Introduction
As we all know, the gains arising out of the trading of shares (listed on a recognized stock exchange) are liable to be taxed under Section 111A/112A, depending upon the holding period. But what about foreign stocks? Do you know about the taxation of foreign stocks under the provisions of the Indian Income Tax Act? Let's elaborate on the same.
Latest Amendment under Budget 2023
Till now, there is no TCS on foreign remittances up to Rs 7 lakh in a year. If investors remit more than Rs 7 lakh for investing in foreign securities under the Liberalized Remittance Scheme (LRS), a TCS of 5% is applicable.
But the Budget 2023 hiked TCS on foreign remittances of more than Rs 7 lakh through the LRS to 20% for investments in overseas assets, real estate, bonds, foreign company stocks, etc.
Foreign stocks and their holding period
As per the provisions of income tax laws, the tax treatment of foreign stocks is similar to that of unlisted equity shares in India. As per the provisions of Section 2(42A) of the IT Act, if a foreign stock is held for up to 24 months, then the gains derived from such stocks would be treated as short-term capital gains; otherwise, such gains would be long-term in nature.
Types of income you might earn
When it comes to investments in stocks, there are two types of income to consider:
- Capital Gains
- Dividends
Let's talk about capital gains first.
The taxability of capital gains depends on the holding period of the stocks. If you hold foreign company shares for more than 24 months, the gains are considered long-term capital gains and are taxed at 20% (plus applicable surcharge and cess).
On the other hand, if you hold the shares for up to 24 months, any resulting gains are considered short-term capital gains. These are added to your total income and taxed according to the applicable slab rates.
Secondly, when you will earn a dividend,
It will be taxable at a flat rate of 25%.
Just like non-residents investing in India are taxed in India, Indians investing abroad might face taxation in the foreign country too. You might wonder why you have to pay taxes twice, right?
So, in remedy of this problem, the Indian government has signed the Double Tax Avoidance Agreement (DTAA) with over 95 counties, which aids in the claim of tax credits in the event of double taxation.
What is a DTAA (Double Tax Avoidance Agreement)?
Double Taxation Avoidance Agreements (DTAA) are treaties signed between two or more countries and are applicable in cases where a taxpayer residing in one country has to earn his or her income from another country. Which enable NRIs to get relief from having to pay taxes multiple times. DTAA does not mean that the NRI can completely avoid taxes, but it does mean that the NRI can avoid paying higher taxes in both countries.
It covers a range of incomes, including income from employment, business profits, dividends, interest, royalties, and capital gains. These agreements specify guidelines as to which country holds the right to impose taxes on particular types of income. Typically, the country where the income is generated will have the primary right to levy taxes on it, whereas the country of residency may also impose taxes at a lower rate.
It offers relief via two methods:
Exemption
Under this method, income in one country will be taxed while it is exempt in another, which will avoid double-time taxability of the same income.
Tax Credit
The tax credit method allows the taxpayer to claim a credit for the tax paid in one country against the tax liability arising in another country. Which will eliminate double taxation.
How to report it in the ITR
The taxpayers should file ITR Form 2 to report such gains under two heads:
- All gains from the sale of stocks must be reported on the capital gains schedule (Schedule CG).
- All gains from dividends shall be reported in Schedule OS.
- All assets should be reported in the foreign asset schedule (Schedule FA) if the investor has held the shares on or after March 31st of that particular year.
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