For NRIs and Indian investors, investing in US stocks offers a diversified portfolio and reduces geographical risk. Through domestic or foreign brokers and indirect investments, you can directly invest in US stocks.
However, if you are considering the tax implications of investing in US stocks for NRI and Indian residents, then you are in the right place. In this blog, you will read about the tax implications that NRIs and Indian residents face while investing in US stocks. Additionally, about the different ways individuals can invest in US stocks. So, read on and gather all the information.
Key Takeaways
- Investing in foreign markets, like US stocks, offers NRIs and Indian residents to diversify their portfolio.
- Through direct and indirect investments, NRIs and Indian residents can invest in the US stock market.
- For NRIs and Indian investors, there is no capital gains tax in the US. However, on dividend income 25% is charged.
- In India, the capital gain tax is imposed as per the investment holding period, i.e., long-term or short-term capital gain tax. Additionally, on dividend income 30% standard tax is imposed.
- Under the DTAA, using Form W-8BEN, you can claim a foreign tax credit and avoid paying taxes twice on the same income.
What are the Different Ways NRIs and Indian Residents Can Invest in US Stocks?
There are two ways in which Indian residents and NRIs can invest in US stocks from India:
- Direct investment in US stocks
- Indirect Investment in US stocks (ETFs or mutual funds)
Moving further, let's read about these methods in some detail.
Direct Investments
The process of directly investing in the US stock market is simple. Considering this, you can make a direct investment in two ways. First, connect with a broker in India and ask them to help you open a trading account overseas. Secondly, contact a foreign investment broker and ask them to help you open a trading account abroad.
Further, the domestic broker with regulatory requirements ensures compliance and simplifies the US investment process. They work as intermediaries. On the other hand, if you prefer a wide range of investment options and direct control, opening a trading account through a foreign broker is the right choice.
Indirect Investments
In the indirect investments, you do not need a broker to purchase the US stocks. In this, without direct investment, you get exposure to the US stocks and get the stock of your choice. Considering this, here is the list of a few popular indirect stock investment options in the US:
- Mutual Funds: Through international mutual fund programs, you can invest in the US. While many of them only allow US citizens, some of them follow distinct indices for specific Asian or South American nations. These are good options for investors who like a less hands-on approach.
- Exchange-Traded Funds (ETFs): ETFs are just like mutual funds. However, they trade similarly to individual stocks on the exchange. ETFs are a cost-efficient and flexible option for getting an idea of the US market. Additionally, these provide more control to investors.
These are the different ways by which NRIs and Indian residents can invest in the US stock market. Moving ahead, let's know what the tax implications of investing in US stocks are for NRIs and Indian residents.
What are the US Tax Implications of Investing in US Stocks?
When it comes to US stocks, there are mainly two types of taxes that are imposed in the U.S. These are as follows:
Capital Gains
Capital gains tax is imposed when a US stock is sold at a higher price than its purchase price. However, if you are an NRI or an Indian resident, you do not need to pay or manage capital gain tax. It applies only to US residents, green card holders, and citizens.
Dividends
On your dividends that you received from the US stock market, you need to pay 25% dividend tax in the US. It is because the dividend you earned is treated as income in the US, as it arises in the country. Considering this, it is taxable there.
These are the US tax implications of investing in US stocks. Moving further, let's know the Indian tax implications of investing in US stocks.
Tax Implications of Investing in US Stocks for NRIs and Indian Residents in India
In India, the US stocks are taxed in three ways, i.e., Tax Collected at Source (TCS), capital gains, and dividends. Let's discuss them in detail:
Tax Collected at Source (TCS)
If your investment in the US stock is more than INR 7,00,000, then you need to pay 5% TDS on it. This clause is imposed as per the Liberalised Remittance Scheme (LRS) of the RBI. As per this, 5% TCS (Tax Collected at Source) is imposed on all foreign remittances that are more than INR 7,00,000. This means that if the investment amount from your US stocks exceeds INR 7,00,000, then you need to pay 7% TCS on it.
Capital Gains
In India, the capital gains are determined according to the holding period, i.e., short-term and long-term capital gains.
- Short-Term Capital Gains: If you held the US shares for less than 24 hours, then it comes in short-term capital gains. The short-term capital gains are taxed as per the income tax slab rate of the investor in India.
