Before going into the specifics, you must know about the two types of taxes on stock trading in the United States. These include:
- Tax on dividends, and
- Capital gains tax
For Indians investing in the US stock market, understanding these two types of taxes is paramount.
Find out who holds the title of India’s Highest Tax Payer today.
Tax on dividends
To calculate the tax on US stocks in India, you must also consider the dividends earned from these stocks, which are considered taxable income as per the Income Tax Act. Indian investors earning these dividends are taxed at a flat 25%, and the US businesses withhold this tax amount, paying the remaining 75% to the investor.
Thus, for Indians investing in the US stock market, if the dividend declared is $200, the investor makes $150. That said, this tax is lower compared to the standard tax for foreign investors in the United States, owing to the treaty between the US and India. Additionally, if you, as an investor, choose to reinvest the dividend, it will be added to your income and taxed at your regular income tax slab rate.
You can also leverage the Double Tax Avoidance Agreement (DTAA) to adjust the US withholding tax against your tax liability in India. Let us look at an example to understand the same:
Let us assume the company paying dividends has declared $200 as the payout. This implies you will receive $150. At the same time, the tax liability within India will be computed on $200. If the tax liability is around $60 in India, you will only have to pay $10, as you had already paid $50 in the United States. While calculating your tax liability in real life, you must add $200 to your taxable income and calculate your liability as per the income tax slab applicable to you.
Capital Gains Tax
Indians investing in the US stock market must also know about the capital gains tax. There are no taxes applicable in the United States when you earn capital gains. That said, you must pay taxes on these gains in India. Capital gains tax in India is divided into long-term capital gains (LTCG) tax and short-term capital gains (STCG) tax.
Let us now see how you can compute capital gains on foreign shares.
- Long-term capital gains: As per the Union Budget 2024 amendments, if you hold stocks for more than 24 months (2 years) before selling them, the gains will be termed long-term capital gains and will be taxed at 12.5% without any indexation benefit.
- Short-term capital gains: If you hold stocks for less than 24 months (2 years) before selling them, the gains will be termed short-term capital gains and are taxed at your income tax slab rate.
Let us take a look at an example to better understand capital gains tax.
Mr. A, an Indian investing in the US stock market, purchases shares worth $1000 and sells them for $1500 after 25 months. Thus, they will earn an LTCG of $500, with a tax liability of $62.5 without any indexation benefit.
If Mr. A had purchased shares worth $1000 and sold them for $1200 within 24 months, they would have earned a short-term capital gain of $200, which would be added to his taxable income and taxed as per their applicable slab rate.
