Planning to invest in foreign stocks? Find out its tax implications

A lot of investors have been investing in foreign stocks for the past few years. However, more often than not, they are faced with tax complications.

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Suresh Surana, Founder, RSM India, says, “Investing in foreign stocks is one of the best ways to diversify a portfolio. However, when investing in foreign stock, an investor needs to be wary about the tax treatments as well.”

Tax treatment of Capital Gains

First and foremost, it is pertinent to note that the foreign stocks are treated at par with unlisted equity shares in India for the purpose of taxation. Thus, if such foreign stocks are held for more than 24 months, the gains derived from their sale would be categorized as long term, otherwise short term in nature.

Surana says, “The Long term capital gains on foreign stocks would be subject to tax at 20 per cent along with the benefit of indexation, whereas the short term capital gains would be taxed in accordance with the slab rates, applicable to the resident individual in India.”

The tax rates mentioned in the above table will be enhanced by the applicable rate of surcharge to the investor as well as Health and Education Cess of 4 per cent.

Tax treatment of dividends

Dividends derived from the foreign stocks are subjected to tax in the hands of the Indian investor as ‘Income from other sources as per the applicable slab rates.

How to claim the foreign tax credit?

Surana says, “It is possible that the Indian investor may be subject to tax in the source country i.e. the foreign country based on the source rule and the investor would be liable to tax in India based on the residence rule, which may lead to double taxation.” He further adds, “ In such cases of double taxation, the investor may resort to obtaining relief or Tax credit for the taxes paid by him in the foreign country as per the Double Tax Avoidance Agreement (DTAA) between such a foreign country and India.”

In the absence of the existence of any DTAA between India and the foreign country where the investor is subjected to tax, investors can obtain unilateral relief for the taxes paid in the foreign country u/s Section 91 of the IT Act.

In order to claim the foreign tax credit, investors are mandatorily required to furnish Form No. 67 (specific form to claim foreign tax credit) as prescribed under the Income Tax Rules on or before the filing of return of income.

What are the disclosures that you need to make in ITR?

In case of an investor being Resident and Ordinarily Resident in India and holds as a beneficial owner or otherwise, any asset, including any financial interest in any entity, located outside India, has signing authority in any account located outside India, is a beneficiary of any asset, including any financial interest in any entity, located outside India, etc. would be required to furnish the details of such foreign assets in schedule FA of the applicable Income Tax return at the time of filing the return of income in India.

Surana adds, “It is notable that individuals who have their tax status as Non-Residents (NR) and Resident but Not Ordinarily Resident (RNOR) are not required to furnish details of the foreign assets in schedule FA.”

Also, the transaction details of the Capital Gain and Dividend would be required to be provided by the investor in Schedule CG and Schedule OS respectively at the time of filing of return of income.