The income tax treatment from shares invested in a domestic company varies with those invested in a foreign company. The foreign exchange regulations in India prohibits investment outside India after a specific limit. As per RBI, a resident individual can invest a maximum of USD 250,000 into the shares of listed and unlisted foreign companies and debt instruments. The tax treatment for profits earned on such investments is explained below.
Tax on Sale of Foreign Stocks
The taxpayers investing in foreign stocks shall pay income tax similar to the tax levied on income from unlisted shares. If there is a capital appreciation at the time of sale of the foreign stocks, tax is levied on the capital gain. The capital gain on the sale of foreign stocks shall be classified as long-term or short-term capital gain.
If you sell the foreign shares after 24 months (>2 years) of purchase, they are termed long-term capital gains. But if you sell them within 24 months (<2 years) of purchase, they are termed short-term capital gains.
You need to pay tax at 20% on the long-term capital gain of such stocks. The resident individuals can take the benefit of indexation. But if there is a short-term capital gain, you should pay tax as per the applicable tax slab rates.
The criteria of the period of holding of foreign stocks listed in India, i.e., stock exchange located at the International Financial Services Centre (IFSC), GIFT City in Gujarat, will change to 12 months from 24 months. Hence, if you sell the shares of such a foreign company after 12 months (long-term capital gain), you need to pay tax at 10% without indexation on the profits exceeding Rs 1 lakh. But if you sell the shares listed on the recognised stock exchange of India within 12 months, tax shall be paid at 15% of the short-term capital gain.
In addition to the short-term and long-term capital gain tax, the taxpayer must pay surcharge and health and education cess.
Tax on Dividend Received From Foreign Stocks
The dividend received from the foreign company shall be chargeable to tax under the head “Income from other sources”. You can also claim expenses from the total dividend income. A maximum of 20% deduction is allowed from the total dividend income.
Tax Credit to Avoid Double Taxation
The income arising from the shares of a foreign company is generally chargeable to tax in the source country (foreign country) as well as the country of residence of the taxpayer. However, as per the Double Taxation Avoidance Agreement (DTAA), the country of residence provides a credit of taxes paid by the taxpayer in the source country. Therefore, the taxpayer can claim the Foreign Tax Credit (FTC) in the country of residence for the taxes paid in the source state. To claim FTC, furnish Form 67 electronically through the e-filing portal to the income tax department. The taxpayer should submit such a form before furnishing the income tax return for the financial year in which such income is charged to tax.
Hence, one should consider the income tax implications before investing in a foreign company’s shares.
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For any clarifications/feedback on the topic, please contact the writer at namita.shah@cleartax.in
I’m a chartered accountant and a functional CA writer by profession. Reading and travelling in free time enhances my creativity in work. I enjoy exploring my creative side, and so I keep myself engaged in learning new skills.
