Gains from Foreign Stock Shares
Tax on Gains from Sale of Foreign Shares:
The foreign investment tax on 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 tax on foreign shares is subject to a 20% tax rate, plus a surcharge, a health and education cess, and an 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 the redemption of such foreign stocks are proportional to the extent of the fund’s exposure to foreign stocks.
If the percentage of Indian equity stock is greater than 65 percent, the gains will be taxed similarly to equity-oriented funds. Short-term capital gains tax on foreign shares held for less than a year will be taxed at 20%. 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 12.5% on gains above Rs.1.25 lakhs.
Global funds with less than 65% exposure to Indian equity will be classified as non-equity funds and taxed accordingly. Holding these foreign mutual funds in India 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 a long-term capital gain, and the LTCG on foreign shares will be 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 countries, 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 the DTAA between India and the concerned country. In case, DTAA is not signed, the investor may obtain a unilateral relief under Section 91 of the IT Act.
Note: It is essential to furnish Form No 67 as per IT rules on the date of filing the tax return or before filing it.
It is very important to be aware of how different types of foreign investments are treated. For example, direct investment in foreign stocks and investing in Indian mutual funds that then invest in foreign stocks can have different tax implications.
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DTAA (Double Tax Avoidance Agreement)
The Indian Government has established Double Tax Avoidance Agreements (DTAA) with over 95 countries, providing a mechanism to claim tax credits in cases of double taxation. In many of these agreements, there are provisions for concessional tax deductions on dividend income at the source.
DTAA typically offers relief through two methods:
- Exemption Method: This method involves taxing the income in one country while exempting it in the other. It aims to prevent the same income from being taxed in both countries.
- Tax Credit Method: The tax credit method allows the taxpayer to claim a credit for the tax paid in one country against the tax liability arising in another country. This ensures that the taxpayer does not face double taxation on the same income.
Therefore, it is advisable for investors to review India's double tax avoidance agreement with the respective country to gain clarity on the tax implications of income from foreign stocks. Understanding the specific provisions of the agreement can help investors navigate potential tax challenges and optimize their tax liability.
How To Declare 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 a notice to the assessee.
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