US stocks: You receive $75 on a $100 dividend, but India may tax the full amount again; how to claim relief
Indian investors who hold US stocks can earn dividends, typically drawn from a company’s profits or accumulated cash. This periodic payout is usually made in cash per share, though some companies may issue additional shares instead.
However, not all US-listed companies pay dividends. In case a company, let’s say Apple announces a dividend, you are required to have ownership of that stock before the record date to be eligible for the payout.
The overall dividend payout is calculated by multiplying the dividend amount by the number of shares you own. So, if the company pays $1 per share and you own 100 shares, you will receive $100 in your account.
If you are an Indian resident for tax purposes and hold US stocks in your portfolio, you would not receive the full dividend income given by a company, as the United States withholds flat 25% tax at source.
This means if a company had declared a $100 dividend payout, then you would receive $75 in your bank account. The levy is lower than the standard tax rate for foreign investors in the US due to its tax treaty with India.
How are dividends from US stocks taxed in India?
Just because the US has withheld tax on your dividend income before it reached your bank account does not mean the amount is exempt from tax in India.
Dividends earned from US stocks are taxable in India at the income-tax slab rate applicable to the investor, whether the payout is received in cash or reinvested. The exact tax outgo depends on whether you choose the new or old tax regime and your total income for that particular financial year.
So, even if you receive only $75 from a declared dividend of $100 after US tax withholding, the entire $100 will be considered for taxation in India.
How to get relief from double taxation?
A tax treaty between India and the US offers relief from double taxation, but claiming it requires investors to follow the prescribed process. The relief available depends on the applicable tax rules and the investor’s individual circumstances.
“For avoidance of double tax, Indian law provides for foreign tax credit. Taxpayer can claim a foreign tax credit in India for eligible tax paid in the US. Taxpayer has to report the dividend in the Indian income tax return claim tax credit in the return along with a so-called Form 44 (erstwhile Form 67 ) with the required details and supporting documents,” according to Gaurav Makhijani, Managing Partner at Makhijani Gera & Associates LLP.
Taking the same example as earlier, if the tax payable on a $100 dividend in India works out to $30, the investor can claim a foreign tax credit of $25 for the tax already paid in the US and pay the remaining $5 in India.
This is a simplified illustration. In practice, the investor must add the full dividend income to their taxable income in India and calculate the tax payable based on their applicable income-tax slab.
Therefore, understanding the tax on foreign dividends, as well as shares, in India is important to have realistic expectations from your investment.
