of foreign stock investments are reported accurately:
Personal Information: Start by filling in your personal details, such as PAN, name, and address. Ensure that all personal information is accurate.
Capital Gains Section: In the 'Capital Gains' section, report the sale of foreign stocks under either short-term or long-term capital gains. Include the sale price, acquisition cost, and the capital gain amount. You’ll also need to provide details about the foreign country where the stocks were listed.
Income from Other Sources: For dividends, report them in the 'Income from Other Sources' section. Include the gross dividend amount, and if TDS has been deducted in the foreign country, enter the details for foreign tax credit.
Foreign Tax Credit: If you have paid foreign taxes, report them in the 'Foreign Tax Credit' section. Fill in the necessary details and include the TDS certificate from the foreign country to claim the credit.
Verification and Submission: After filling out the form, review all the information for accuracy. Once verified, submit the form electronically. You may also need to verify your submission using Aadhaar OTP, net banking, or a physical verification option.
Latest Updates (Budget 2025 & News)
The latest updates in the Budget 2025 may include amendments related to the taxation of foreign income. This could involve changes to tax rates, exemptions, or procedures for claiming foreign tax credits. It's important to stay updated on these changes to ensure compliance with the most recent regulations. The government might also introduce provisions for simplified reporting for foreign investments or ease the process for claiming foreign tax credits. Be sure to refer to the official Income Tax Department website and budget announcements for the latest changes.
Conclusion
Reporting gains from foreign stocks in ITR-2 is crucial for ensuring tax compliance and avoiding penalties. Accurate reporting of capital gains, dividends, and foreign taxes paid is necessary to avoid issues with the tax authorities. By following the correct steps in ITR-2 and staying updated with the latest tax developments, taxpayers can manage their foreign stock investments effectively. The proper filing of foreign income will ensure that you are not only compliant with the law but also eligible for benefits like foreign tax credits, reducing the burden of double taxation. For a simplified and hassle-free filing experience, it is highly recommended to download theTaxBuddy mobile app.
Frequently Asked Question (FAQs)
Q1: How do I report capital gains from foreign stocks in ITR-2?
To report capital gains from foreign stocks in ITR-2, navigate to the 'Capital Gains' section. You will need to provide the sale price, the acquisition cost (adjusted for any applicable expenses or adjustments), and the resulting capital gain or loss. It's important to classify the gain as either short-term or long-term, based on the holding period of the stocks. Short-term capital gains (STCG) are typically taxed at 15%, while long-term capital gains (LTCG) over ₹1 lakh are taxed at 20% with indexation benefits.
Q2: Are dividends from foreign stocks taxed in India?
Yes, dividends from foreign stocks are taxable in India as income from other sources. These dividends are subject to the applicable income tax slab rates depending on your total income. If any tax has been withheld by the foreign country, you may be eligible for a Foreign Tax Credit (FTC), which can reduce your overall tax liability, subject to conditions.
Q3: How can I claim a Foreign Tax Credit (FTC) on foreign dividends?
If tax has been deducted in the foreign country on dividends received, you can claim a Foreign Tax Credit (FTC) by reporting the foreign taxes paid under the 'Foreign Tax Credit' section in ITR-2. You must provide details of the tax deducted, including the amount of tax paid and the country of origin. The FTC helps avoid double taxation by allowing you to offset the taxes paid abroad against your tax liability in India, subject to the provisions of the Double Taxation Avoidance Agreement (DTAA).
Q4: What is the penalty for not reporting foreign income or foreign stocks?
Failing to report foreign income or foreign stocks in your ITR can result in serious penalties. Under the Income Tax Act, penalties can include fines of up to 30% of the undisclosed income. In cases of willful concealment or fraudulent intent, imprisonment can also be imposed. It's essential to disclose all foreign income and assets accurately to avoid such penalties.
Q5: Do I need to file ITR-2 if I have foreign stock investments?
Yes, if you have foreign stock investments and earn capital gains or dividends from them, you must file ITR-2. This form allows you to report income from foreign sources, including capital gains, dividends, and interest, and to claim relevant deductions or tax credits. ITR-2 is specifically designed for individuals with income from sources other than a business or profession.
Q6: Can I file ITR-2 with foreign income without a tax audit?
You do not need a tax audit if your foreign income is below the threshold for mandatory audit. For individuals, the audit requirement applies if your total turnover exceeds ₹1 crore for business or ₹50 lakh for professional income. However, if your foreign income is substantial or you are involved in complex foreign transactions, a tax audit may be required for compliance purposes.
Q7: What documents are needed to file foreign income in ITR-2?
When filing foreign income in ITR-2, you will need the following documents:
TDS certificates from the foreign country or proof of tax deducted at source (TDS).
Proof of the acquisition and sale of foreign stocks (e.g., contract notes, sale statements).
Details of any foreign taxes paid, such as withholding taxes on dividends or capital gains.
Bank statements or foreign income reports showing dividends, interest, or other income earned.
These documents help substantiate the foreign income and tax credits you claim.
Q8: How do I calculate the tax on gains from foreign stocks?
The tax on gains from foreign stocks depends on the holding period and current tax regulations:
If you hold the foreign stocks for 24 months or less, the gains are considered Short-Term Capital Gains (STCG) and are taxed at your applicable income tax slab rate.
If you hold the foreign stocks for more than 24 months, the gains are classified as Long-Term Capital Gains (LTCG) and are taxed at a flat rate of 12.5% without indexation benefits.
Note: Unlike equity shares listed on Indian stock exchanges, foreign stocks do not qualify for the ₹1 lakh exemption on LTCG under Section 112A.
Q9: Can I report foreign stock dividends in INR?
Yes, foreign stock dividends should be reported in Indian Rupees (INR). You need to convert the foreign currency amount into INR based on the exchange rate applicable on the date the dividend was received. Ensure that you use the correct exchange rate to avoid discrepancies and ensure accurate reporting of income.
Q10: Is there any tax relief for foreign tax paid on dividends?
Yes, if you have paid taxes on dividends in a foreign country, you can claim tax relief by reporting the foreign tax paid under the 'Foreign Tax Credit' section of ITR-2. This is subject to the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the country where the tax was paid. The FTC allows you to offset the foreign tax paid against your Indian tax liability, reducing the possibility of double taxation.
Q11: What happens if I fail to report foreign income in my ITR?
Failure to report foreign income in your ITR can lead to penalties, including interest on unpaid taxes and a possible legal inquiry. If the omission is discovered by the Income Tax Department, penalties of up to 30% of the undisclosed income may be imposed. Moreover, failure to disclose foreign income may result in prosecution for tax evasion. It's critical to accurately report all income, including foreign sources, to avoid such penalties.
Q12: How often should I update my foreign income details in ITR?
You should update your foreign income details every year in your ITR based on the income received or earned during the relevant assessment year. Ensure that you report any changes in your foreign investments, dividends, interest, or capital gains, and that your foreign tax credits and TDS certificates are accurate and up-to-date to avoid issues with the tax authorities. Regular updates will ensure that your returns are compliant and reduce the risk of discrepancies.
