Introduction
If you’re planning to invest in US stocks from India, it’s important to understand how taxes work—both in the US and in India. Taxes can impact your returns, and staying compliant ensures smooth and stress-free investing.
This article outlines the key tax considerations Indian investors must understand when doing a US stock investment from India, including dividend tax, capital gains tax, and how to avoid double taxation.
1. Do Indian Residents Have to Pay US Taxes?
Yes, but only on specific types of income such as dividends.
When you invest in US stocks from India, the US Internal Revenue Service (IRS) applies a 25% tax on dividends earned from US companies. This is deducted at source and sent directly to the IRS.
However, capital gains made from selling US stocks are not taxed by the US for Indian residents. You only pay capital gains tax in India.
2. Tax on Dividends
For instance, if you receive $100 in dividends from your US stock holdings.
- The US government deducts 25%, so you get $75 in your account.
- The $25 goes to the IRS as withholding tax.
This is automatic and applies to all foreign investors, including Indians. The deducted amount is visible in your brokerage statement.
3. Tax on Capital Gains
The good news is that the US does not levy capital gains tax on Indian residents.
However, you must pay capital gains tax in India, based on how long you held the stock:
- Short-Term Capital Gains (STCG): If sold within 24 months → taxed as per your income tax slab
- Long-Term Capital Gains (LTCG): If held for more than 24 months → taxed at 20% with indexation
Make sure to declare your gains when filing your Indian income tax return.
4. Double Taxation Avoidance Agreement (DTAA)
India and the United States have a Double Taxation Avoidance Agreement (DTAA) in place. This agreement ensures that you are not taxed twice on the same income.
For example:
- The dividend tax deducted in the US can be claimed as a foreign tax credit in India.
- So if you’re taxed 25% in the US and your income slab in India requires you to pay 30%, you only pay the difference (5%) in India.
You’ll need Form 67 to claim this credit while filing taxes.
5. Required Documentation
When you invest in US stocks from India, make sure you maintain the following documents for accurate tax filing and compliance:
- Form 1042-S (for dividend tax deducted in the US)
- Brokerage statements for transactions and gains
- Form 67 for claiming foreign tax credit
- Proof of remittance (if using LRS under RBI)
Being organized helps you claim benefits and avoid penalties.
6. Income Tax Return Filing in India
Declare your foreign income (dividends and gains) under the appropriate sections:
- Schedule FA (Foreign Assets): Details of foreign holdings
- Schedule CG (Capital Gains): Details of profits/losses
- Schedule TR (Tax Relief): To claim DTAA benefits
These schedules are submitted with your annual ITR—typically ITR-2 or ITR-3 if you have foreign income or capital gains.
7. What About ETFs and Mutual Funds?
ETFs or mutual funds that invest in US stocks can also have tax implications:
- If you invest in an Indian fund that invests in the US, taxation is done as per Indian mutual fund rules.
- If you buy a US-listed ETF directly, it’s treated like buying US stocks and taxed accordingly.
Make sure you understand the structure before investing.
8. Tax-Saving Tips
Here’s how to be tax-efficient in your US stock investment from India:
- Hold stocks for more than 24 months to benefit from lower LTCG tax
- Avoid frequent buying/selling to reduce short-term gains
- Track dividend income and claim tax credits properly
- Maintain detailed records of exchange rates used during each transaction to ensure accurate INR conversion when reporting gains..
9. RBI’s Liberalised Remittance Scheme (LRS)
As an Indian resident, you must use the RBI’s Liberalised Remittance Scheme (LRS) to invest in US stocks from India. As per the current rules:
- You can remit up to $250,000 per financial year
- A 5% Tax Collected at Source (TCS) is applicable on remittances above ₹7 lakh (adjustable while filing returns)
Ensure you complete LRS documentation through your bank or broker when funding your US brokerage account.
Conclusion
Understanding international tax rules is essential before you invest in US stocks from India. While dividends are taxed in the US, capital gains are only taxed in India. Thanks to DTAA, you can avoid paying tax twice. With proper planning and documentation, your US stock investment from India can be tax-efficient and fully compliant.
Always consult a tax advisor if your portfolio grows or if you have multiple international holdings. Smart investing goes hand-in-hand with proactive tax management.
