Your US stock market income will still be taxed
It is said that there are 2 things you cannot escape in this world; death and taxes. Obviously, when you invest in the US stock market, any income earned from these investments would be taxed. Like in India, when you invest in the share market USA, you can generate dividend income when declared by the company and capital gains when you book profits on sale of these assets. Like in India, the US market share prices also fluctuate, so you earn capital gains in the US also.
This is one more thing you need to understand when you are investing in US stocks. It does not matter whether you are investing in mutual funds or in equities or in indices like the Dow and the NASDAQ. These will generate income and hence will be taxed. Here we look at the tax implications of buying US shares, both in the case of dividends declared and in terms of the capital gains earned. Remember a person remitting funds abroad, has to mandatorily file tax returns in India.
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Tax implications of investing in US stocks
Investing in the US stocks has a number of tax implications and you need to understand how the tax will be imposed at multiple levels.
- The primary point of taxation is when you remit funds abroad. The RBI extant regulations allow an individual to invest up to $2.50 lakhs annually, which is equivalent to Rs2.05 crore. Under LRS, once you remit more than Rs7 lakhs in a year, you need to start paying 5% Tata Collected at Source (TCS). Unlike TDS, this is not a tax on income, but it is a presumptive tax. When you file the returns, you can always get refund of the amount deducted by the bank as TCS. This is meant more for an audit trail.
- Let us say, you invest in a US company or in a US mutual fund and that investment pays dividend. Obviously, dividends are income and they would be taxed. In the US, any such dividend is directly taxed at the rate of 25%. So, if you receive $1000 as dividend then the net dividend you get on hand is just $750 as the US government deducts $250 as dividend tax. Does that mean you have to pay double tax i.e. in the US and in India on the same dividends? You don’t have to; and that is thanks to the DTAA.
- The Double Taxation Avoidance Agreement (DTAA) is a mutual tax treaty that has been signed between the US and Indian governments. The impact of DTAA will be that when you file returns in India, the dividend is taxed as other income at the peak rate of tax applicable. For instance, if you are subjected to 30% tax on the dividend, you actually get offsetting credit for the 25% already paid to the US government (due to DTAA) and you only pay net tax of 5% in India. That is the advantage of DTAA.
- How is capital gains taxed in the US. The answer is that capital gains are tax free in the United States. Only the dividends are taxed in the US and that can be claimed as an offsetting credit in India. However, any capital gains earned in the US is not taxable.
- However, the capital gains will be taxed in India depending on whether it is long term gains or short term gains. Remember, that US equities and international equities are treated as non-equity assets in India with special concessions. Hence, it will be short term capital gains if held for less than 24 months. Being non-equity asset, the short term capital gains would be taxed at your peak rate applicable, i.e. 20% or 30%.
- What about long term capital gains tax? If US equities are held for more than 24 months, it is classified as long term asset. In this case, it is taxed at 20% with the benefit of indexation. Remember, the Rs1 lakh exemption is only applicable to Indian equities and us equities are classified as non-equity assets in India and hence that exemption is not available.
There are two more related issues on the taxation front. Firstly, can these losses be set off against gains? They can be set off in much the same way as other non-equity gains and losses are set off. There is no difference. Secondly, should this be declared as capital gains or business income. It is better to classify as business income since in that case all the related currency, and bank charges can be showed as legitimate expenses.
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