Taxation Landscape - India & Abroad

When you invest globally, the returns you earn do not all belong to you alone. At certain moments, the tax authorities take a share, and knowing when those moments arrive is what this chapter is about. The aim here is to introduce the events that are taxable, so that nothing catches you off guard later.

There is one principle that sits underneath everything else, so it is worth stating first. As a resident Indian, your worldwide income is taxable in India. It does not matter that the stock is American or the fund is Irish.

There are broadly five events to keep in mind.

1. Selling at a profit (capital gains)

The first, and the main one, is selling at a profit, which creates a capital gain. Whenever you sell a foreign stock, ETF, or fund for more than you paid, the difference is a capital gain, and it is taxable. But not all capital gains are treated equally.

If you sell after holding for a longer period, the gain is called a long-term capital gain, or LTCG. If you sell sooner, within the shorter window, it is a short-term capital gain, or STCG. The dividing line for foreign shares is a holding period of 24 months. Sell after two years, and your gain is long-term, taxed at a flat 12.5%. Sell before two years, and your gain is short-term, added to your total income and taxed at your normal income tax slab, which for many people is a higher rate.

2. Receiving a dividend

The second event is receiving a dividend. When a foreign company pays you a dividend, that is itself a taxable event, separate from any gain on selling the share. The dividend is added to your income and taxed in India. Cross-border dividends also have a small nuance of being double-taxed. To learn more about it, refer to Module 4.

3. Holding foreign assets (a reportable event)

The third event is one people almost always miss: simply holding foreign assets is a reportable event. Even if you never sell, and never receive a single dividend, the mere fact of owning foreign shares or holding a foreign account creates an obligation to disclose it in your Indian tax return. There is no tax to pay just for holding, but there is a duty to declare. You do not need to know how here. You only need to know that owning a foreign asset is, by itself, something the tax system expects you to report.

4. Sending money abroad (TCS)

The fourth is one you have already met, and it belongs here only for completeness: sending money abroad, where TCS applies. When you remit money out of India above a threshold, tax is collected at source at the time of transfer. As you already know from Chapter 3, this is not a real cost, it is advance tax that is adjusted against your total liability and refunded if in excess. It is a taxable touchpoint in the journey, but a recoverable one, so it needs no more than this pointer here.

5. US Estate Tax

There is also a consideration for larger holdings that is worth a brief flag, though it sits at the edge of what a beginner needs. Certain foreign assets, notably US-based ones, can carry what is called estate tax exposure, a tax that can apply to the value of those assets in the event of the holder's death, for non-residents holding US-situated assets above $60,000. This is not something that affects your everyday investing, and it is not a tax you deal with while buying, holding, or selling in the ordinary way. But it is a real consideration for people building up sizable foreign holdings, and it is one reason the choice of how you hold an asset can matter later on. The detail, and the ways people manage it, belong to Module 4.