Calculating Capital Gains from U.S. Stocks: A Detailed Guide
- Farheen Mukadam
- Jul 14
- 8 min read
Capital gains from selling shares listed on Indian stock exchanges are taxed differently from gains from selling shares on American stock exchanges. Through a variety of channels, including the Liberalised Remittance Scheme (LRS) under the FEMA Act, Overseas Direct Investment (ODI), Income Tax Act 1961 compliances, etc., the RBI permits investment in overseas enterprises. Investors who purchase foreign equities may be required to abide by these rules established by the Indian government. Only taxpayers who are residents or ordinarily residents are required to declare capital gains or income from U.S. stocks in India. Here is a detailed guide on the calculation of capital gains from U.S. stocks.
Table of Contents
How to Invest in U.S. Stocks?
Thanks to helpful policies like the RBI's Liberalised Remittance Scheme (LRS) and the emergence of user-friendly digital platforms from brokers and fintech startups, investing in U.S. stocks from India has become much easier. In essence, there are two main ways to get this exposure. One option available to investors is direct stock ownership, which entails setting up a suitable broking account and buying shares of certain U.S.-listed businesses of their choosing. They may also choose indirect investing options, mostly through Indian mutual funds or exchange-traded funds (ETFs) that are made especially to invest in U.S. stocks or follow important U.S. market indices such as the Nasdaq 100 or S&P 500.
Benefits of Investing in U.S. Stocks
Due to geographical diversification, investing in equities from the United States or any other foreign nation provides investors with stability and diversity in returns. In the long run, investing in scalable and appealing multinational corporations can yield enormous returns. If you are familiar with FAANG (Facebook, Apple, Amazon, Netflix, and Google), you should know that investing in these internet behemoths ten years ago would have yielded exceptional profits. Assuming an investor made $10,000 in the FAANG portfolio in 2012, their investment would grow to $2,06,506 in 2020, yielding returns of about 19.65% over eight years. The exponential growth of these enterprises was not anticipated by many.
Residential Status and Taxability
Regarding taxes, a taxpayer's residence status is determined by residency regulations established by the Income Tax Act. To comprehend the tax implications on earnings from foreign investments, let's first ascertain the taxpayer's residential status. Three kinds of an individual's residence status have been established by the Income Tax Act, specifically:
Residents and Ordinary Residents (ROR): In India, residents' worldwide income is subject to taxation.
Resident not ordinarily resident (RNOR): Money earned or received in India from a foreign country from a business or profession established or run in India is the sole situation in which it becomes taxable.
Non-Resident Indians: NRIs are subject to the same taxes as RNORs.
According to the guidelines outlined in the Income Tax Act, the residence status indicated above is to be determined by the number of days a person spent in India during the relevant year and prior years. Therefore, income from U.S. equities will only be taxed in India under section 6 of the Income Tax Act if you are a resident and ordinarily resident. Dividend income, capital gains from foreign equities, or capital gains from U.S. mutual funds are the main sources of income from foreign assets.
Capital Gains on U.S. Stocks
When U.S. equities are sold for more than their acquisition price, a capital gain results. The good news is that there won't be any tax implications in the United States if the investment is sold for a profit. This is because capital gains made by non-residents of the United States are not subject to tax implications or withholding in the country. However, you must comply with India's tax regulations as a tax resident, which means the following issues will arise:
Gains on equities that are not listed in India will be handled the same as gains on shares that are not listed. As a result, the returns will be classified as either short-term or long-term based on how long the investment is held.
Long-Term Capital Gain on U.S. Stocks
It will be regarded as a long-term capital gain if the shares are kept for more than 24 months before being sold. The sale of foreign equities that are not listed on the Indian exchange will provide an LTCG at a flat rate of 20% along with health and education cess (plus surcharge, if applicable). At the expense of the investment, the indexation benefit will also be accessible. A long-term capital gain from the sale of foreign equities that are not listed on the Indian exchange, however, would be leviable at a fixed rate of 12.5% (plus health and education cess, plus surcharge, if applicable), without the benefit of indexation, as per Budget 2024, effective July 23, 2024.
Short-Term Capital Gain on U.S. Stocks
The shares will be regarded as short-term capital gains if they are held for less than 24 months before being sold. Conversely, any STCG from the sale of foreign stock is included in total income and subject to taxation at slab rate.
The following table summarises the tax rates on U.S. stocks:
The Impact of Double Tax Avoidance Agreement (DTAA) on U.S. Stock Ownership
With over 100 nations, the Indian government has signed the Double Tax Avoidance Agreement (DTAA), which facilitates the claim of tax credits in the event of double taxation. When income is earned in one nation and the recipient is a tax resident in another, DTAA sorts the issue. In this case, the originating country may impose taxes on the same income under the source rule, and the receiving country may impose taxes on the same income under the resident rule. The DTAA provision is especially important for income that is subject to both national taxes and for obtaining favourable tax rates in the country of origin.
