Investing in foreign stocks is the latest fad in India. Many people are investing in such stocks to diversify their portfolio and get better returns. The craze of owning FAANG stocks and the FOMO factor has driven this demand.
US stocks are the most popular as the markets in the country account for about half of the total global market capitalisation. An individual can invest up to $ 250,000 in a year in global stocks.
Apart from considerations like currency depreciation and compliance one also needs to consider how these investments are taxed in India. There is no income tax on capital gains in the US for foreigners. However, you need to pay taxes on capital gains in India in case you own foriegn stocks directly.
Investments in mutual fund schemes which invest in global stocks are not included. They are taxed as regular domestic capital gains. It should be noted that capital gains arise only when you sell stocks. Unrealised gains are not taxed.
Such taxes are of two types - short term and long term capital gains tax - just like we have for sale of domestic stocks, however the rules, terms and conditions are different.
Gains on sale of foreign stocks which have been held for more than 24 months are called long term capital gains (LTCG). These gains are taxed at 20% plus applicable surcharge and fees along with the benefit of indexation.
Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. It reduces the tax liability. Suppose you have invested $100 in a stock. After 5 years, you sell it for $120. If inflation in the US is 2% per annum, the indexed cost of shares is $110.4 (100*1.02^5 in excel). This means your long-term capital gain is $9.6 and not $20.
Gains on sale of foriegn stocks which have been held for less than 24 months / 2 years are called short term capital gains (STCG). These gains are added to your current income and are taxed at a slab rate applicable to the investor.
Long-term capital gains tax is applicable on domestic stocks if held for more than 36 months / 3 years and taxed at 10% with the benefit of taxation. Short term capital gains tax is applicable on domestic stocks if held for less than 36 months / 3 years and taxed at 15%.
Difference between capital gains tax for domestic and foreign stocks
+Surcharge and cess as applicable
Dividends derived from the foreign stocks are subjected to tax in the hands of the Indian investor as ‘Income from other sources’ as per the applicable slab rates.
Dividend income on foreign stocks in the US is taxed at flat 25%. This is deducted at source before you receive the dividend. However, due to the Double Taxation Avoidance Agreement (DTAA) between the two countries, you will get a tax credit of 25%.
So, do consider these points in mind while investing in global stocks.