Shares of Netflix worth $990 bought at the original IPO cost in 2002 would now be valued at $455,532 as of December 10, 2020. The return on investment is 45,913% more than 18 years. There are numerous good results stories of foreign stocks which attract quite a few investors from across the planet. If you are intending to invest in a foreign stock, this report is for you to comprehend the implications beneath the provisions of the Foreign Exchange Management Act (FEMA) and the Income-tax Act.
The FEMA prohibits the investment outdoors India beyond a specific limit. Under the Liberalised Remittance Scheme (LRS), resident people can invest abroad by way of acquisition and holding shares of each listed and unlisted overseas enterprise and debt instruments.
The limit of overseas direct investment by the resident person shall be inside the all round limit prescribed beneath the provisions of the Liberalised Remittance Scheme, by the RBI. Currently, Liberalised Remittance Scheme has prescribed a blanket Limit of USD 2,50,000 for specific specified purposes only.
If you invest in foreign stocks, you earn Capital Gains and Dividend Income. The tax therapy of each such incomes beneath the Income-tax Act and treaties has been explained right here:
Tax Treatment of Capital Gains
The earnings taxable beneath the head capital gains depends upon many variables such as the period of holding, price of acquisition, the complete worth of consideration, and so forth. Shares of a foreign enterprise shall be treated as brief-term capital asset if they are held for not more than 24 months right away preceding the date of transfer. In other instances, it shall be treated as lengthy term capital gains. However, if such shares are listed on any Indian stock exchange, i.e., the stock exchange situated in International Financial Services Centre (IFSC), then such period shall be 12 months rather of 24 months.
The tax therapy of the capital gains arising from the transfer of shares listed on a foreign stock exchange shall be related to the capital gains from the unlisted shares.
Long-term capital gains arising from the sale of unlisted equity shares shall be taxable at the price of 20 per cent plus surcharge and overall health & education cess. The advantage of Indexation would be out there to the resident taxpayers. In the case of non-residents, the tax shall be charged at the price of 10 per cent with no giving for the advantage of indexation and foreign currency fluctuation. However, if the foreign stocks are listed on any stock exchange in an IFSC, the lengthy term capital arising from the sale of such listed shares more than Rs 1 lakh shall be taxable at the price 10 per cent plus surcharge and overall health & education cess. The advantage of indexation and foreign currency fluctuation shall not be out there in this case.
The brief-term capital achieve arising from the transfer of unlisted shares shall be taxable at the regular price of tax. Whereas, the brief-term capital gains arising from the transfer of shares listed on any stock exchange in an IFSC shall be taxable at the price of 15%.
India has entered into DTAAs with more than 95 nations. The treaties allocate the taxing rights amongst the supply nation and the resident nation. Almost all the treaties include the provisions that the capital gains arising from the alienation of shares of a enterprise shall be taxable in the supply nation. Thus, the capital gains arising to a particular person resident of India from the transfer of foreign shares shall be taxable each in the foreign nation (on basis of supply rule) and in India (on basis of residence rule). However, the foreign tax credit can be claimed in the nation of residence for the taxes paid in the supply state.
Tax Treatment of Dividend
Dividend received by a resident shareholder in respect of the foreign shares shall be taxable in India at the applicable tax prices. The dividend is taxable on a net basis immediately after claiming a deduction of interest expenditure incurred to earn that earnings. The deduction for the interest expenditure shall not exceed 20% of the total dividend earnings. No additional deduction shall be permitted beneath Section 57 for any other expenditures which includes commission or remuneration paid to a banker or any other particular person to realise such dividend.
However, exactly where total earnings of an Indian enterprise contains any earnings by way of dividends declared, distributed or paid by a foreign enterprise, in which such Indian enterprise holds 26% or more in nominal worth of the equity share capital, the dividend shall be taxable at the price of 15% topic to the situation that no expenditure shall be permitted to be deducted from such earnings.
As per the DTAAs, the dividend is taxed in the nation of the supply according to neighborhood tax laws. However, if specific provided situations are fulfilled, the dividend shall be taxable in the supply state at a concessional price. As per most of the DTAAs entered into by India, the dividend is taxable in the supply nation in the hands of the useful owner of shares at the price ranging from 5% to 15% of the gross quantity of the dividends.
Claim of Foreign Tax Credit
If the earnings from foreign shares is taxable in each the nations (resident nation and the supply nation) and the assessee has paid tax in the supply nation, he shall be permitted a credit for the similar in the nation of residence, by way of deduction or otherwise. The credit shall be permitted in the year in which assessee presented such earnings to tax or assessed to tax in India. A taxpayer is necessary to furnish a statement in Form No. 67 on or ahead of the due date for furnishing return of earnings to claim the foreign tax credit.
Disclosure in ITR
Details of earnings by way of dividend need to have to be entered in Schedule OS, Income from other sources, in case earnings is taxable at regular tax prices and in Schedule SI, Income chargeable to tax at unique prices, if such earnings is taxable at unique prices.
Details of earnings by way of capital gains need to have to be furnished in Schedule CG, Capital Gains, based on its nature (Short term or lengthy term). Further data is necessary to be furnished in Schedule SI, Income chargeable to tax at unique prices, in case such earnings is taxable at unique prices.
(By CA Naveen Wadhwa, DGM, Taxmann.com, and CA Ritu Gupta, Assistant Manager, Taxmann.com)