Investing in US Stocks and worried about tax?
Some platforms such as Vested and IndMoney are gaining popularity for investing in US Stocks. Investing in Google, Netflix, Facebook, Microsoft or Disney does seem to be a great opportunity. However, what about taxes? This post answers the question from the India as well as US perspective.
Tax in USA:
Capital Gains Assuming you are a Non-Resident Alien for US Tax purposes, there is no capital gains tax in the US. This applies for both short term and long term capital gains (we're avoiding going into how stocks are classified as short term or long term for this reason).
Dividend
Dividend will be taxable in the US. As per the India-US DTAA, dividend will be taxable in the US at the rate of 25%. You will get foreign tax credit for this tax paid in the US while filing Indian Tax Returns but Foreign Tax Credit is rarely one to one. More on that below.
Pro-tip: Since there is no Capital Gains, growth stocks like Amazon make more sense than say a Walmart which pays dividend.
Tax in India:
Capital Gains
If your Residential Status as per the Income Tax Act is Resident, your worldwide income is taxable in India. This would mean that Capital Gains earned on US stocks will be taxable in India.
The below chart describes how tax will work on long term and short term US shares:
Slab rates for individuals are available here.
Conversion of USD into INR:
The SBI TT buying rate is used for conversion of USD into INR. The rate on the last day of the month immediately preceding the month in which purchase/ sale takes place.
We created a couple of examples to aid understanding:
Example 1: Mr. India invested in Disney stock at USD 117.3 on 29 May 2020. He sells his holding on 31 December 2020 when Disney stock price is USD 150.
Stock was purchased on 29 May 2020. SBI TT Buying rate as on 30 April 2020 will be used.
Stock was sold on 31 December 2020. SBI TT Buying rate as on 30 November 2020 will be used.
Let's assume the SBI TT Buying rates are as follows:
30 Apr 2020: USD 1 = INR 75
30 Nov 2020: USD 1 = INR 80
Short Term Capital Gains are calculated as under:
Example 2: Captain America invested in Google stock at USD 840.18 on 13 April 2017. He sells his holding on 4 May 2019 when Google shot up to USD 1400.
Shares were held for more than 24 months. So the gains are long term capital gains. First, let's determine the exchange rates to be used:
Stock was purchased on 13 April 2017. SBI TT Buying rate as on 31 March 2017 will be used.
Stock was sold on 4 May 2019. SBI TT Buying rate as on 30 April 2019 will be used.
Let's assume the SBI TT Buying rates are as follows:
31 Mar 2017: USD 1 = INR 70
30 Apr 2019: USD 1 = INR 75
Note: Cost inflation index is available here.
Transfer Costs, Brokerage, Costs to Sell
You can reduce your short term or long term capital gains by any costs to sell including commission, brokerage, or any other transfer costs.
We've also compiled a few FAQs on Capital Gains on Securities which may be useful.
Dividend
Just like the US, Dividend will be taxable in India as well. In India, the tax will be payable at slab rates. You can claim foreign tax credit for tax paid in the US, however, this has the following practical problems:
US reporting period is a Calendar Year and return is due by June 15 (for Non Resident Aliens). While in India, we use the Financial Year (April-March). This creates accounting and reporting issues for claiming of credit.
Foreign tax credit is rarely a one to one credit due to exchange rate differences and different reporting periods.
Conversion of USD into INR:
The SBI TT buying rate is used for conversion of USD into INR. The rate on the last day of the month immediately preceding the month in which the dividend is declared, distributed or paid by the company.
Same concept as Capital Gains. One quick example to understand this:
Mr. India invested in Walmart stock and received dividend of USD 10 on 15 May 2020. Rate used is as under:
Dividend received on 15 May 2020. SBI TT Buying rate as on 30 April 2020 will be used.
Hope this post is useful and helps you understand the tax implications on investing in US Stocks. If you need any further help, feel free to reach us at support@thegalacticadvisors.com or post a query.
