Before investing in Indian stocks, it’s important to understand how your investments are taxed. Here’s everything you need to know about this process:
Generally, gains derived from the sale of foreign stocks would be taxed as capital gains in the hands of the Indian investor. For tax purposes, foreign stocks are treated the same as unlisted equity shares in India.
Tax on Gains from Sale of Foreign Shares:
In this section, we will discuss the tax on gains from sale of foreign shares.
Thankfully, gain on sale of foreign shares is not taxable in India. This means that any person who has invested in a stock market abroad or who has sold the shares of a foreign company does not have to pay any taxes on the profit they make. In case they visit India at some point in time, they can carry forward all the gains and sell their shares to enjoy tax free gains.
However, if Indians invest in companies abroad which are listed on a stock exchange outside Indian territory, then such investment is taxable upon repatriation to India and subject to capital gains tax – even though there is no income tax levied on such repatriated profits.
Tax on Global Mutual Funds
If a person invests in global funds that have exposure to foreign stocks, the gains on redemption of such stocks are proportional to the extent of their exposure to such stocks.
If the percentage of Indian equity stock is greater than 65%, the gains will be taxed similarly to equity-oriented funds. Short-term capital gains on funds held for less than a year will be taxed at 15%.. Since these gains are subject to a differential taxation structure, the applicable cess will vary depending on the holding period. However, if a person holds it for more than 12 months (1 year) then they will be taxed at 10% on any gains that are above Rs.1 lakh for every financial year.
Global funds which have less than 65% of assets in Indian equits will be classified as non equity funds and taxed accordingly. Short term holdings (less than 3 years) will be taxed at the normal slab rate. If you hold the mutual funds for more than 3 years, it will be considered as a long-term capital gain and will be taxed at 20% with the indexation benefit.
Tax on Dividends Earned from Foreign Shares:
If the investor has already received a dividend, then it shall be taxed at a flat rate of 25%.
The Indian government has signed the Double Tax Avoidance Agreement (DTAA) with over 95 counties, which aids in the claim of tax credits in the event of double taxation. DTAA typically provides relief through two methods: (i) exemption and (ii) tax credit. The exemption method taxes income in one country while exempting it in another.
If the investor has paid taxes in the foreign country for these shares, they can obtain relief on tax credits as per DTAA between India and the concerned country. In case if DTAA is not signed, the investor may obtain a unilateral relief under Section 91 of the IT Act.
How To Report Gains From Foreign Shares In ITR
The taxpayers should file ITR Form 2 to report such gains under two heads:
- All gains from the sale of stocks must be reported in the capital gains schedule (Schedule CG)
- All gains from dividends shall be reported in Schedule OS
- All assets should be reported in the foreign asset schedule (Schedule FA) if the investor has held the shares on or after 31st March of that particular year.
The upside to investing in foreign stocks is that they’re USA-taxable. So your final yield will be the total return from the stock minus the tax.. If you invest in foreign companies, your money will be converted to US dollars and might fluctuate.
If foreign assets are not disclosed, it could lead to a penalty of 10 Lakhs. Your income tax department may also classify your tax return as defective and issue notice to you.
If you find yourself in a situation where you are required to file a tax return for gains from foreign stocks, take help from the industry’s experts. The easytaxplanner team has a lot of experience in helping their customers file ITRs and they can also guide them when it comes to investing in the Foreign Exchange Market.