Important Keyword: Tax on Foreign, DTAA, Income from Capital Gains, Income Tax, Tax on Income from US equity, Tax Relief.

Income Tax on Foreign Shares

As individual investors venture into foreign share markets to expand their investment horizons and potentially boost returns, it’s essential to weigh various factors. Investing in foreign shares offers access to global markets and the promise of enhanced profitability. However, before diving in, investors must carefully assess factors like geopolitical risks, currency fluctuations, and tax implications.

Taxes play a pivotal role in shaping investment decisions and can significantly impact trading frequency and overall profitability. Understanding the tax landscape is crucial for investors looking to navigate the complexities of foreign share markets effectively.

Key considerations include:

1. Capital Gains Tax: Profits from the sale of foreign shares may be subject to capital gains tax, both in the investor’s home country and the country where the shares are traded. Varying tax rates and regulations apply, necessitating a thorough understanding of how they affect returns.
2. Withholding Tax: Many countries impose withholding tax on dividends paid to foreign investors. These taxes can vary widely, impacting the net returns received by investors. It’s essential to factor in withholding taxes when evaluating investment opportunities.
3. Currency Risks: Currency fluctuations can affect the value of foreign investments and impact returns when converting profits back into the investor’s home currency. Investors must consider exchange rate movements when assessing the true cost and potential gains of foreign share investments.
4. Reporting Requirements: Investors are typically required to comply with reporting requirements for foreign investments imposed by tax authorities in their home country. Accurate reporting is essential to avoid penalties and legal complications.

To navigate the tax implications efficiently, investors can explore strategies such as tax-loss harvesting, investing through tax-advantaged accounts, and seeking professional tax advice. By understanding the tax implications upfront and implementing appropriate strategies, investors can maximize returns and manage risks effectively in foreign share markets.

Tax in India on Income from Foreign Securities

Tax treatment of income from foreign investments in India varies based on the taxpayer’s residential status. Residential status is determined by the number of days an individual stays in India during the financial year and the preceding years. Here’s a breakdown of the tax treatment based on residential status:

1. Resident and Ordinary Resident (ROR):
   • Residents are taxed in India on their global income, including income from foreign securities.
   • Income from foreign investments, such as dividends, interest, and capital gains, is taxable in India as per the applicable slab rates for the individual.
   • Foreign tax credits may be available to offset taxes paid on income earned abroad, subject to double taxation avoidance agreements (DTAA) between India and the foreign country.
2. Resident but Not Ordinary Resident (RNOR):
   • RNORs are taxed in India only on income earned or accrued in India and income received in India.
   • Income from foreign investments is typically not taxable in India for RNORs, provided it is not received in India or accrued or deemed to accrue or arise in India.
3. Non-Resident (NR):
   • Non-residents are taxed in India only on income earned or received in India.
   • Income from foreign investments, such as dividends, interest, and capital gains, is generally not taxable in India for non-residents unless it is received or deemed to be received in India.

It’s important for taxpayers to accurately determine their residential status and understand the tax implications of their foreign investments in India. Seeking professional tax advice can help individuals navigate the complexities of cross-border taxation and optimize their tax positions.

Income Heads for Trading in Foreign Securities

Investors engaging in trading activities involving foreign securities encounter various income heads for tax purposes. Here’s a breakdown of these income heads:

1. Capital Gains from Foreign Shares:
   • When investors sell foreign shares, the resulting income is categorized as Capital Gains Income under the Income Tax Act.
   • For unlisted foreign shares, the period of holding is considered as 24 months.
   • Long-Term Capital Gain (LTCG): Gains or losses from selling unlisted stocks held for more than 24 months are classified as LTCG or LTCL.
   • Short-Term Capital Gain (STCG): Gains or losses from selling unlisted stocks held for up to 24 months fall under STCG or STCL.
2. Capital Gains from Global Mutual Funds:
   • Gains from redeeming units of foreign ETFs or global funds that invest in foreign stocks are treated as capital gains.
   • If the fund’s investment in domestic company equities is less than 35%, taxation occurs at slab rates for the entire gain amount.
   • If the fund’s investment in Indian equities is 65% or more, it is treated like equity-oriented funds. In such cases, the holding period is 12 months. Selling funds within 12 months results in short-term capital gains taxed at 15%. If sold after 12 months, gains exceeding INR 1 lakh are taxed at 10%.
3. Other Income from Foreign Shares:
   • Dividend Income: Dividends received from foreign companies are considered taxable income under the head “Income From Other Sources” at slab rates. Taxpayers can claim expenses incurred for earning dividends, such as remuneration or commission, as deductions from dividend income.

Income Tax on Foreign Shares and securities

Income Tax on Trading in shares of foreign countries is similar to the tax treatment of other capital assets.

The calculation of capital gains in rupees for foreign assets is based on the telegraphic transfer buying rate (TTBR) of the relevant currency on the last day of the preceding month before the asset transfer.

Taxation on Dividend Income

Income from dividends received from foreign shares or securities is subject to taxation at slab rates in India. This income should be disclosed under the “Income from Other Sources” head in the Income Tax Return (ITR). Additionally, since this income may also be taxed in the source countries, double taxation could occur. To mitigate this, India has entered into Double Taxation Avoidance Agreements (DTAA) with various countries, providing provisions for concessional tax rates.

Carry Forward Loss for Sale of Foreign Shares

In the event of a loss from the sale of foreign shares, investors can offset Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). Any remaining loss can be carried forward for up to 8 years to offset against future STCG and LTCG. Similarly, Long Term Capital Loss (LTCL) can be set off against LTCG only, with any remaining loss carried forward for up to 8 years for offsetting against future LTCG.

Example:

Let’s consider Riya’s investment scenario:

• Riya purchased 20 shares of Apple Inc. on 01/04/2023 at USD 170 per share.
• She received dividends on 30/06/2023 (USD 50), 29/09/2023 (USD 75), and 31/12/2023 (USD 90).
• On 05/02/2024, Riya sold all 20 shares at USD 190 each.

The TTBR on such dates were as below:

To calculate the dividend income earned from the shares of Apple Inc. for the financial year 2023-24, we need to sum up all the dividends received during that period.

Thus, Riya’s total dividend income from the shares of Apple Inc. for the fiscal year 2023-24 amounts to INR 17,650, which she needs to report under the “Income from Other Sources” section while filing her Income Tax Return (ITR).

Now, let’s compute the capital gains from the sale of shares:

• Purchase value = USD 170 * 20 shares = USD 3,400
• Sales value = USD 190 * 20 shares = USD 3,800
• Capital Gains in USD = USD 3,800 – USD 3,400 = USD 400

Converting this capital gain to INR using the exchange rate of INR 90 per USD, we get:

Capital Gains in INR = USD 400 * INR 90 = INR 36,000

Additionally, if any taxes were withheld on Riya’s dividend income in the US, she can claim credit for the same under the Double Taxation Avoidance Agreement (DTAA) between India and the USA by filing Form 67.

Disclosure in the ITR:

• Riya must report her income from investments in the US market in her Indian Income Tax Return.
• The dividend income should be disclosed under the “Income from Other Sources” schedule.
• Capital gains or losses from the sale of foreign shares or securities should be reported under the “Capital Gains” schedule.
• Her investments in the foreign share market need to be disclosed under Schedule FA (Foreign Assets).
• To claim a foreign tax credit, taxes paid outside India must be reported in Schedule TR for tax relief.
• Riya must file Form 67 along with her ITR to claim a foreign tax credit.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/