Globalisation and accessibility to foreign markets have seen more Indian investors invest in foreign securities. Through the application of Groww, INDmoney, and Vested, many people now own stocks of the companies listed on the international market, like NASDAQ, NYSE, or the London Stock Exchange.
Nevertheless, as much as investing in a foreign country may present desirable returns and diversification advantages, there are certain tax implications under Indian law. To stay within the tax payment limits and not risk any fines, it is necessary to understand how to calculate the tax on the sale of foreign securities.
This paper elaborates on the taxation of income earned on foreign shares, the calculation of capital gains, and the tax rates that should be paid according to the Income Tax Act, 1961.
Understanding Foreign Securities
The foreign securities are defined as financial instruments of a company or government located outside India. These may be foreign company stock, mutual funds, bonds, exchange-traded funds (ETFs), or depository receipts.
Indian residents have an opportunity to invest in such securities by using the Liberalized Remittance Scheme (LRS) of Reserve Bank of India that enables these individuals to invest up to USD 250,000 annually in the overseas assets.
The amount of profit that the investor makes when these securities are sold is taxable in India under the head of capital gains, depending on the period of holding the securities and the nature of income.
Taxation of Sale of Foreign Securities
When dealing with foreign securities, income is taxed based on whether it is a capital gains tax or a dividend tax.
When you sell foreign shares or mutual funds at a profit, the profit is taxed as capital gains. Conversely, proceeds received as dividends on such investments are taxed as income received from other sources.
In this paper, we are going to concentrate primarily on the capital gains tax on selling foreign securities.
Capital Gains Classification
Capital gains on foreign securities are classified according to the length of stay of the investment.
- Short-Term capital gains (STCG): In case the foreign security is sold in less than 24 months, the gain on sale is a short-term capital gain.
- Long-Term Capital Gains (LTCG): When the holding period is more than 24 months, the profit made is considered a long-term capital gain.
This classification is important because it will dictate the rate of tax to be paid as well as the calculation method.
Tax Rate on Sale of Foreign Securities
The tax is applicable according to the short-term or long-term capital gain:
- Short-Term Capital Gains (STCG): The STCG on the sale of foreign securities is subjected to taxation as per the applicable rate of income tax to the investor. Such as, assuming that an investor lies in the category of 30 percent tax bracket, the gain will be taxed at 30 percent along with any surcharge and cess.
- Long-Term Capital Gains (LTCG): Section 112 of the Income Tax Act imposes LTCG on foreign securities at 20% with indexation allowance. The indexation enables the investor to increase or decrease the cost of acquisition due to inflation, which will decrease the taxable gain.
Capital Gains Calculation
The sale of foreign shares or securities is subject to a simple formula to determine the capital gains:
Capital Gain = Sale Consideration – Indexed Cost of Acquisition – Expenses on Transfer.
The sales consideration is the amount of the sale of the foreign security. The acquisition cost is the price paid initially in a foreign currency, converted into the Indian rupees by use of the telegraphic transfer buying rate on the date of purchase. In the same way, the price sale is converted based on the rate in the date of sale.
In the long-term capital gains, the indexed cost is computed by using the Cost Inflation Index (CII) announced by the Income Tax Department.
Example
As an example, an Indian investor bought stock of a U.S. firm that has a value of USD 5,000 in April 2020, at an exchange rate of Rs. 75 per USD, which is equivalent to Rs. 3,75,000.
The investor sold these shares in July, 2024 on the exchange rate of Rs.83 per USD, which made him to have a net of Rs. 5,81,000.
Capital Gain = Rs. 5,81,000 – Rs. 3,75,000 = Rs. 2,06,000.
As its holding period is more than 24 months, it is a long-term capital gain. With indexation benefits, the taxable gain will be Rs. 2,06,000, which will be subject to tax of 20.
Foreign Tax Credit (FTC)
Should you have paid foreign tax on your foreign investment income in the country in which it was earned, then you can claim a Foreign Tax Credit (FTC) in India so as to avoid the occurrence of a second taxation.
India has signed the Double Taxation Avoidance Agreements (DTAA) with numerous states. Under DTAA, you are allowed to claim the foreign tax credit for an amount of tax paid in a foreign country on the same income.
Suppose the tax authorities in the USA deducted 15 per cent on your capital gains, and in India, you pay 20 percent tax. Then, after claiming the FTC, you will pay only 5 percent tax in India.
You need to claim this benefit by filling out Form 67 online first, then sending your income tax return. You should also show evidence of foreign taxes paid.
Conclusion
Investment in foreign securities provides Indian investors with an opportunity to invest in global markets and diversify their portfolios. Nevertheless, it is also necessary to learn about the taxation on foreign share sales and adhere to Indian income tax regulations.
The tax paid on such investments is based on the holding period, nature of gain, and tax treaties between India and a foreign country. Proper calculation, correct reporting, and timely filing of income tax returns will ensure not only compliance but also investment optimization through the benefit of indexation and foreign tax credit.