Capital Gains from U.S. Stocks: Capital gains from U.S. stocks will only be subject to taxation in India by the Indian tax resident (ROR). As a result, Indian tax residents with ROR status are exempt from paying any taxes on their accumulated gains in the United States. Only in India are they required to pay taxes. In this instance, the DTAA is not really relevant.
Dividend Income from U.S. Stocks: The United States is permitted to impose a 25% tax withholding on dividends declared by U.S. companies in accordance with Article 10 of the India-U.S. DTAA. In this instance, dividend income is taxable to Indian Tax Residents (RORs) in both India (the resident country) and the United States (the source country).
These taxpayers may, however, be eligible for relief under Section 90 of the Income-tax Act in conjunction with Article 25 of the U.S. Double Taxation Agreement, which addresses relief from double taxes in India. You can claim the tax that the United States withheld as a credit against your Indian income tax liability. This reduction is only available for typical Indian tax rates, though. You must file Form 67 prior to filing the ITR in order to be eligible for DTAA relief.
Illustration: For instance, an American corporation paid $1000 in dividend income and $2000 in short-term capital gains to Mr. X, a tax resident (ROR) in India. A $250 withholding tax certificate in Form 1042-S was issued, and there is a 25% tax withholding. Calculate Mr. X's tax liability in India since he is in the 30% tax slab.
STCG ($2000*83) = Rs. 166,000
Divided income ($1000*83) = Rs. 83,000
Total income= Rs. 249,000
Income tax applicable at 30%= Rs. 74,700
Less: Relief u/s 90= Rs. 20,750
(Lower of actual tax withholding or Indian average rate * Dividend Income
Actual tax withholding = Rs. 20,750
Average rate * dividend = (74,700/249,000 * 83,000) = Rs. 24,900)
Balance tax payable= Rs. 53,950
ITR Compliance Essentials for U.S. Investment Holders
It should be mentioned that even if your income is below the basic exemption limit taxable in India, you will still be required to file a tax return if you have financial interests in an offshore corporation or have invested in foreign equities. ITR-2 or ITR-3 has to be filed based on the nature of income earned.
Schedule FA: Disclosure of Foreign Assets It is required for tax residents (RORs) to disclose any information in this schedule if they hold U.S. equities, a U.S. bank account, or real estate investments.
Schedule FSI: Foreign Source of Income: Before submitting your ITR, you must fill out this schedule and file Form 67 if you have any income that is subject to double taxation and you wish to claim relief under section 90. The income tax department must receive the disclosure of information such as a list of overseas assets, bank account, income from foreign investments, foreign taxes paid, tax credit claimed under the relevant DTAA, etc.
Conclusion
Linking Indian cash to U.S. stocks is one of the finest strategies to make diversified investments. This provides access to well-known international companies like Tesla, Amazon, Apple, and others. Investors can place their money overseas and take advantage of quick trading chances and bright futures on the US stock market. However, it is crucial to understand the tax implications of these holdings and comply with the ITR filing norms to prevent delays and penalties.
Frequently Asked Questions
Can we invest in U.S. stocks from India?
Indians are able to invest in the US stock market. Purchasing and holding U.S. stocks in your portfolio can be done in a variety of ways. Among the well-liked choices are mutual funds, ETFs, and direct stocks. There are two ways to invest in U.S. stocks from India: directly and indirectly.
How to trade U.S. stocks in India?
By opening an overseas trading account with a domestic or international broker, you can make direct investments in the US stock market.
Are U.S. stocks taxable in India?
Yes, you are required to pay taxes in India on both dividends and capital gains from American equities. If you own equities for more than 24 months, you will be required to pay 12.5% LTCG tax on capital gains. Short-term gains are taxed at your slab rate.
Do I have to pay tax on U.S. stocks?
Yes, you are investing in US stocks, and as you are an Indian tax resident, you must pay taxes on any dividends and capital gains you receive.
How to calculate capital gains tax on foreign shares in India?
Short-term capital gains are subject to slab rates of taxation if you own the shares for less than 24 months. Shares held for more than 24 months will be subject to long-term capital gain tax, which is 20% with indexation. With effect from July 23, 2024, this rate has been lowered to 12.5% without the benefit of indexation.
How do I calculate my stock gains?
You can use a stock gain tax calculator to calculate your gains on Indian or international stocks effortlessly.
What is the most recent update on the LRS Limit for investing in US stocks?
According to the Finance Act of 2023 and subsequent clarifications, no tax collected at source (TCS) will be applied to any outward remittance made by an individual for the purpose of investing in U.S. stocks up to Rs 700,000. Over Rs 700,000 in outgoing remittances would incur a 20% TCS fee. When you file your ITR, you can claim this tax as a credit, and it will appear in your 26AS.
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