How taxes will work for investors in India when investing in the US

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For investors in India, there are two types of taxation events when you have returns from your investments in US stocks:

Tax on investment gains:

This tax is payable if you sell your investments at a higher price than when you buy them, and is calculated as the sale price minus purchase price. You will be taxed in India for this gain. You will not be taxed in the US. The amount of taxes you have to pay in India, at the end of the fiscal year, depends on how long you hold the investment:

  1. To qualify as a long term capital asset, the period of holding in case of shares of a foreign company is over 24 months. Thus if you hold the investment for longer than 24 months → the gain will be taxed at a long term capital gains tax rate of 20% (plus the applicable surcharges and cess fees).
  2. Whereas, if you hold the investment for less than 24 months → the gain qualifies as short-term capital gains and will be taxed as normal income in India. For example, if you buy one Google stock at a share price of $1000 and you sell your share less than 24 months later for $1100, you will be taxed in India for the $100 gain you have made. Taxation is based on the tax bracket that you fall under according to your income level.
Tax on dividend:

Unlike investment gain, dividend will be taxed in the US at a flat rate of 25%. This means that the company paying the dividend will subtract the 25% taxes before distributing the remaining 75% to the investor. For example, if Microsoft gives an investor $100 of dividend, it will withhold $25 as tax, and will give the investor the post tax dividend of $75. Subsequently, this post tax dividend is included as taxable income in India (as normal income).

Fortunately, US and India have a Double Taxation Avoidance Agreement (DTAA), which allows taxpayers to offset income tax already paid in the US. The 25% tax you already paid in the US is made available as Foreign Tax Credit and can be used to offset your income tax payable in India.

This article is meant to be informative and not to be taken as a tax advice. Tax laws are subject to change and may vary depending on your circumstances. Consult with a finance professional, attorney or tax professional regarding your specific financial, legal or tax situation.

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