Tax Rules for International Investments: Stay Compliant and Profitable

• For foreign stocks, long-term capital gains (held for over 24 months) are taxed at 12.5% without indexation

• Short-term capital gains on such investments (held for less than 24 months) are taxed based on the individual's income tax slab rates

• A 20% Tax Collection at Source (TCS) applies when remitting over ₹7,00,000 abroad for investments

• If taxes are paid in a foreign country (e.g., withholding tax on dividends), you can claim Foreign Tax Credit in India to avoid double taxation

Investing in international stocks can be lucrative, but it comes with unique tax considerations. In India, you will have to pay capital gains tax on foreign shares. Long-term capital gains, held for more than 24 months, are taxed at 12.5% without indexation benefit. While short-term capital gains, held for less than 24 months, are taxed as per the applicable income tax slab.

Dividends from foreign stocks are also considered income and taxed as per your applicable tax bracket. The income will be converted to Indian Rupees (INR) for calculation purposes.

Most foreign countries levy withholding tax on dividends. For example, the US withholds tax at 25% on dividends. This foreign tax can be claimed as a tax credit under the Double Taxation Avoidance Agreement (DTAA) to offset your Indian tax liability.

Investing in foreign stocks brings unique tax implications for Indian residents:

Check out the application of capital gains tax on selling foreign shares:

• Long-term Capital Gains (LTCG): Stocks held over 24 months are taxed at 12.5% (plus surcharge and cess) without indexation benefit

• Short-term Capital Gains (STCG): Stocks held less than 24 months are taxed at the applicable income tax slab rates (up to 30%)

Dividends from foreign stocks are taxed according to your income tax bracket in India.

Resident Indians must report foreign investments and income in their tax returns, while NRIs only pay tax on India-based income.

A 20% TCS is applied when remitting over ₹7,00,000 abroad for investments.

For foreign ETFs, holding periods of more than 24 months qualify for LTCG from July 2024.

Gains or dividends from foreign stocks are converted into INR for tax purposes, affecting the amount of tax.

If you are a resident Indian and hold foreign shares, any income from them, like dividends or capital gains, is taxable in India. Check the table below for more clarity:

To calculate tax on selling foreign shares, follow these steps:

1. Determine the Holding Period - If you’ve held the shares for more than 24 months, the gains are considered long-term capital gains.

2. Calculate the Gain - Subtract the purchase price from the selling price to find your profit.

3. Apply Tax Rate - Long-term capital gains are taxed at 20% in India, plus any additional surcharge and cess.

For example, if you bought shares for ₹1,00,000 and sold them for ₹1,50,000, your gain is ₹50,000. The tax on this gain would be 20% of ₹50,000, which is ₹10,000, plus any applicable surcharge and cess.

Foreign Tax Credit (FTC) allows taxpayers to avoid double taxation on income earned from foreign investments. If you pay tax on dividends or capital gains in a foreign country, FTC enables you to claim a credit for those taxes.

This ensures you’re not taxed twice on the same income, thus reducing your overall tax burden. For instance, if you paid tax on foreign stock dividends abroad, you can use the FTC to offset that tax liability in your home country.

To claim a Foreign Tax Credit (FTC) in India, follow these steps:

1. Convert Foreign Income to INR - Use the Telegraphic Transfer Buying Rate (TTBR) for the last day of the month before the income is due.

2. Classify Income - Categorise your foreign income under the relevant head (salaries, interest, dividends, etc.).

3. Claim Credit for TDS - Refer to the DTAA and claim credit for taxes deducted in the source country.

4. Obtain a TRC Certificate - Get a Tax Residency Certificate to apply for the correct DTAA benefits.

5. Fill in ITR Details - In Schedule FSI, include income earned abroad, tax paid in the source country and the tax payable in India.

6. Enter Tax Relief - Claim the lower of the tax paid abroad or the tax payable in India.

To minimise taxes on international investments, here are some strategies:

1. Leverage Tax Treaties (DTAA)

Utilise Double Taxation Avoidance Agreements between India and the country where you are investing. This can help avoid paying taxes on the same income in both countries.

2. Claim Foreign Tax Credit (FTC)

If tax is paid in a foreign country, claim FTC in India to offset the taxes already paid, reducing your tax liability.

3. Hold Investments for Long Term

Long-term capital gains on foreign shares are taxed at a lower rate. Holding investments for more than 24 months can reduce your tax liability.

Currency fluctuations can significantly impact the returns on foreign investments. Here's a breakdown of the major points to consider:

• Currency Risk for Indian Investors: Currency fluctuations affect returns on international investments.

• Currency Risk Management Strategies: Tools like forward contracts, options, and currency swaps can help you manage this risk.

• Hedging Techniques: Natural hedging and other methods also allow you to protect your investment against currency fluctuations.

1. How is capital gains tax calculated on foreign stocks?

It is calculated based on the holding period. If the stocks are held for over 24 months, they are considered long-term and taxed at 12.5% without indexation. Short-term capital gains are taxed based on the individual's income tax slab.

2. What are the tax rates for foreign shares and investments?

Capital gains from foreign shares are taxed at 12.5% for the long term and as per income tax slab for the short term held under 24 months. Dividends are taxed at 25% in the source country.

3. How do foreign tax credits work for international stock investments?

It allows Indian residents to offset taxes paid on foreign stock investments against their Indian tax liability. This helps avoid double taxation on the same income.

4. Is withholding tax applied to dividends from foreign stocks?

Yes, withholding tax is applied to dividends from foreign stocks at a rate of 20% under Section 195 for foreign companies. This rate may be reduced under applicable DTAA.

5. What are the tax implications when selling foreign shares?

When selling foreign shares, the tax implications depend on the holding period. Long-term capital gains from shares held for more than 24 months are taxed at 12.5%. Short-term capital gains from shares held for less than 24 months are taxed according to the applicable income tax slab.

6. Can I claim foreign tax credits on international dividends?

Yes, you can claim foreign tax credits on international dividends to offset the tax paid abroad, as per the DTAA while filing your income tax return in India.

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