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The basics of investing in US stocks and how to navigate the tax implications

  • February 24, 2023
  • 4 min read
The basics of investing in US stocks and how to navigate the tax implications

The US stock market has grown to be a popular choice for many investors. The US is one of the oldest stock markets in the world, and it is more established, less volatile, and produces superior returns when adjusted for currency. The majority of the top worldwide corporations by market capitalization are traded on US stock exchanges. 

Indian citizens can invest in the US markets in two different ways: directly through stock purchases and indirectly through the use of mutual funds and exchange-traded funds (ETFs).

Investigation in US stocks – Methods: 

  • Direct investment in the US markets

A domestic broker with ties to stockbrokers in the US or a foreign broker with a presence in India are two options for opening an offshore trading account under the category of direct investments. In the first case, domestic brokers serve as middlemen for transaction execution by collaborating with brokers in the US. 

An individual should be aware that restrictions on the amount of trades that can be done or restrictions on investing in specific investment vehicles may exist depending on the brokerage firms.

  • Indirect investment in the US markets

The first option is mutual funds. Mutual funds that invest in international markets fall into two categories. One is a fund of funds, which is a local mutual fund that invests in an overseas mutual fund, and the other is a local mutual fund that invests in an overseas stock. A management fee for the underlying international fund is charged in addition to the management fee for the Indian fund when dealing with funds of funds. In general, mutual funds that invest in foreign funds have higher expense ratios. 

Exchange Traded Funds, or ETFs, are similar to mutual funds in that they are essentially a group of different equities that are exchanged under one fund. However, unlike mutual funds, ETFs are traded on exchanges with real-time pricing, just the way stocks are traded. ETFs can also be used to gain exposure to specific industries by purchasing an ETF that tracks industry.

  • Tax Implications

Stock trading in the US are of two types:

  • Dividend taxes
  • Tax on Capital Gains
  • Dividend taxes

One must also consider dividends received from US stocks when figuring the tax due on American stocks in India. This sum is subject to a flat 25% tax rate. Hence, if the corporation declares a $100 dividend, one will receive $75. This is less than the standard tax rate for foreign investors in the US, according the tax treaty between India and the US.

Also, the dividend one receives in cash or investments are taxed in India at the appropriate income tax rates by adding it to your existing income. But nonetheless, a Double Taxation Avoidance Agreement (DTAA) between India and the USA enables an individual to use the tax restrained in the US to balance the tax burden in India.

  • Tax on Capital Gains

Another sort of tax on stock trading in the US is the capital gains tax. In the US, capital gains are not subject to taxation. Hence, if you purchase shares for $500 and sell them for $800, there will be no tax due in the US on the $300 capital gain. One will, however, be required to pay taxes in India on this gain.

In conclusion:

Tax laws are subject to constant change and can significantly affect an investor’s net return. The IRS website contains comprehensive tax regulations for dividends, capital gains, and wash sales.

In order to have reasonable expectations for the investment, it is crucial to understand the tax on foreign shares in India. Since investors are unaware of and likely concerned about taxes and fees eroding their gains, many investors opt to avoid international stocks.

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