Understanding taxation on US stocks in India: A guide for investors

Did you know that Indian investments in US stocks grew by over 200% in 2020-21, making tax compliance more crucial than ever?

Understanding the taxation of US stocks in India can help you avoid costly mistakes and maximise your investment returns. US stock investments trigger tax obligations in both countries and knowing the rules can prevent unexpected tax bills.

This guide breaks down everything you need to know about US stock taxation for Indian investors. You'll learn about dividend taxes, capital gains calculations, tax treaty benefits, and practical strategies to optimise your tax position. Whether you're a seasoned investor or just starting with US stocks, this information will help you make tax-efficient investment decisions.

Understanding tax framework for US stocks

The tax framework for US stocks follows specific agreements between India and the United States. Your investments are protected by the India-US Double Taxation Avoidance Agreement (DTAA), which prevents you from paying taxes twice on the same income.

Overview of India-US tax treaties

The DTAA sets clear taxation guidelines, including a 25% dividend withholding tax rate. You can claim credit for taxes paid in the US against your Indian tax liability by filing Form 67 along with Schedule TR in your ITR. This treaty considers India a developing nation and includes special provisions to prevent misuse through third-country routing.

Regulatory bodies involved

Key regulatory bodies oversee your US stock investments:

• Securities and Exchange Commission (SEC) - Enforces securities laws and regulates US exchanges
• Financial Industry Regulatory Authority (FINRA) - Monitors trade activity and oversees broker-dealers

These bodies work together to protect your interests and ensure fair market practices.

Recent changes in tax regulations

Budget 2024 brought significant changes to benefit investors like you:

• Reduced long-term capital gains tax from 20% to 12.5% for holdings over 24 months
• Removed indexation benefits while maintaining parity with Indian equity taxation
• Added a 20% Tax Collected at Source (TCS) for annual remittances above Rs. 7 lakh

These changes aim to smooth your global investment journey while ensuring proper tax compliance. Uniform tax treatment encourages more participation in international markets.

Dividend taxation mechanism

When you receive dividends from US stocks, understanding the taxation mechanism helps you plan your investments better. The US applies a 25% withholding tax on dividend payments to Indian investors.

Withholding tax calculations

Your dividend income faces initial taxation in the US before reaching your account. For example, if you receive a dividend of ₹8,438.05, the US will withhold ₹2,109.51 (25%), leaving you with ₹6,328.53. The exchange rate for conversion is taken from the last day of the month before the dividend declaration.

DTAA benefits and limitations

The India-US Double Taxation Avoidance Agreement offers these key benefits:

• Protection against paying tax twice on the same income
• Reduced withholding tax rate of 25% instead of higher rates
• Ability to claim credit for taxes paid in the US

However, you should note certain limitations. The difference in financial years between the US (calendar year) and India (April-March) can create reporting complexities. exchange rate fluctuations might also affect your tax calculations.

Tax credit claim process

To claim credit for taxes paid in the US, you must:

• File Form 67 before submitting your Income Tax Return
• Include Schedule TR with your tax filing
• Report the gross dividend amount in your Indian income
• Calculate tax liability based on your applicable slab rate

For instance, if your Indian tax liability on the dividend is ₹2,531.41, and you've already paid ₹2,109.51 in the US, you only need to pay the difference of ₹421.90 in India. This process ensures you don't bear an excessive tax burden while complying with both countries' regulations.

Remember to properly document your dividend receipts and tax payments to ensure the smooth processing of your tax credit claims.

Capital gains computation

Calculating capital gains on your US stock investments requires attention to both holding periods and currency fluctuations. Here's what you need to know about computing your tax liability effectively.

Long-term vs short-term classification

The key factor in determining your tax rate is the holding period of your US stocks. If you hold stocks for more than 24 months, they qualify as long-term capital gains (LTCG). Starting July 23, 2024, LTCG will be taxed at 12.5% plus applicable surcharge and cess. For shorter holding periods, your gains are treated as short-term capital gains (STCG) and taxed at your income slab rate.

Cost basis determination

Your cost basis includes:

• Purchase price in rupees
• Brokerage fees
• Foreign exchange charges
• Other transaction costs

Currency conversion impact

Currency fluctuations can significantly affect your gains or losses. Here's how it works:

Let's say you invested ₹75,000 (USD 1,000 at ₹75 per dollar) in US stocks. When you sell at the same dollar value but at ₹78 per dollar, your proceeds would be ₹78,000. Even though the stock price remained unchanged, you'd have a taxable gain of ₹3,000 due to currency appreciation.

The exchange rate for tax calculations is taken from:

• Purchase date: Last day of the preceding month
• Sale date: Last day of the preceding month

Remember that currency movements can work both ways. A weakening rupee increases your returns in INR terms, while a strengthening rupee reduces them. For example, if Netflix's share price increased by 46.3%, but the rupee appreciated, your actual returns might be lower at 38.61%.

Keep detailed records of both stock prices and exchange rates at the time of each transaction. This documentation helps you accurately report gains and claim any applicable tax benefits.

Tax filing requirements

Filing taxes for your US stock investments requires careful attention to documentation and compliance requirements. The Indian income tax law mandates specific reporting for all foreign assets and income.

Required forms and documentation

To properly report your US stock investments, you need these essential documents:

• Schedule FA - For declaring foreign assets and accounts
• Schedule FSI - For reporting foreign-sourced income
• Schedule TR - For claiming tax treaty benefits
• Form 67 - For claiming foreign tax credits

Remember to convert all values to Indian currency using the telegraphic transfer buying rate.

