Investors who invest in the Indian market are well aware of the tax implications. But what about taxation when you invest in US stocks. Taxation remains the primary concern for Indian investors exploring international investments. The tax policies are critical to understanding if the net return is worth the effort. If you are exploring investment opportunities in the US market, learning about the tax policies makes sense.
When investing in US stocks, tax applies to the dividend and capital gain from an investment. So, taxes are two kinds –
- Tax on dividend
- Capital gain tax
Tax on dividend
Any dividend paid by American corporates is taxed at a flat rate of 25% deducted at the source, meaning you need to pay tax in the US. However, India and the US have signed a Double Tax Avoidance Agreement, which prevents a single income from getting taxed twice. So, if you were paid a dividend of USD100, you will receive only USD 75 after deducting the tax. Similarly, tax received in cash or reinvestment is also taxed in India per income tax slabs. But if you have already paid tax in the US, you can offset tax liabilities in India under DTAA.
Let’s understand with the help of an example.
Suppose you have received USD 200 as a dividend. You will receive USD 150 in hand after a 25% tax deduction. However, in India, the tax will be calculated on the entire amount of USD 200. Since you have already paid the tax, you can claim a credit of USD 50 for the tax withheld in the US.
It is a simplified example to help you understand. But the real-life calculation is more complex.
Anyway, because of the tax treaties signed between the two countries, the tax you pay is much lower than other foreign investors.
The second type of tax is the capital gain tax when you sell shares in the US market. Capital gain refers to the profit generated from the sale when the stock’s selling price exceeds its purchasing price.
There is no capital gain tax in the USA. So, you will have to pay the capital gain tax in India.
Also Read: Indian Stock Market Vs US Stock Market
Long-term capital gain
If you hold the shares of a US company for more than twenty-four months, your capital will be taxed for LTCG. In the case of ETF investment, the LTCG period is 36 months. A 20% tax rate will apply to long-term capital gains in India.
Short-term capital gain
Short-term capital gain tax rates will apply for an investment period of fewer than twenty-four months. In India, a short-term capital gain is taxed per the investor’s income tax slab.
Here is an example to make it clear.
Suppose you purchased Amazon stocks for USD 600 and sold them after twenty-four months for USD 800. In this case, USD 200 is your long-term capital gain. A long-term capital gain tax will be USD 40 plus surcharge and cess fees.
A short-term capital gain tax will apply per your income tax slab if you sell the stocks before twenty-four months.
Let’s summarise the US tax implications.
|Income Type||Taxed in US||Rate %||Taxed in India||Rate||Charges|
|Dividend||Yes||25||Yes||Applicable tax slab|
|Long-term Capital Gains||–||Yes||20%||Surcharge and cess|
|Short-term Capital Gains||–||Yes||Applicable tax slab|
Taxes are a critical element when it comes to expanding your investment to foreign markets. Knowing about the tax implication will set your expectations right.
The tax implications for investing in US stocks are pretty straightforward. We hope this article has helped clear your doubts. If you are ready to invest in the US market, take the first step and open an overseas account with Angel One.
Disclaimer: “This blog is exclusively for educational purposes and does not provide any advice/tips on Investment or recommend buying and selling any stock”