Investing in global markets can be rewarding, but one area often overlooked is taxation. Many first-time investors are unclear about how taxes apply when investing in US equities. If you are considering American shares, understanding the tax on US stocks in India is critical for planning and maximizing your returns.

Why Tax Matters in Cross-Border Investing

While it’s exciting to participate in international markets, tax obligations can directly affect your net gains. Ignoring them may lead to surprises later. Knowing how the rules work allows you to make informed decisions and avoid penalties.

Two Layers of Taxation to Consider

  1. In the United States
  • Dividends: The US government typically applies a withholding tax of 25% on dividends paid to Indian investors.
  • Capital Gains: Interestingly, the US does not tax capital gains for non-residents.
  1. In India
  • Dividends: Taxed as per your income slab in India, with credit available for the 25% already withheld in the US under the DTAA.
  • Capital Gains: In India, short-term capital gains (held for less than 24 months) are taxed as per your income slab, while long-term gains are taxed at 20% with indexation benefits.

Midway Example: Practical Impact

Let’s say you earned dividends of $500 from your US holdings. The US government may deduct $125 (25%) upfront. When reporting this in India, you’ll declare the full $500, but you can claim a credit for the $125 already paid due to the Double Taxation Avoidance Agreement (DTAA). This ensures the tax on US stocks in India doesn’t eat away all your returns.

Common Mistakes Investors Make

  • Not reporting foreign assets in annual income tax filings.
  • Overlooking currency conversion when calculating gains.
  • Assuming that only domestic taxation applies.

How to Stay Compliant

  • Maintain detailed records of every transaction, including remittances and withdrawals.
  • Report all foreign assets in the relevant income tax schedules.
  • Consult with a professional if your holdings grow complex.

Conclusion

Cross-border investing offers opportunities for diversification and long-term financial growth, but taxes play an unavoidable role. By understanding how the tax on US stocks in India works, you can ensure compliance, minimize surprises, and preserve more of your hard-earned returns.