When investing in the stock market, understanding how your investments are taxed is important. Here’s all that you need to know before investing in international stocks from India.
Taxation of Foreign Stocks Under Direct Investments
Generally, the gains derived from disposing of the foreign stocks would be subjected to tax as capital gains in the hands of the Indian investor. For the purpose of tax treatment, foreign stocks are treated at par with unlisted equity shares in India.
Categorization of Gains
The tax rate would be determined on the basis of the period for which the foreign stock is held by the investor after its acquisition.
- A holding period of 24 months is prescribed under third provision to Section 2 (42A) of the IT Act for classification between a long-term capital asset or short-term capital asset. Thus, if the holding period of the foreign stock is up to 24 months, the gains derived from such stocks would constitute short term capital gains, otherwise such gains would be long term in nature.
- In case of stocks listed on the Indian stock exchanges, this period is 12 months.
Tax Rate
Accordingly, the long-term capital gains on foreign stocks would be taxable at 20% after claiming the benefit of indexation whereas the short term capital gains would be taxed as per the slab rates applicable to the Indian investor. The benefit of indexation allows the adjustment of the acquisition cost with respect to inflation index.
For instance, in case you invest INR 75 lakh now and sell the stock after two years for INR 90 lakh, the cost of INR 75 lakh will be adjusted by inflation index. Assuming that over the two years, the inflation index has increased from 100 to 110, the indexed cost for tax purposes would be INR 82.50 lakh and tax will be payable only on the gain of INR 7.50 (INR 90 less INR 82.50).
The tax rates would be further increased by the applicable rate of surcharge and education cess.
Taxation of Foreign Stocks Listed on IFSC GIFT City or Under Equity-Oriented Indian Mutual Funds Investing in Foreign Stocks
Tax treatment of the capital gains arising from the investments made in stocks which are listed on any recognized stock exchange in an IFSC or an equity oriented mutual fund (where STT is paid), is akin to that of listed equity shares, provided that in case of IFSC, the consideration is paid in foreign currency under LRS route.
Categorization of Gains
If the period of holding exceeds 12 months, the gains derived will be treated as long-term capital gains. However, if the period of holding does not exceed 12 months, then the gains would be categorized as short-term capital gains.
Tax Rate
Long-term capital gains would be subjected to tax at a rate of 10% (plus applicable surcharge and cess) under Section 112A of the IT Act after claiming an exemption up to INR 1 lakh. However, in this case, the benefit of indexation cannot be availed. Short-term capital gains, which would be taxed at a rate of 15% (plus surcharge and cess) under Section 111A of the IT Act.
Short-term gains arising from equity-oriented mutual funds where STT is not paid would be charged to tax as per the marginal slab rate and long term capital gains transaction not being subjected to STT would be taxed in accordance with Section 112 of the IT Act i.e. at the rate of 20% after availing the benefit of indexation.
In case of Indian mutual funds, being non-equity oriented (i.e. debt-oriented), the tax treatment would be similar to those of international mutual funds as mentioned hereinbelow.
Taxation of Foreign Stocks International Mutual Funds
International mutual funds are accorded the same tax treatment as those of debt mutual funds in India.
Categorization of Gains
Accordingly, gains derived therefrom would be treated as long-term in nature where the units of these funds are disposed of or sold after three years from the date of its acquisition, otherwise the same would be categorized as long term in nature.
Tax Rates
The short-term capital gains would be subjected to tax as per the investor’s applicable slab rate. On the other hand, long-term capital gains leviable to tax at 20% along with indexation benefit under Section 112 of the Act.
Taxation of Dividends Earned on Foreign Stocks/Mutual Funds
Foreign Stocks
Dividends derived from the foreign stocks would be liable to tax in the hands of the Indian investor as “income from other sources” in accordance with the slab rates applicable to the Indian investor. Further, similar to capital gains tax, tax rate on dividends would also be further increased by the applicable rate of surcharge (maximum surcharge capped at 15% of tax) and education cess (4% of tax plus surcharge).
As a result, the highest tax rate applicable would be 35.88% for shareholders being individuals and hindu undivided families (HUFs) whose total income exceeds INR 1 crore..
Mutual Funds
The tax implications of dividends derived from the mutual funds will depend upon the type of option i.e. either dividend option or growth option.
Dividend Option
Mutual funds make a dividend payout to the investors who opt for dividend option, which is taxed as per the investor’s applicable marginal slab rates and is also subjected to tax deducted at source (TDS) under Section 194 of the IT Act. The credit of TDS is available against the tax liability of the investor.
Growth Option
In case an investor chooses a growth option, dividend payout does not exist; rather such dividend amount is re-invested in the mutual fund plan. Hence, no tax on such dividends would be required to be paid by the investor as the re-invested amount ultimately forms part of the capital gains taxation.
Availability of Foreign Tax Credit
In situations where the Indian investors are deriving gains from foreign stocks, it is possible that such Indian investors would be made liable to tax in the source country i.e. the foreign country and also in India on account of such investor being a resident in India.
This may lead to double taxation on the same income and accordingly, the investor may be eligible to obtain relief or tax credit with respect to the taxes paid by him in the foreign country as per the double tax avoidance agreement (DTAA) between such foreign country and India.
In the absence of any such DTAA between India and the foreign country where the investor is subjected to tax, the investor may obtain unilateral relief in India for the taxes paid in the foreign country in accordance with Section 91 of the IT Act.
For the purpose of claiming the foreign tax credit, the investor would be mandatorily required to furnish online the Form No 67 as prescribed under the Income Tax rules on or before the filing of return of income.
Disclosure Requirements in Income Tax Return with Respect to Foreign Stocks
The Indian investor would be required to provide the transaction details pertaining to the capital gain and dividend in “Schedule CG” and “Schedule OS” respectively in their income tax return in India.
The Indian investor being resident and ordinarily resident in India would also be required to furnish the details of such foreign stocks in “Schedule FA” of the applicable income tax return. Such a requirement is not applicable in case of investors who are non-residents (NR) and resident but not ordinarily resident (RNOR).
Consequences and Penalties
In accordance with “The Black Money (Undisclosed Foreign Income and Assets) And Imposition of Tax Act, 2015 (‘BMA’)”, if a foreign asset acquired is not disclosed in the Schedule FA in the past, such non-disclosure of the same in Indian tax return may trigger a penalty of INR 10 lakh.
In addition to the same, there might be a possibility that the tax department would treat the income tax return as a defective return under Section 139(9) and consequently issue notice to the assessee, believing that the assessee has tried to escape from tax liability.
Accordingly, it is absolutely critical that such investors should diligently disclose all necessary details of foreign investments or signatories in foreign accounts, etc., in the income tax return in Schedule FA.
