Many of the top global firms, including Alphabet, Apple, Amazon, Microsoft, TESLA, and Meta, are listed on US exchanges. There are now brokers in India that allow Indians to invest in US companies. While investing in the US stock market could prove highly rewarding, it is essential to understand the tax implications before investing your hard-earned money.
Here are some of the most important things you should know about the taxability of US stock investments.
Gains from US Stocks
There are two different ways an investor can generate profits from their US stock investment- dividends and capital gains. There are no tax implications for losses from US stock investments.
Like Indian companies, the US companies pay dividends on their stocks for distributing excess profits. But investors should remember that the frequency of dividend payouts or the dividend amount is never guaranteed. On the other hand, capital gains are when you sell the stocks at a price higher than the price at which you purchased the stocks.
Taxes on Dividends
The dividend payouts are taxed at 25% for Indian investors in the US. Compared to other foreign investors, the dividend tax rate is lower for Indian investors due to the tax treaty between India and the US. The US company will deduct the dividend tax from the payout before giving the same to the Indian investor.
In India, the dividend income will be added to the investor’s taxable income and taxed as per their tax slab. Because of the Double Tax Avoidance Agreement (DTAA) between India and the US, investors can set off the tax withheld by the US company against their tax liabilities in India.
Taxes on Capital Gains
Capital gains are not taxed in the US. However, in India, you’ll either pay STCG (Short-Term Capital Gains) tax if the investment was held for less than 24 months or LTCG (Long-Term Capital Gains) tax if the investment was held for more than 24 months.
In the case of STCG, the capital gains will be added to the investor’s taxable income and taxed as per their tax slab. If the investment was held for more than 24 months, LTCG at 20%, plus applicable surcharge and fees, should be paid on the gains.
Here’s a quick overview of the tax implications on US stock investments.
|Income Type||Taxability (US)||Taxability (India)|
(Withheld by US company)
|Applicable slab rates. Credit of tax withheld in the US is available|
|LTCG||No||20% + applicable surcharge and fees|
|STCG||No||Applicable slab rates|
Let us assume that you are holding 100 shares of Microsoft, and the company announces a dividend of $2/share. So, you should receive $200 as dividend income. But Microsoft will deduct dividend tax at 25% ($50) and only pay you $150.
In India, this dividend income of $150 will be added to your taxable income and taxed as per your tax slab. However, you can claim a credit on the tax withheld by Microsoft in the USA.
- Capital Gains
Let us assume that you invested $1,000 in shares of Microsoft. Over time, your investment of $1,000 rises to $1,500, resulting in a profit of $500. If the holding period is longer than 24 months, you’ll be required to pay LTCG of $100 (20% of $500) + applicable surcharge and fees in India.
If the investment was held for less than 24 months, the profit of $500 will be added to your taxable income and taxed as per your tax slab. The capital gains will not be taxed in the US.
Making Tax-Efficient Investments
Whether you’d like to invest in the US stock market or any of the investment plans in India, ensure that you clearly understand the tax implications before making any decisions. In many cases, taxes can consume a significant portion of the generated returns, but efficient tax planning can help reduce your tax liabilities.
If you are new to the world of investments, you can always consider working with a tax advisor who can assist you in making tax-efficient investments.