ITR filing, taxation of US stocks, capital gains in US stocks, dividends, taxes, ltcg, foreign earnings in ITRIf you’ve made capital gains in US stocks, here’s how to report your foreign earnings in the ITR.

Investments in US stocks are taxable for resident Indians and foreign earnings must be reported while filing an Income Tax Return (ITR). You could have earned a dividend, a capital gain, or you could incur a capital loss while investing in US stocks. There are specific rules to deal with and they must be properly reported in the ITR to avoid any income tax notification.

There is no capital gains tax in the US, which means that gains from the sale of US stocks are tax-deductible under US tax laws. However, these gains are taxable under Indian tax laws. Sujit Bangar, Founder of TaxBuddy.comProvides a comprehensive view of the tax structure on foreign income arising from equity investments.

Taxation of US stocks

Resident taxpayers who invest in US stocks need to declare such investments in the ITR as well as pay applicable taxes on income earned from such investments. Such investments produce two types of income – dividend income and capital gains from the sale of shares. The tax rules for both types of income are different. The India-US Double Taxation Avoidance Agreement (DTAA) ensures that income taxes are not levied in two places. Thus, you do not have to pay tax on the same income in India as in the United States.

Dividend income from US stocks

Dividend income on investing in US stocks is taxable in the US at 25%. This tax is deducted and pays you a net tax profit. Let’s say you earned $500 in earnings, of that $125 (25%) that is deducted as income tax and only $375 is credited to your account. In India, such dividend income is taxed as income from other sources and at the applicable tax bracket rates. Hence, $500 (converted in rupees) has to be declared as dividend income. The total income (including dividend income) is then taxed and against this, the $125 US tax paid can be claimed as an external tax credit. This is in accordance with Article 25 of the DTAA between India and the United States. Thus, you do not have to pay tax in two places on the same income. However, income must be declared in India, even if your tax liability is up to zero.

Capital gains from US stocks

Income from capital gains is accrued when US stocks are sold or transferred. This income is long-term capital gain (LTCG) if the shares are held for more than 24 months, otherwise it is short-term capital gain (STCG). At present, there is no tax on capital gains income in the United States. Hence, the tax must be paid in full in India without claiming any foreign tax credit. Income from capital gains should be calculated in a manner similar to that of Indian equity and declared accordingly. Tax credit is available for LTCG income up to Rs. 1 lakh in case of Indian shares not available in case of foreign shares. The tax rate for LTCG on foreign stocks is 20% and the same for STCG is at applicable tranche rates.

If one incurs a loss on selling US stocks, the short-term capital loss can be offset against LTCG or LTCG, but long-term capital loss can only be offset against LTCG.

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Taxpayers (non-commercial cases) who have invested in foreign stocks (assets) are obligated to file ITR compulsorily in ITR-2 as they have to report these foreign investments in Schedule FA of ITR-2. This table must be filled out carefully. In this table, not only the details of the assets but also the income generated from these assets need to be declared.

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