How Gains From Foreign Shares Are Taxed In India

Overview of tax on foreign shares in India

Investing in foreign shares has become increasingly popular among Indian investors seeking to diversify their portfolios and take advantage of global growth opportunities. However, understanding the taxation of gains from these investments is crucial for effective financial planning.

In India, gains from foreign share markets are taxed based on the duration for which the stocks were held. Here’s a summary of how these gains are taxed:

• Short-Term Capital Gains (STCG): If foreign shares are sold within 24 months of purchase, the gains are considered short-term and are taxed according to the individual’s income tax slab rate.
• Long-Term Capital Gains (LTCG): For stocks held for more than 24 months, the gains are considered long-term and are taxed at a rate of 20%, plus applicable surcharge, health and education cess, and with the benefit of indexation on the cost.

Additionally, from October 1, 2023, individuals investing in foreign shares, mutual funds, or cryptocurrencies abroad will have to pay a 20% Tax Collected at Source (TCS) if they spend over a certain amount in a financial year.

Types of Gains from foreign shares market in India?

Gains from foreign share markets are taxed in India based on the type of income and the duration for which the investment is held.

These gains can be categorized as capital gains and dividend income.

1.Dividends: These are payments made by a corporation to its shareholders, usually as a distribution of profits. When a company earns a profit or surplus, it can reinvest it in the business (called retained earnings), and pay a portion of the profit as a dividend to shareholders.

Dividend income from foreign shares is subject to taxation in India.

2. Capital Gains: This income is realized when you sell your foreign shares investment for more than you paid for it. The gain is the difference between the higher selling price and the lower purchase price.

Capital gains are classified as either short-term or long-term, depending on how long you held the investment before selling. In India, if you hold the foreign shares for more than 24 months, they are considered long-term and are taxed at a rate of 20% with indexation benefit. If held for 24 months or less, they are considered short-term and are taxed according to the individual’s income tax slab rates

Tax Implications of Selling Foreign Shares

The tax implications of selling foreign shares for an Indian resident can be quite detailed. Here’s a summary based on the latest information:

• Capital Gains: Any gains or losses from the sale of foreign shares are taxable as capital gains or losses in India.
• Holding Period: Shares held for more than 24 months are considered long-term capital assets, and gains or losses are classified as long-term capital gains or losses (LTCG/L).
•  If held for 24 months or less, they are short-term capital gains or losses (STCG/L).
• Tax Rates:
  • LTCG: Long-term capital gains on foreign shares are taxable at 20%, plus the applicable surcharge and cess. Indexation benefit can be applied to the cost of acquisition.
  • STCG: Short-term capital gains are taxable at the individual’s applicable income tax rates, plus the applicable surcharge and cess.
• Conversion Rates: For conversion of income from capital gains earned in foreign currency to rupees, the telegraphic transfer buying rate of the State Bank of India as on the last day of the month preceding the month in which the shares are transferred is used

Tax on Globle Mutual Funds –

Capital Gains: Profits earned from mutual funds are taxable as capital gains. The tax rate depends on whether the gain is short-term (STCG) or long-term (LTCG).

• • Equity Funds: If held for more than 12 months, they qualify for LTCG, which is exempt up to ₹1 lakh and taxed at 10% beyond that. If held for 12 months or less, they attract STCG, which is taxed at 15%.
  • Debt Funds: For holding periods of more than 36 months, gains are considered LTCG and taxed at 20% after indexation. If held for 36 months or less, the gains are STCG and added to your income, taxed as per your slab rate.

Dividends Earned from Foreign Shares

• In the US: Dividends from US shares are subject to a flat withholding tax rate of 25% for non-resident Indians (NRIs) under the US-India DTAA.
• In India: Dividends received from US shares are taxed as “Income from other sources” in India. The same dividend income is taxed at the applicable income tax slab rate of the individual. However, due to the Double Tax Avoidance Agreement (DTAA), you can claim a foreign tax credit for the taxes paid in the US.

 

What is the Double Taxation Avoidance Agreement (DTAA)?

DTAA is an agreement between two countries to avoid taxing the same income twice. If you have paid taxes on your foreign income in the country where it was earned, you can claim a credit for those taxes against your Indian tax liability, provided there is a DTAA between India and that country.

India has signed the Double Tax Avoidance Agreement (DTAA) with over 95 countries. This agreement allows investors to claim tax credits to avoid double taxation

Yes, India has Double Taxation Avoidance Agreements (DTAA) with various countries, including the US, to provide relief from double taxation. Under the DTAA, you can claim a foreign tax credit for the taxes paid in the foreign country on the dividend income against your Indian tax liability.

The Double Taxation Avoidance Agreement (DTAA) typically offers relief through two methods:

1. Exemption Method: This method allows the income to be taxed in only one country. This means that the income is exempt from tax in the resident country if it’s taxed in the source country where the income is generated.
2. Tax Credit Method: Under this method, the individual or entity pays taxes on the foreign income in the source country, and then claims a credit for these taxes against the tax liability in their country of residence.

 

How To Report Gains From Foreign Shares In ITR

To report gains from foreign shares in your Indian Income Tax Return (ITR), you should use ITR Form 2. Here’s how to report these gains:

1. Capital Gains: All gains from the sale of stocks must be reported in the capital gains schedule (Schedule CG).
2. Dividends: All gains from dividends shall be reported in Schedule OS.
3. Foreign Assets: If you held the shares on or after 31st March of the relevant year, you should report them in the foreign asset schedule (Schedule FA).

Investments in foreign companies involve currency risk since the funds are converted to dollars (or the relevant foreign currency) before being invested. This can affect the investment value as the exchange rates fluctuate.

Under the Income Tax Act, 1961, non-disclosure of foreign assets can lead to serious consequences. The penalty for non-disclosure can be as high as ₹10 lakhs. Moreover, the tax return could be considered defective under Section 139(9), and the Income Tax Department may issue a notice to the taxpayer.

It’s important for taxpayers to be diligent in disclosing all relevant information to avoid such penalties and notices.

 

Documents required to claim the foreign tax credit

The assessee needs to furnish the following documents to claim the credit of foreign tax –

(a) A statement specifying income offered to tax in the foreign country for the previous year and foreign tax which has been deducted or paid on such income in Form No. 67.

(b) A certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee from the tax authority of the foreign country or the person responsible for the deduction of such tax. It should be signed by the assessee and accompanied by the following-

• An acknowledgement of online payment or bank counterfoil or challan for payment of tax, where the payment has been made by the assessee.
• Proof of deduction, where tax has been deducted.

 

 

Frequently Asked Questions