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Foreign Income and Taxes

Investments, stocks, portfolios-these seem to be quite the buzzwords on social media these days. And now the option of being able to invest in foreign stocks has made investment an even more alluring choice. Investment in foreign stocks could be a good option to diversify an individual’s portfolio and to get better returns. Keep in mind that RBI guidelines are applicable to individuals if they plan to invest in foreign stocks.

How to buy foreign stocks?

Individuals can acquire foreign stocks either by direct investment or via purchase. You can purchase foreign stocks under the

  • Liberalised Remittance Scheme (LRS).
    It allows all resident individuals to freely remit up to USD 2,50,000 per financial year, subject to RBI and FEMA Guidelines.
  • Investments under the Overseas Direct Investment (ODI) route.
  • Additionally, individuals can also acquire foreign stocks via the Employee Stock Options Plan (ESOP) of the employer.

Taxes on Income from foreign stocks

For ordinary Indian residents, the total income you earn from investing in foreign stocks or your global income so to speak is taxable in India subject to DTAA. However, for NRIs income earned and received outside India is generally not taxable.

A little confused about your Residential status? You can check out the Residential status calculator.

When it comes to Indians investing in foreign stocks, the US clearly wins the race. So let’s talk a bit about the taxability of US stocks in India. An investor gets generally two types of income from foreign stocks:

  1. Dividends
    When an resident individual receives dividend from an US stock, it will be taxed at the rate of 25% , the rest will be given to the shareholder. Now that earning will also be taxed by the Indian government according to the prevailing tax rates. However, owing to the DTAA signed between India and the US, the tax that has been deducted in the US can be claimed as foreign tax credits against the tax liability in India.
  2. Capital Gains
    However, when it comes to capital gain from US shares, no taxes are levied on profit or gain incurred at time of selling stocks in US. But contrary in India, capital gain income will be taxable as per Indian tax laws.

Taxation of Shares Purchased under ESOP

An increasing number of companies are giving stock options to their employees.  Apple, Netflix, Spotify are a few of the companies offering ESOPs

When it comes to ESOP, things are a little bit more nuanced as the taxation happens at two stages:

  1. At the time of allotment of shares
    The income is determined based on the difference of the fair market value (FMV) of shares on the date of allotment and the amount paid to acquire such shares. This income is treated as perquisite and taxed as part of salary income at the applicable slab rates.
  2. At the time of sale of shares
    During the time of sale of shares, the income is taken as the difference between the sale proceeds and the cost of acquisition of shares (i.e. FMV). The individual would need to pay tax on such capital gain.

However, there are other considerations too when it comes to taxation on ESOPs

  • Tax residency of the individual at the time of allotment of shares
  • Tax residency of the individual during the vesting period i.e. grant to vest dates
  • Cost of acquisition
  • Challenges in claiming double-taxation relief/foreign tax credit under a Tax Treaty owing to the differentiation in nature of income from ESOP i.e. as employment income or capital gain

Mode of Tax payment

Tax on salary income in the case of ESOP shares is subject to tax withholding by the employer. For capital gain on foreign shares, the tax needs to be submitted by the individual by way of Advance Tax or Self-assessment Tax.
However, under the LRS scheme, if the amount transferred abroad exceeds INR 7 lakh then TCS @5% on the excess amount is applicable and individuals can get the refund on filing the income tax return in India.

Reporting of foreign incomes

In case of capital gain income during FY 2020-21, individuals need to file Form ITR-2 or ITR-3.
The reporting it in your ITR would be as below for foreign stocks:

  • Schedule CG for Capital gain
  • Schedule OS for Dividend income
  • Schedule FSI and Schedule TR for claiming foreign tax credit in case of double taxation relief
  • Schedule Foreign Assets: Details of holding of foreign shares/securities 

Investing in foreign stocks is a comparatively new phenomenon in India. The taxability when it comes to income from foreign shares often gets complicated. India has different DTAA with different countries and the clauses of the DTAA may also get updated from time to time. To put in other words, not only will taxability on foreign income differ from country to country but it may also differ for the same country from one time period to the other.

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Got Questions? Ask Away!

  1. Hey @Nihal ,

    Since you hold the status of a resident, your global income is taxable. Thus, you must report the income on sale of foreign shares and pay tax on it at applicable rates. Check out our Learn Center resource for more information about NRO and NRE Accounts- Guide: Income Tax for NRO and NRE Accounts

  2. Avatar for Nireka Nireka says:
  3. Hey @Nireka

    Indian investors can invest in US stocks from India subject to RBI’s LRS guidelines. There may some RBI restrictions to hedge the foreign stock positions. For tax implications, any dividends income from foreign stock will be taxed in India subject to India- USA DTAA, as dividend is taxed @25% in USA.

    Any capital gain from sale of foreign stocks are also taxed in India. When foreign stocks are sold within 24 months then it will be treated as short term, other wise long term. In case of short term gain, slab rates will apply and in case of long term gain, 20% rate with indexation or 10% without indexation will apply. Moreover, investors can claim foreign tax credits to avoid double taxation.

  4. Can I claim credit of the tax deducted in the USA on income from the sale of shares of my company (ESOP)?

  5. Hi @Dixita

    If you are a resident in the financial year, you must report such foreign income in the ITR in India. As per the DTAA agreement between India and the USA, the same income is not taxable in both countries. Thus, if you have paid tax on such income in USA, you can claim the credit of such tax paid by filing Form 67. Tax relief shall be lower of tax paid in USA or tax payable in India and can be reduced from total tax liability in India.

    You can refer to the below article for detailed provision of DTAA between India and the USA: DTAA between India and USA - Learn by Quicko

    Hope this helps :slightly_smiling_face:

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