Buying US Stocks Through GIFT City? Check The Tax Impact First

The United States (US) stocks are no longer out of reach for Indian retail investors. With investment platforms operating through Gujarat International Finance Tec-City (GIFT) City, many Indians can now buy shares of global companies, and even fractional units, without needing a very large starting amount. The idea is attractive. A young investor in India can gain exposure to US-listed companies and gradually build a global portfolio.

But the tax side is where many investors may slip up. Buying US shares is not the same as buying shares of an Indian listed company. The income earned from such investments, whether through the sale of shares or dividends, has to be reported correctly in India. There are also rules around foreign asset disclosure, remittances under the Liberalised Remittance Scheme, and tax collected at source.

For a small investor, the amount invested may look minor. But for tax filing purposes, even small overseas holdings can create reporting obligations.

How Gains From US Stocks Are Taxed

If an Indian resident sells US shares at a profit, the gain is taxable in India. For Indian tax purposes, overseas listed shares are generally treated differently from Indian listed shares. The holding period also changes.

If the US shares are held for more than 24 months, the gain is treated as long-term capital gains. If they are sold within 24 months, the gain is treated as short-term capital gains.

Long-term capital gains on such foreign shares are taxed at 12.5 per cent. Short-term capital gains are added to the investor’s total income and taxed according to the slab rate applicable to that person. So, an investor in a higher tax bracket may end up paying more tax if the shares are sold within two years.

Investors should also remember that gains have to be calculated carefully in Indian rupee terms. Since the investment is in a foreign currency, exchange rate movement can also affect the final gain or loss reported on the income tax return.

Dividends Are Not Tax-Free

Dividends received from US stocks also need attention. In many cases, tax is withheld in the US before the dividend reaches the investor. This does not mean the dividend can be ignored in India.

The gross dividend has to be reported in the Indian income tax return and is taxed as per the investor’s slab rate. If tax has already been deducted overseas, the investor may be able to claim a foreign tax credit in India, provided the required conditions are met.

For claiming this credit, taxpayers generally need to file Form 67. Details may also have to be mentioned in the relevant schedules of the income tax return. This is why investors should keep dividend statements, tax withholding details, and platform reports safely. These records become important at the time of filing the return.

Do Not Miss Foreign Asset Reporting

The biggest mistake many first-time global investors make is assuming that only large foreign investments need to be disclosed. That is not how the reporting requirement works.

Indian residents holding foreign shares, overseas financial accounts, or any foreign financial interest may have to report these details in the income tax return. Such details are generally reported in schedules dealing with foreign assets and foreign source income.

This requirement may apply even when the investment is small. A fractional share or a small portfolio does not automatically remove the disclosure obligation. In some cases, a person may have to file an income tax return because of foreign asset holding, even if the income is otherwise below the basic exemption limit.

Non-disclosure of foreign assets can create serious trouble later. For taxpayers, it is safer to report clearly than to treat overseas investments casually.

LRS And TCS Rules Also Matter

Money sent abroad for buying US stocks is usually covered under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI). Under this route, a resident individual can remit up to USD 250,000 in a financial year for permitted purposes, including overseas investments.

Investment through GIFT City does not mean the LRS limit can be ignored. Fractional investing also does not create a separate tax break. Whether the investor buys one full share or only a small portion of a share, the remittance still needs to be viewed under the applicable foreign remittance rules.

Tax collected at source also has to be checked. Tax Collected at Source (TCS) is linked to the total amount remitted abroad during the financial year, not to each stock purchase separately. At present, remittances up to Rs 10 lakh in a financial year attract nil TCS. Once the total remittance crosses Rs 10 lakh, TCS may apply at 20 per cent on the amount above that threshold, depending on the nature of the remittance and applicable rules.

The convenience of buying US stocks should not make investors careless about paperwork. Before investing through GIFT City, investors should understand how gains will be taxed, how dividends will be reported, whether a foreign tax credit is available, and what disclosures are needed in the income tax return. Proper records from the first transaction can make tax filing much smoother later.