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How Gains From Foreign Stock Markets Are Taxed In India
Understanding how your investments are taxed is critical when investing in the stock market. Before investing in international stocks from India, here’s everything you need to know.
In general, gains derived from the sale of foreign stocks would be taxed as capital gains in the hands of the Indian investor. For tax purposes, foreign stocks are treated the same as unlisted equity shares in India.
Gains from Foreign Stock Shares –
Tax on Gains from Sale of Foreign Shares:
The tax on gains from the sale of foreign stocks is determined by the holding period of such shares. If the investor has held shares for more than 24 months then long-term capital gain (LTCG) will apply. If not, short-term capital gain (STCG) will be applicable.
- The Long-term capital gains from the sale of foreign stocks are subject to a 20% tax rate, plus a surcharge, a health and education cess along with indexation benefit on the cost.
- Short-term capital gains from the sale of such stocks will be considered as a part of current income and will be taxed as per the slab rate applicable to the investor.
Tax on Global Mutual Funds
If a person invests in global funds that have exposure to foreign stocks, the gains on redemption of such foreign stocks are proportional to the extent of the funds’ exposure to foreign stocks.
If the percentage of Indian equity stock is greater than 65 per cent, the gains will be taxed similarly to equity-oriented funds. Short-term capital gains on funds held for less than a year will be taxed at 15%. On these gains, the applicable cess will be levied. On the contrary, if the holding period is more than 12 months (1 year) then it will be taxed at 10% on gains above Rs.1 lakh per year.
Global funds with less than 65% exposure to Indian equity will be classified as non-equity funds and taxed accordingly. Holding these for less than three years will result in short-term gains that will be taxed at the normal slab rate. On the other hand, holding the mutual funds for more than three years will be considered long-term capital gain and taxed at 20% with the indexation benefit.
Tax on Dividends Earned from Foreign Shares
If the investor has received a dividend on such holdings, then it shall be taxed at a flat rate of 25%.
The Indian government has signed the Double Tax Avoidance Agreement (DTAA) with over 95 counties, which aids in the claim of tax credits in the event of double taxation. DTAA typically provides relief through two methods: (i) exemption and (ii) tax credit. The exemption method taxes income in one country while exempting it in another.
If the investor has paid taxes in the foreign country for these shares, they can obtain relief on tax credits as per DTAA between India and the concerned country. In case if DTAA is not signed, the investor may obtain a unilateral relief under Section 91 of the IT Act.
Please note that it is essential to furnish Form No 67 as per IT rules on the date of or before filing the tax return.
How To Report Gains From Foreign Shares In ITR
The taxpayers should file ITR Form 2 to report such gains under two heads:
- All gains from the sale of stocks must be reported in the capital gains schedule (Schedule CG)
- All gains from dividends shall be reported in Schedule OS
- All assets should be reported in the foreign asset schedule (Schedule FA) if the investor has held the shares on or after 31st March of that particular year.
If you invest in foreign stocks, keep in mind that you will have to pay taxes, as your actual returns will be the return from the stock minus taxes. Furthermore, if you invest in foreign companies, you will have to deal with currency fluctuations because the funds will be converted to dollars before being invested.
In addition, if the foreign assets are not disclosed, it may trigger a penalty of 10 Lakhs. Additionally, the income tax department of India would treat the tax return as a defective return under Section 139(9) and may issue notice to the assessee.
If you find yourself in a situation where you are required to file a tax return for gains from foreign stocks, take help from the industry's experts. Tax2Win has a huge team of experienced eCAs who can help you with ITR filing so that you can get maximum refunds and reap the benefits of investment in the foreign exchange market.