TAXES ON US INVESTING
"FY21 was the year when not only did many retail investors join D-street but they also dipped their toes in the global markets for the first time, which made it exciting for us at Vested Finance", says Mr. Viram Shah, Co-Founder and CEO, Vested Finance.
Mr. Shah further adds that one of the constant worries for investors that are on the fringe in regard to investing internationally is - taxation. Many believe that their tax filings will become significantly complicated if they open a brokerage account in the US and start investing in global companies. That is not true. As with everything new, only the first step takes time to get adjusted to it but once that threshold is crossed, things become easier. The goal of this article is to explain how taxation works for an Indian resident investing internationally via a US brokerage account.
The first thing you need to know is that similar to investing in India, there are two types of taxes – a tax on investment gains and the tax on dividends.
First, let's look at tax on investment gains. You will only be taxed in India for this gain and not in the US. The amount of taxes you have to pay in India, at the end of any fiscal year, depends on how long you hold the investment. Any investments held for longer than 24 months in the case of stocks and 36 months in the case of ETFs are considered as a long-term investment and will be taxed at the long-term tax rate of 20 per cent with indexation benefits. The indexation benefit helps reduce the long-term tax rates.
Now, if you hold the investment for less than the long-term threshold then that gain qualifies as short-term capital gains and will be taxed as per your income tax slab in India.
Next, let’s look at the tax on dividends. Unlike investment gain, dividends will be withheld in the US at a flat rate of 25 per cent. This means that the broker will deduct 25 per cent taxes before adding the remaining 75 per cent to your brokerage account. For example, if Microsoft gives an investor $100 of dividend, the broker will withhold $25 as tax, and the investor will get a post-tax dividend of $75. Fortunately, the US and India have a double taxation avoidance agreement (DTAA) that allows taxpayers to offset income tax already paid in the US. The 25 per cent tax you already paid in the US is made available as a foreign tax credit and can be used to offset your income tax payable in India.
Apart from these taxation regulations, one additional complication that arises is converting one’s dollar gains and dividends into rupees. Here, the regulations mention that this conversion can be done using the telegraphic transfer (TT) rate from the end of the previous month. While this sounds complicated, an investor doesn’t need to worry about it because a platform like ours provides a summary of all transactions along with the dividend and capital gains information in rupees as per the regulations. This really simplifies the tax reporting needed in India.
So, that was a short overview of how taxation works when investing internationally. There is definitely some learning that one would need to do when filing taxes for the first year, but I strongly believe that the benefits of creating a global portfolio make the efforts worth it.