Tax implications of investing in US stocks & ETFs
The Indian stock market offers plenty but if you’re looking for geographical diversification in your portfolio, you might want to look beyond it.
The United States is the biggest market in the world and a great attraction for investors the world over.
Investing in the US market means an opportunity to invest in the biggest companies in the world, and that includes the likes of Google, Facebook, Amazon, Apple, and more.
Now when something has so many great things to offer, why doesn’t everyone invest in the US? The truth is that investing in the US is much easier now than it ever was, but there are some misconceptions among Indians that hinder this route. The biggest of them are the worries of taxation upon the returns.
Let’s dive deeper into how taxation works when Indian citizens invest in the US stock market, either through stocks or exchange-traded funds.
Tax implications for investors
There are just two types of taxes levied on investors in this arena – capital gains tax and tax on dividends. Let’s understand both these taxes.
1. Capital Gains Tax
This is the tax paid on the appreciation of your asset over a period of time. Let’s say you bought a stock for 100$ and sold it after some time for 150$, capital gains tax is levied on the appreciation of 50$ on the stock.
An Indian Investor does not have to pay any capital appreciation tax in the US. The taxes on this are levied in India, depending on whether it is long-term capital gains or short-term capital gains.
a) Long Term Capital Gains (LTCG)
If you have held an asset such as a stock or ETF for 24 months or more before selling it, you have to pay 20% as long-term capital gains tax, along with other applicable surcharges and fees.
b) Short Term Capital Gains (STCG)
If you have sold a financial asset in less than 24 months for a profit, you add these gains to your income and pay taxes based on your income tax slabs.
The important thing to remember is 24 months is the duration that separates long-term and short-term capital gains.
2. Tax on dividends
Dividends are another way that investors make money. The taxation on dividends, when you invest in the US, is fairly simple. The tax on dividends for Indian investors in the US is 25%, which is lower than the tax rate for US citizens.
This is due to a treaty signed by India and the US to encourage investments from India to the US and vice versa.
Let’s understand this with an example. If you have received $ 1000 as dividends from an investment in the US, the amount you receive after the tax deduction is $ 750.
Now what gets most investors worried is if they have to pay taxes again in India on the 750$. The good news is that you don’t.
India and the US have signed a DTAA (Double Tax Avoidance Agreement) which ensures that you are not paying double taxes.
So, the tax you’d have to pay in India is not on the $ 750 you received after deductions but the $ 1000 you received as dividends, and the $ 250 that you’ve already paid as tax is accounted as tax paid on the amount. You only have to pay more if your tax slab exceeds 25%.
Invest in the US stock market with EduFund
You can now just download the EduFund app and create an account to start investing in the US. The account opening process is simple and the charges are zero you can get started with FAANG in your portfolio and have it geographically diversified!