Understand Tax Implications before Investing In The US Stock Market

Are you an Indian resident? Are you looking to invest in US stocks?
 
Due to several strong factors, Indian investment is constantly increasing in US stocks. One of the main reasons for Indians to get attracted to the USA's stock market is its variety of investment sectors. Also, the USA stock market is one of the biggest and most developed in the world. Then you might be wondering how your investments will be taxed and if there are any exemptions in Tax Filing Online. Hold onto your hats because, in this blog, we're about to unfold the twists and turns of its tax implications. Specifically, how dividends and capital gains will be taxed in both the US and India. Buckle up, because we're going to unravel the overlooked aspect of investing in US stock that could make or break your investing strategy.

What are the Tax Implications?

Let's start by knowing the different kinds of taxable incomes you may get from investing in US equities:

1. Tax on Dividends
2. Capital Gain on Sale

Tax on Dividends

Dividends are the returns distributed to shareholders. When a company distributes its profits, it also offers dividends to stockholders. While counting the tax on your US stock investments, you have to look into the dividends you have earned from your US stocks. The amount you have earned is taxable at a flat rate of 25%. For example, when a company declares a dividend of $100, this amount will be charged at a rate of 25%, and you will receive $75. $25 will be tax that you'll have to pay on your earnings.

“Please note this tax rate is lower then the standard tax rate for foreign investors in the USA due to the tax treaty between India and USA.

Let us now explore Indian tax policy. The amount of dividends you get in cash is likewise taxed in India at the appropriate income tax slabs when added to your existing income. But as per India and the USA's Double Taxation Avoidance Agreement (DTAA), you are allowed to use the tax withheld in the US to offset the tax liability in India. When a company declares a dividend of $100, you will receive $75. However, the tax in India would be calculated at $100. Let's say India has a tax liability of $30. Since you have already paid $25 in the USA, You will have to pay only $5 in India. 

*Please note that this is only an example; the real-time calculation will require more effort since you will need to add $100 to your taxable income and calculate your tax due depending on the slab that applies to you.

Tax on Capital Gain

The other kind of income that you can generate is capital gain from the sale of your US stocks. Firstly, understand what capital gain is. When you sell your shares at a price higher than the purchase value, the amount generated is a gain on invested capital. And here is good news, there is no capital gain tax in the USA for non-resident individuals.

If your residence status under the Income Tax Act is "resident," your whole international income is taxed in India. That plainly implies that capital gains gained on US stocks will be taxed in India while Online Tax Return Filing. This means that capital gains generated on US equities will be taxed in India.

Hence, if you acquire $100 worth of shares and sell them for $400, you will not be taxed in the United States on the $300 generated capital gain. However, you will still be required to pay taxes on capital gains in India.

Conclusion 

To summarise, dividends generated from US equities will be subject to a 25% tax in the US under the India-US DTAA. On the other hand, NRIs in the United States do not pay capital gains tax. Dividends, on the other hand, will continue to be taxed in India, resulting in apparent double taxation. However, the India-US DTAA allows you to claim a foreign tax credit and balance the tax withheld in the United States against your Indian tax burden.

Understanding the tax technical is crucial for Tax Filing Online. Many investors avoid overseas equities because they are unaware of and likely concerned about taxes and fees cutting into their gains. We hope this article explains the tax consequences of investing in US companies.