Understanding Taxation on Foreign Investments

Introduction

Today when investors seek to navigate the stock market, in their bid to diversify their portfolios, they may seek to own stocks pertaining to companies operating within varied industries. It also implies the addition of securities stemming from different parts of the world. In fact, several wealth management experts tend to recommend that investors divert a third if not more of their stock allocation toward foreign enterprises. This in turn allows them to be in possession of more efficient portfolios.

Those of whom are unaware of taxes applicable on international securities held, stand to be missing out on their true earnings capabilities.  This article seeks to shed light on taxation applicable to foreign investments.

A Brief Interview

As foreign stock is viewed as an equity investment it is important to understand the taxes applicable on such holdings. Investments in foreign stock are viewed as investments falling under unlisted shares. In accordance with this, keeping in mind the holding period for these investments, gains are viewed as long-term or short-term.

Should shares of a foreign company be held for a period that falls below 24 months immediately prior to the date of transfer, they are classified as short-term capital gains. Else, they are qualified as long-term capital gains.

That being said, should such shares be listed on an Indian stock exchange the period under considerations falls from 24 months to 12 months.

Long term capital gains derived via the sale of foreign stocks have a tax rate amounting to 20 per cent applicable in addition to a surcharge and health and education cess and the benefit of indexation.

On the flip side, short-term capital gains derived from the sale of foreign shares are taxed keeping in mind the slab rate appropriate for the taxpayer under consideration.

Additional Considerations

The Income Tax Act of India stipulates that the taxability of an individual is dependent upon their residential status. This status is determined by taking into account the individual’s physical presence in the country evident via the number of days they spend in India for a given financial year. In certain cases, the previous 4 years are also taken into account.

The Liberalized Remittance FEMA Scheme makes it a possibility for resident individuals to remit a sum of up to USD 250,000 or (INR 1.86 Crores approximately) each financial year for current or capital account transactions that are permitted.

Dividends drawn from foreign stocks held have taxes applicable to them that are the responsibility of Indian investors. The ‘income from other sources’ tab holds true here and is charged in accordance with the tax slab applicable to a given taxpayer.

Source rules may also kick in and imply that Indian investors may need to pay tax in the source country via which their investments are derived. That being said, India has double tax avoidance treaties in effect with over 150 countries today.

Keeping in mind the provisions outlined in DTAA, investors can claim credit for taxes they paid in foreign lands or alternative forms of relief may be possible such that they aren’t required to pay tax on the same income more than once.

Most important however is the requirement for all Indian tax residents to disclose each of their foreign assets and foreign income in their tax return. Regardless of whether or not there even is an income, all assets must be disclosed in a tax return. This reporting holds true in case of assets held at any time during a financial year. Even if you happen to sell an asset and don’t possess it as of March 31 of a financial year, you are still required to declare information pertaining to the asset along with income derived from it in your tax return.

Conclusion

Should you choose to invest in foreign stock it is important to be aware of taxes applicable on the same as the actual returns derived by you will incur a deduction from the taxes. Moreover, when you make investments in foreign companies you must be aware of and be willing to bear the currency fluctuations applicable. This is because your money is converted into United States Dollars prior to being invested.

Frequently Asked Questions

Q1. What foreign assets must you declare in your income tax return?
A1. The following foreign assets must be declared in an income tax return.

• Cash value insurance contract or annuity contract
• Custodian accounts
• Depository accounts
• Equity and debt instruments
• Financial interest in any entity
• Immovable property held
• Trusts where the taxpayer is a trustee, a beneficiary, or a settler

Q2. Up to how much money can be remitted each year by a resident individual?
A2. Resident individuals – including minors – are allowed to remit up to USD 250,000 each financial year. This may be in the form of current or capital account transactions or else a combination of the two.