How Are Foreign Stocks, Mutual Funds, and ETFs Taxed in FY2025- 26?

With the beginning of the new financial year, Indian taxpayers investing in overseas assets need to understand how different investment instruments, foreign equities, mutual funds, and ETFs will be taxed. As per the Finance Bill 2025, long-term capital gains (LTCG) are now taxed at a flat rate of 12.5% without the benefit of indexation. This marks a shift from the previous regime, where indexation played a role in reducing taxable gains.

Short-term capital gains (STCG), on the other hand, are taxed according to the individual’s applicable income slab rate. Notably, foreign securities do not fall under Section 112A, and hence, the ₹1.25 lakh LTCG exemption does not apply. Instead, gains are taxed under Section 112.

Permissibility of Foreign Investments under LRS

Investing in foreign equities, mutual funds, or ETFs is governed by India's foreign exchange regulations. Under the Liberalised Remittance Scheme (LRS), a resident individual can remit up to $250,000 per financial year for permissible current or capital account transactions.

Such transactions include purchasing foreign stocks, units of overseas mutual funds, or ETFs. However, individuals must ensure that their investments comply with the LRS norms and any applicable regulatory guidelines.

Read More: ITR Filing for AY 2025–26: Which ITR Form from 1 to 5 Should You Use?

Taxation of Capital Gains on Foreign Investments

Foreign Stocks

As per Section 2(42A) of the Income Tax Act, shares of companies not listed on a recognised Indian stock exchange, such as foreign stocks, are classified as long-term capital assets if held for more than 24 months.

• Long-term capital gains on such stocks are taxed at 20% under Section 112 with indexation.
   
• Short-term capital gains (if held for 24 months or less) are taxed at the investor’s applicable income tax slab rate.

Foreign Mutual Funds and ETFs

For units of specified mutual funds (those with less than 35% allocation to domestic equities), gains, irrespective of the holding period, are considered short-term and taxed at slab rates under Section 50AA, without indexation.

If the units are not classified as specified mutual funds:

• Held for more than 24 months: Treated as long-term, taxed at 12.5% under Section 112 (without indexation).
   
• Held for 24 months or less: Treated as short-term, taxed at the applicable slab rate.

Dividend Income from Foreign Assets

Dividends received from foreign equities and overseas mutual funds are taxed under the head "Income from Other Sources." These are taxed at the investor’s marginal slab rate in India.

Additionally, taxes might be deducted in the foreign country where the company or fund is based. In such cases, Indian residents may claim a Foreign Tax Credit (FTC):

• If a Double Taxation Avoidance Agreement (DTAA) exists with the foreign country, credit can be claimed as per the treaty.
   
• In the absence of a DTAA, unilateral relief can be claimed under Section 91 of the Income Tax Act.

Mandatory Reporting of Foreign Assets

Resident and ordinarily resident individuals are required to disclose their foreign holdings in Schedule FA of the Indian Income Tax Return.

Details to be disclosed include:

• Country of investment
   
• Nature and type of asset
   
• Date and cost of acquisition
   
• Income generated during the year

Failure to report these can attract penalties under the Black Money Act, even if the investments are fully legal and tax-paid.

Applicability of TCS on Foreign Remittances

Under the LRS framework:

• For total remittances up to ₹10 lakh in a financial year for investment purposes, no TCS is applicable.
   
• If the amount exceeds ₹10 lakh, TCS at 20% is applicable.

This tax, collected at source, is adjustable against final tax liability but affects the cash flow at the time of remittance. Investors planning large foreign investments should plan this accordingly.

Claiming Foreign Tax Credit (FTC)

To claim a credit for foreign taxes paid, the following steps are essential:

• File Form 67 electronically before the end of the assessment year.
   
• Ensure the income is also declared in the Indian ITR.
   
• Maintain supporting documents, including proof of tax paid and income earned.

FTC can reduce the overall tax burden, but it requires accurate reporting and documentation.

Conclusion

Understanding the updated taxation rules for foreign investments is essential for Indian investors seeking global diversification. From capital gains treatment to TCS and mandatory disclosures, staying compliant with tax regulations is crucial for hassle-free investing abroad.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Mutual Fund investments in the securities market are subject to market risks, read all the related documents carefully before investing.