Introduction
Investing in US markets from India offers diversification, exposure to innovative companies, and the potential for long-term wealth creation. However, before you dive in, it’s essential to understand how taxation works on your overseas investments. Taxes apply differently to capital gains and dividends, and both India and the US have specific rules you must follow.
In this guide, we’ll break down the tax on US stocks in India, how the Double Taxation Avoidance Agreement (DTAA) helps, and what you should keep in mind to remain compliant while managing your after-tax returns more effectively.
1. Tax Residency and Its Role
As an Indian resident, you are taxed on your global income. This means any profits from your US stock investments — whether capital gains or dividends — are taxable in India, regardless of where the income originates.
Even if you keep the money in your US brokerage account without remitting it back to India, you are still required to report it in your Indian tax return.
2. Capital Gains Tax on US Stocks
2.1 Short-Term Capital Gains (STCG)
If you sell your US stocks within 24 months of purchase, the gains are considered short-term and are taxed at your applicable income tax slab rate in India.
2.2 Long-Term Capital Gains (LTCG)
If you hold the stocks for more than 24 months before selling, the gains are generally taxed at 20% with indexation benefits. Indexation adjusts the purchase price for inflation, reducing your taxable gains.
Example:
- Purchase Price: ₹80,000
- Sale Price after 3 years: ₹1,20,000
- Indexed cost: ₹90,000 (based on inflation index)
- Taxable gain: ₹30,000 → 20% LTCG tax applies.
3. Dividend Taxation on US Stocks
3.1 Withholding Tax in the US
When US companies pay dividends, a 25% withholding tax is applied at source for Indian residents.
Example: If you receive USD 100 in dividends, USD 25 will be deducted before it reaches your account.
3.2 Taxation in India
Dividend income is included in your total taxable income in India and taxed as per your applicable income tax slab. However, you can claim a foreign tax credit for the 25% withheld in the US under the DTAA.
4. Double Taxation Avoidance Agreement (DTAA)
India and the US have a DTAA to prevent double taxation. This means:
- You pay tax in the US (withholding on dividends).
- You also declare and pay tax in India.
- You may claim credit in India for the tax already paid in the US, which can reduce your Indian tax liability.
5. Currency Conversion and Tax Calculation
When calculating gains, all transactions must be converted into INR using the State Bank of India’s (SBI) telegraphic transfer buying rate on the transaction date.
For example:
- Buy price: USD 500 at ₹75/USD → ₹37,500
- Sell price: USD 600 at ₹78/USD → ₹46,800
- Gain: ₹9,300 (taxed based on holding period rules).
6. Filing Tax Returns for US Stock Investments
6.1 Income Tax Return (ITR) Form
You must use ITR-2 if you have capital gains from foreign assets.
6.2 Foreign Asset Reporting (Schedule FA)
All US stock holdings, including unsold shares during the year, must be disclosed under Schedule FA of your income tax return.
7. Common Mistakes to Avoid
- Not reporting unsold holdings – This can lead to penalties for non-disclosure.
- Ignoring currency conversion rules – Incorrect INR conversion can result in wrong tax calculations.
- Missing DTAA claims – Without claiming foreign tax credit, you may overpay.
- Failing to keep proper records – Always store purchase invoices, bank statements, and brokerage reports.
8. Strategic Tax Planning Tips
- Holding investments for more than 24 months may make you eligible for lower LTCG rates.
- Consider reinvesting dividends if they are not required for immediate expenses.
- Invest via US-focused mutual funds or ETFs if you want simpler tax reporting — these are taxed like Indian mutual funds.
- Keep an eye on US stock investment from India rules to stay updated on RBI and tax compliance.
9. Example Scenario – Dividend Tax Credit
If you earn ₹80,000 in US stock dividends in a year:
- US withholding tax (25%): ₹20,000
- Taxable in India: ₹80,000 at your slab rate (say 30% = ₹24,000)
- Less credit for US tax paid: ₹20,000
- Net Indian tax payable: ₹4,000.
Conclusion
Understanding the tax implications of US stock investments is crucial to remain compliant and manage your post-tax returns effectively. By complying with Indian tax rules, utilising DTAA benefits, and maintaining accurate records, you can invest confidently in US markets while keeping your finances transparent and efficient.
Remember – taxation should not be seen as a deterrent to global investing, but as an important factor to plan for carefully.