How are capital gains and dividend income from US stocks taxed?

Tax liability on the earnings from investing in US stocks depends upon the nature of earning and the residential status of the investor. Earning from investing in US stocks can be either in the form of dividends or capital gains. US and India have a Double Taxation Avoidance Agreement (DTAA) which ensures that investors are not taxed twice for the same income. The taxation on earnings from US stocks is simple. Here are the taxation rules for a resident and ordinarily resident in India:

How are dividends received from US stocks taxed?

If you own stock or ETF listed in the US that pays a dividend, your tax liability in the US would be a flat 25% (lower than otherwise for a foreign investor due to the tax treaty between US and India). This tax will be withheld before you receive the dividend, which means that you will receive 75% of the dividend as a cash payout.

"Such dividend income will be taxable in India as well. From FY 2020-21, you have to pay tax on any dividend income earned by you. Such dividend income will be added to your total income for the year and will be taxed at the applicable slab rate," says Swastik Nigam, founder & CEO, Winvesta.

Well, don't worry, the dividends received will not be taxed twice. You will be able to offset the US tax withheld against your tax liability in India as US and India have a Double Taxation Avoidance Agreement as stated above.

How are capital gains on US stocks taxed?

When you sell any holdings in the US, you earn capital gains. The gain amount will be the 'Sale Price - Acquisition Cost' of the security. "There is no capital gain tax in the US for foreigners. However, you will still be liable to pay tax on the capital gains in India and your tax liability depends upon the category that the capital gains fall in," says Nigam.

The capital gains can be long term or short term. If you hold the shares for more than 24 months, the gain will be called as long term capital gains and will be taxed at 20% (plus applicable cess and surcharge) after providing for indexation.

If you hold the shares for up to 24 months, the gain will be categorized as short term capital gains and will be added to your normal income and taxed at the slab rate applicable to you.