How capital gains from US stock are taxed in India?
Capital gains from US stocks are taxed in India based on how long you hold the stock before selling it. This holding period determines whether the gains are classified as LTCG (Long-Term Capital Gains) or STCG (Short-Term Capital Gains), and each has a different tax treatment:
- Long-Term Capital Gains (LTCG): These apply if you hold the US stock for more than 24 months. The good news is that LTCG on US stocks benefits from a lower tax rate in India. You'll pay a flat 20% tax on the LTCG amount plus any applicable surcharge and cess (additional taxes). However, it's important to note that India doesn't allow indexation for LTCG on US stocks, which means you can't adjust the purchase price for inflation.
- Short-Term Capital Gains (STCG): If you hold the US stock for less than 24 months, any profits from selling it are considered STCG. These are taxed less favorably. The STCG tax rate is based on your income tax slab in India. So, depending on your overall income, you could be taxed at a higher rate than LTCG.
Here is the summerise table to understand capital gain tax:
| Holding Period |
Capital Gains Type |
Tax Rate |
| Over 24 months |
Long-Term (LTCG) |
20% + surcharge & cess (no indexation) |
| Less than 24 months |
Short-Term (STCG) |
Your income tax slab rate |
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How US dividends are taxed?
Dividends from US stocks are subject to a flat 25% tax rate in the US due to the India-US Double Taxation Avoidance Agreement (DTAA). In India, these dividends are added to the investor’s income and taxed according to the applicable income tax slabs. However, the tax paid in the US can be claimed against the tax liability in India, and this is because of the DTAA agreement between the USA and India.
Exchange rate variations can introduce numerous complexities. In the United States, reporting periods align with the calendar year, while in India, we adhere to the financial year (April to March). This discrepancy can pose challenges in accounting and reporting, particularly when claiming credits.
The SBI TT buying rate is utilized to convert USD to INR. It's essential to verify this rate on the final day of the month directly preceding the month in which the company declares, distributes, or pays dividends. This principle also extends to capital gains.
Foreign Exchange Fluctuations
Foreign exchange fluctuations can have significant tax implications for Indian investors. Any gains or losses arising from such fluctuations are considered for tax purposes. For instance, if an investor incurs a loss due to a decline in the value of the US dollar against the Indian rupee, this loss can potentially be deducted from their taxable income. Conversely, gains from favorable exchange rate movements may be taxable.
Tax Reporting Requirements
It’s crucial for Indian residents investing in US stocks to adhere to tax reporting requirements. They must comply with the FEMA (Foreign Exchange Management Act) and disclose their foreign assets and income in their tax returns. This includes any capital gains or dividends earned from US stocks. Failing to report these can result in penalties and legal issues. It’s also important to keep track of the exchange rates applicable at the time of transactions, as these will affect the tax calculations.
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