Do you want to invest in the foreign market? Here are the tax rules
International investing has become popular because it not only gives geographic diversification but also protects a portfolio against currency fluctuations. Although one can invest in stocks from several countries, investing in US stocks is considered the most popular as the New York Stock Exchange (NYSE) and NASDAQ are the largest stock exchanges in the world. By opening a brokerage account overseas, through a domestic or overseas brokerage, one can now invest in some of the world’s biggest technology companies like Apple, Tesla, Starbucks, Nike and Meta (Facebook), among others.
You can also invest in foreign markets through international mutual funds available in India. The biggest advantage of these international funds is that you can invest in rupees without worrying about remittances and exchange fees. But before investing, it is important to understand their tax rules. Here are the details:
According to Vested Finance, which is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC), a long-term capital gains tax rate of 20% (plus surcharges and cession fees applicable) is levied on sales of shares held for more than 24 months. For ETFs, the long-term threshold is 36 months. If the investment is held for less than 24 months and profits are recognized, short-term capital gains are charged according to your income tax bracket.
In addition, dividends are taxed in the United States at a flat rate of 25%. The broker paying the dividend will subtract the 25% tax before distributing the remaining 75% to the investor. However, one can take credit for the dividend tax paid when filing income tax in India.
“For investments in US (or foreign) stocks, there are no special tax rates, etc. Foreign ownership is an asset like gold and is taxed accordingly. As we hold foreign assets here, we have to make sure that the funds used come from sources regularly declared in the tax declaration,” explains Sujit Bangar, founder of the online portal Taxbuddy.com.
What happens if you inherit foreign shares? Bangar says: “As an Indian, we invest in foreign assets through underlying instruments such as global funds, for example the Edelweiss US Technology fund. In these types of investments, there will be no incidence of inheritance or inheritance tax. If a person owns US stocks directly as an individual, after death there would be an estate tax impact. But in such a situation, an individual too will get full credit in India for the taxes withheld in the United States due to the DTAA between India and the United States.
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