Determining residential status
Firstly, to determine the applicability of long-term capital gains, it is essential to ascertain the residential status of the taxpayer.
Global income is taxable in case of residents. However, for non-residents and residents but not ordinary residents, income earned and received outside India is not taxable.
Income from US stocks
If you are resident of India and have invested in US stocks, the dividend income and capital gains are the two kinds of income that will arise. Such income will be taxable in India. Also, there is a mutual agreement between India and the US. Hence, the taxpayers need not worry about double taxation on their gains.
In case of a dividend received, US law applies tax at 15% or 20% of your income is above the minimum tax bracket. In India, the dividend income stood exempt in the hands of the receiver till FY 2020-21 as the companies used to pay dividend distribution tax. Onwards FY 2020-21, the dividend has become taxable in the hands of investors and hence will be added to the total income and taxed according to the slab rates.
However, the dividend income received will not be taxed twice, as India and the US have a mutual DTAA (double tax avoidance agreement). Refund of the tax can be claimed while filing ITR for the tax paid in the US under DTAA.
Capital gains income
There is no tax implication on capital gains for non-US residents. However, the tax liability will arise in India for Indian residents investing in US stocks.
For residents and ordinary residents, capital gains of foreign company shares held for a period of more than 24 months are treated as long-term capital assets, and shares with less than 24 months holding are treated as short-term capital assets.
Capital gain is calculated as the sale price less cost of acquisition
Capital gain from the sale of long-term capital assets would be taxed at 20% with the indexation benefit on the purchase price or 10% without such indexation benefit. Indexation is applied to adjust the purchase price of an asset to reflect the effect of inflation over the years of holding of such asset.
Capital gains from the sale of short-term capital assets would be added to the total income of the investor and taxed at the slab rates applicable.
ESOP (Employees Stock Option Plan)
In case a resident or ordinary resident who has received the foreign company shares as ESOP shares, the tax will be levied at two stages.
Stage 1 is when the allotment of ESOPs is made. The differential amount between the actual price paid and FMV of the share is liable to tax. This difference amount is considered as perquisite income and taxed as a part of salary as per individual slab rates. For example, if the company’s listed price is $50 and employee is offered at $25, the tax will be levied between the differential price, i.e. $25 multiplied by the number of shares vested.
Stage 2 is when the ESOP shares are sold. The difference between the sale price and COA (which is FMV considered at stage 1). This difference is regarded as capital gain and tax accordingly. If sold before 24 months, then it will be considered as short-term capital gain and sold after 24 months then gains will be taxed as a long-term capital gain at 20% after indexation benefit.
As the stocks are of a foreign company, the employee will have to report the details of these ESOP shares in a FAR (foreign asset reporting schedule) along with reporting in ‘Asset and Liability’ schedule while filing ITR.
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