Know about taxation while investing in the US market

Earlier we discussed taxation in mutual funds. In this article, we will discuss tax liabilities to consider while investing in the US market.

Many investors are interested in learning more about the US market and its investment opportunities. The financial market in the United States is the most influential financial center globally.

The New York Stock Exchange is the world’s largest stock exchange, with a market capitalization of more than 26.7 trillion dollars as of March 2022, while India’s GDP was 2.7 trillion dollars in 2020. You can imagine how big the US equity markets are. 

As an Indian investor considering investing in the US share market, you should know the tax liabilities and benefits. You will not be able to keep the money you earn tax-free. 

There are two types of gains from equities that are subject to taxation

1. Dividends 

A dividend refers to a portion of a company’s profit that it intends to distribute to its shareholders.  

As a result, because your investment is profitable, you must pay up the tax on the dividend you get. Although a firm is not required to pay dividends, most Blue-Chip corporations do so to retain goodwill. 

2. Capital gains on the sales 

When selling a stock, you have the option of making a profit or a loss. If you make a loss, no tax is due, but you must pay Capital Gains Tax on that profit if you make a profit.  

The stock’s holding duration determines the capital gains tax rate. 

Let’s now dwell on the taxation aspect

1. Dividends 

In the United States, if you own stock in a firm that pays a dividend, your tax burden is a flat 25% which gets deducted from your dividend before you get it, resulting in a cash distribution of 75% of the dividend. 

The good news is that because the US and India have a Double Taxation Avoidance Agreement (DTAA), you would be able to offset the US tax withheld against your Indian tax burden.  

As a result, the tax you pay on the 100% dividend will be offset by an overseas tax credit of 25%, leaving you to pay only the difference. 

Let’s understand with an example

Suppose you own Google (GOOGL) and have received a USD 1000 dividend. The broker will deduct USD 250 as his/her fee from the USD 1000 dividend you gained, while USD 750 will be transferred into your bank account.  

The USD 1000 dividend is included in your annual income for tax whenever you file your return in India. You will, however, be allowed to use USD 250 in international tax credits to decrease your Indian tax liability. 

2. Taxation on capital gains 

There is no Capital Gains Tax on US Stocks for foreigners in the United States. However, you must pay tax in India under the Capital Gains Tax scheme. 

Capital Gains are divided into two categories 

a) Long-term capital gains tax rate (LTCG) 

If you own a stock for more than 24 months, the profit from selling it shall be taxed at the long-term capital gains in India.  

Long-term capital gains are taxable at a rate of 20%. (Plus, any additional surcharge and cess). 

b) Short-term capital gains tax rate (STCG) 

If you make a sale before the 24-month, it will be the same as regular income, and your tax bracket will determine the tax rate. 

Let’s take an example to understand 

For instance, you brought Apple shares worth USD 5000 and sold them for USD 7000, making a profit of USD 2000. While this gain will be tax-free in the United States, you are required to pay your tax dues in India on the USD 2000 capital appreciation.  

If you hold the shares for two years, the tax accumulated is USD 400 plus any applicable surcharges and cess.  

If you sold shares after owning for a little less than 24 months, USD 2000 would’ve been added to your income and taxed according to your tax bracket for the year. 

Let’s sum it up in an illustration for ease of understanding and assimilation

The tax implications of investing in the US stock market are straightforward, and this should not deter any Indian investor from doing so.