- Long-Term Capital Gains: If you held the US shares for more than 24 months, they are treated as long-term capital gains. Considering this, the long-term capital gains are taxed at 20% plus applicable surcharge and cess. Additionally, with US stocks, you can also claim the cost indexation benefits.
Dividend Income
Like the capital gains, the dividend income from the US stocks is also taxable in India. It is taxed at a 30% standard rate. This dividend income is also taxable in the US. This means that paying taxes twice on the same income in two different countries. However, with the Double Tax Avoidance Agreement (DTAA) signed between India and the US, you can avoid this.
Confused? Using this agreement, you can claim a foreign tax credit in India on your paid dividend taxes in the US. This means that you offset your paid dividend taxes in the US against your Indian tax obligations.
For instance, the standard tax rate on dividend income is 30% in India. Additionally, you have already paid 25% tax on your dividend income in the US. Considering this, under the DTAA, you can claim a 25% foreign tax credit on the dividend taxes you paid in the US. Further, only pay 5% tax on your dividend income in the US.
However, to claim these reduced tax rates, you need to provide your broker with proper documentation. This generally involves Form W-8BEN. This form serves as evidence of your foreign status in the US and makes you eligible for treaty benefits.
To summarize, have a look at the table below:
| Nature of Income |
Taxable in the US |
Applicable Tax Rate in the US |
Taxable in India |
Tax Rate in India |
Comments |
| Short-Term Capital Gain |
No |
- |
Yes |
According to the income slab rate |
Applicable along with surcharge and fees |
| Long-Term Capital Gain |
No |
- |
Yes |
20% tax along with indexation |
Applicable along with surcharge and fees |
| Dividends |
Yes |
25% |
Yes |
Generallly 30% (or as per the income tax slab rate) |
Foreign tax credit is available for paid taxes in the US |
So, this was all about the Indian tax implications of investing in US stocks for NRIs and Indian residents. Further, income from the dividends and capital gains will first be converted from dollars to Indian rupees. For currency conversion, the SBI TT buying rate is used. Considering this, for conversion, the rate of the last day of the preceding month is used, in which the dividend income or capital gain is declared. After that, the tax will be calculated.
Now, moving ahead, let's know some tips to invest in the US stocks.
Tips to Invest in US Stocks
Now that you have a basic understanding of the tax implications that NRIs and Indian residents face during US stock investment, let's talk strategy. Here are some tips that, as a foreign investor, help you handle the taxes on the stocks:
- Understand Your Tax Residency: Depending on your residential status, your tax obligations change. If you have stayed significant time in the US, try to understand the tax implications.
- Keep Good Records: Keep a record of all your dividends, trades, and withholding taxes. It will assist you in paying your tax on time without any issues.
- Consider Your Investment Vehicle: Sometimes, investing in a foreign trust or mutual fund assists you in understanding the US taxes. However, these have their own difficulties. So, before opting for this route, it is advisable to take the help of professionals.
- Stay Informed: With time, tax laws and treaties change. So, keep yourself up-to-date with any changes that might impact your investments.
- Understand the Fees and Costs: When investing in US stocks, it is vital to be aware of the several fees associated with trading. These include brokerage fees, taxes, and charges of currency conversion.
These are some tips that, as an NRI or Indian resident, you should consider while investing in US stocks from India.
Final Thoughts
Lastly, UK stock investment provides NRIs and Indian residents with the opportunity to diversify their portfolio. Additionally, it also helps them tap into one of the largest economies in the world. However, it is also vital to understand the tax implications of investing in US stocks for NRIs and Indian residents. It helps in fulfilling the tax obligations and avoiding penalties.
Further, with Savetaxs, you can simply handle your tax implications associated with your US stocks. We have a team of professionals who assist you in understanding the US tax implications and help you with your ITR filings. So, connect with us, easily manage your US tax implications, and increase your foreign investments.
Note: This guide is for information purposes only. The views expressed in this guide are personal and do not constitute the views of Savetaxs. Savetaxs or the author will not be responsible for any direct or indirect loss incurred by the reader for taking any decision based on the information or the contents. It is advisable to consult either a CA, CS, CPA or a professional tax expert from the Savetaxs team, as they are familiar with the current regulations and help you make accurate decisions and maintain accuracy throughout the whole process.
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