Digital compliance platforms

Modern tax administration has evolved to embrace digital solutions. Cloud-based platforms now offer:

• Automated tax calculations with built-in validations
• Seamless integration with existing systems
• Real-time updates for tax regulation changes

These digital solutions help reduce compliance risks and speed up the filing process. They offer features like auto-fill of financial statements and bulk upload capabilities, making the task more efficient.

Common filing errors to avoid

Watch out for these frequent mistakes when filing your US stock taxes:

1. Incomplete Schedule FA: You must report all US stocks held during the financial year, even if your total income falls within the basic exemption limit.
2. Incorrect reporting period: For US investments, consider the accounting period from January to December when filing your returns.
3. Missing documentation: Ensure you have all supporting documents before starting the filing process. This includes statements showing:

• Peak value of investments during the accounting period
• Closing value at period end
• Gross interest received
• Total proceeds from sales

Remember that resident Indians must file returns if they hold foreign assets, regardless of their income level. To ensure accurate reporting, keep detailed records of all transactions, including purchase dates, sale proceeds, and dividend receipts.

Tax optimisation strategies

Smart tax planning can significantly boost your returns from US stock investments. Here's how to make your portfolio more tax-efficient.

Timing your investments

The holding period of your US stocks directly impacts your tax rate. With the new tax regime, holding stocks for more than 24 months qualifies you for a reduced LTCG rate of 12.5%. Consider this timeline when planning your buy and sell decisions.

Key timing strategies:

• Plan exits near the 24-month mark to benefit from lower LTCG rates
• Track currency fluctuations for optimal selling points
• Consider tax implications before year-end trades

Portfolio structuring techniques

Structure your portfolio to maximise tax benefits while maintaining your investment goals. The recent uniform tax treatment between Indian and US equities offers new opportunities for portfolio optimisation.

For effective structuring:

1. Balance short-term and long-term holdings
2. Consider currency exposure in your allocation
3. Track your cost basis meticulously
4. Document all transaction costs

Loss harvesting opportunities

Tax-loss harvesting helps reduce your tax liability by offsetting gains with losses. For example, if you have ₹1 lakh in short-term capital gains, selling stocks with unrealized losses of ₹60,000 can reduce your net STCG to ₹40,000, saving ₹9,000 in taxes.

Unlike the US market's 30-day wash sale rule, India doesn't explicitly restrict buying back stocks after harvesting losses. However, consult a Chartered Accountant before implementing this strategy, as tax authorities might scrutinise quick buybacks.

Remember that in India, you can carry forward capital losses for eight fiscal years. This gives you flexibility in planning your tax-loss harvesting strategy across multiple tax years.

These strategies can enhance your after-tax returns while maintaining compliance with Indian and US tax regulations.

Common challenges and solutions

Investing in US stocks brings unique challenges that need careful navigation. Here's how to handle the most common hurdles you'll face.

Double taxation issues

While double taxation concerns are valid, the India-US DTAA provides relief. You can claim credit for taxes paid in the US against your Indian tax liability. For example, if you pay a 25% tax on dividends in the US, you can offset this against your Indian tax obligation. The key is maintaining proper documentation of all tax payments and following the correct claim procedures.

Currency conversion fees

Your investment journey involves multiple currency conversion points that affect your returns. Here's what you need to know about the fees:

• Trading commission fees per transaction
• Currency conversion charges (typically 0.75% of the amount)
• Exchange process fees from securities exchanges
• Custody fees for holding foreign stocks

To minimise these costs, consider consolidating your trades and strategically planning your currency conversions. Remember that frequent trading can significantly impact your returns due to cumulative conversion fees.

Compliance bottlenecks

Meeting tax compliance requirements in two jurisdictions can be complex. The RBI's Liberalised Remittance Scheme (LRS) allows you to invest up to USD 250,000 annually in foreign assets. To streamline compliance:

1. Track exchange rates carefully - use the SBI TT buying rate for converting USD to INR
2. Keep detailed records of all transactions
3. Monitor currency fluctuations that might affect your tax liability

Remember that currency strength directly affects your investment returns. Even if you're holding steady US stocks, exchange rate changes can create taxable gains or losses. For instance, if the rupee weakens from ₹75 to ₹80 per dollar, you'll need more rupees to buy the same amount of US stocks.

Pro tip: Consider using digital platforms that automate currency conversion tracking and tax calculations to reduce compliance headaches and minimise errors.

Looking forward

A final note on US stock taxation

Smart tax management helps you maximise returns from your US stock investments. This guide covered essential aspects of taxation, from DTAA benefits to practical optimisation strategies.

Remember these key points for your US investment journey:

• DTAA protects you from paying taxes twice
• Long-term gains now attract only a 12.5% tax for holdings beyond 24 months
• Proper documentation helps claim foreign tax credits smoothly
• Strategic timing and loss harvesting can reduce your tax burden
• Digital platforms simplify compliance and calculations

US stocks offer great opportunities to grow your wealth through global market exposure. With this tax knowledge, you can make informed investment decisions while staying compliant with Indian and US regulations.

Keep detailed records of your transactions, stay updated on tax changes, and consult tax professionals when necessary. Understanding these tax implications will help you build a stronger international investment portfolio.

Disclaimer: This article provides general information on US stock taxation for Indian investors and is not tax advice. Tax laws may change. Always consult a qualified tax professional for personalized guidance on your specific situation.

Contributed by Denila Lobo

Denila is a content writer at Winvesta. She crafts clear, concise content on international payments, helping freelancers and businesses easily navigate global financial solutions.