Investing in US stocks? Here’s how the tax math works & how you can save some | Economic Times

NEW DELHI: Data from brokerages and financial institutions show more and more Indians are now investing in US stocks, some to seek diversification across regions and others lured by the splendid rally in technology stocks.Shares of Apple, Tesla and Zoom have risen manifold this calendar, thanks to a rise in people’s dependence on technology as they were forced to live and work from homes. This rally has also drawn mutual funds, PMS strategies and individuals to raise their bets on US stocks.While the gains on such investment may have been eye-popping, one should not lose sight on the taxation aspect: such capital gains and dividend income do attract sizeable taxation.At ETMarkets.com, we talked to industry executives and tax experts to try and figure out the tax implications.The following explainer is based on our discussions with Vinay Bharathwaj, Co-Founder & Executive Chairman, Stockal; Archit Gupta, CEO & Founder, Cleartax; Swastik Nigam, Founder & CEO, Winvesta, and Saakar Yadav, Managing Director of myITreturn.com. Read on...Let’s start with the basics. What are capital gains in the context of investment made in US stocks?Indian citizens are allowed to invest in shares of US-listed firms, exchange-traded funds and listed fixed income securities, but are not allowed to dabble in derivatives. So any profit booked on such investments will be capital gains. Dividends are not considered capital gains, but are part of your regular income.Let’s start with the dividends. Where and how are they taxed?Dividends are paid out by companies from their profits. Under the US law, Indians need to pay 25 per cent tax on their dividend income instead of 30 per cent, thanks to a tax treaty between the US and India. This tax will be withheld before you receive the dividend, which means you will receive 75 per cent of the dividend as a cash payout. This payout will be considered part of your income in India.Once I get the dividend in my account, do I need to pay taxes in India?As per latest Indian laws, dividend income is taxed as part of regular income. So, dividend income from US stocks will be added to your total income for the year and will be taxed at the applicable slab rate.But, you can offset the payable tax by the amount already paid in the US, as the two countries have a Double Taxation Avoidance Agreement. This would allow you to take credit for the tax withheld in the US and adjust it against your tax liability in India.For example, if you are in the highest tax slab, you may have to pay some taxes on the dividend. But you can offset the whole amount if you are in the lower slabs.What about capital gains?Fortunately, the US does not levy any tax on capital gains on foreigners (unless you have resided in the US for more than 183 days). But back home, you need to pay short-term or long-term capital gains taxes, depending on the tenure of your investment.Long-term capital gain: If you hold the shares for more than 24 months before selling them, the gain will be categorised as long-term capital gains and will be taxed at 20 per cent (plus applicable cess and surcharge) after indexation of cost.Short-term capital gain: If you hold the shares for up to 24 months before selling them, the gain will be categorised as short-term capital gain and added to your normal income to be taxed at the tax slab applicable to you.What happens in case of death while holding US stocks? Does this trigger any extra tax?In case of death, the securities will be subject to IRS (US tax agency) audit before being transferred to the legal heir. The audit may trigger US estate taxes, which need to be paid. Unlike India, which does not levy any tax on inheritance, the US levies 18-40 per cent tax. Non-resident investors are exempted from this tax, if the invested assets are worth less than $60,000. Anything above that will be taxed.Wow, those rates look pretty high! How can one avoid triggering estate taxes?One way of doing this is, if you have assets worth more than $60,000, you can split the investment between family members to get a higher total exemption. This way, assets under per head will come down sharply.Are there any other way to reduce taxes while investing in the US?Well, there are two more ways to bring down your tax outgo. The first one is a bit complicated. If you are investing in ETFs, you can choose to invest in US ETFs that are domiciled in some other regions, say Europe. For example, ETFs in the US have equivalent UCITS (a regulatory framework that allows sale of cross-Europe mutual funds) ETFs listed on London Stock Exchange, which can be bought.Thanks to the treaties between the US and some European countries, the dividends are taxed at 15 per cent (10 percentage points less while investing directly from India). Moreover, since they are not domiciled in the US, you can avoid the estate tax.The second option is straightforward. In the case of long-term capital gains, you can reinvest the gains in a residential house in India and avail exemptions from capital gains tax.What if my portfolio is in the red and I want to cash out my holding? Can I set off my losses?Yes. Under Indian income-tax laws, capital losses are allowed to be set off against capital gains. That is, taxes need to be paid only on the net capital gains. So, it may be advisable to liquidate stocks whose value has seen a permanent reduction to moderate the level of gains.It should be noted that losses in long-term capital assets can be adjusted only against gains on long-term capital assets. But short-term capital loss can be set off against both long-term and short-term capital gains. In case the losses cannot be set off, you can carry forward and set-off the balance losses in the eight succeeding years.