I have paid taxes in the U.S for gains realized on my shares. Do I also need to pay any tax in India?

Yes, if you have paid taxes on capital gains in the U.S. for your shares, you may still have to pay taxes on those same gains in India, as India taxes global income for its residents. However, there is relief available in the form of Foreign Tax Credit (FTC) to avoid double taxation on the same income.

1. Taxation in India on Foreign Income

As an Indian resident, you are liable to pay tax on your global income, including capital gains from the sale of shares abroad, such as those in the U.S.. The tax treatment of these gains in India will depend on the type of capital gains (i.e., short-term or long-term).

• Short-Term Capital Gains (STCG):

  • If you sell shares in the U.S. within 36 months (3 years) of purchase, the gains are classified as short-term capital gains in India.

  • STCG on equity shares is taxed at 15% (if the gains exceed ₹1 lakh in a financial year).

• Long-Term Capital Gains (LTCG):

  • If you hold the shares for more than 36 months before selling them, the gains are classified as long-term capital gains.

  • LTCG on listed equity shares is taxed at 10% (if the gains exceed ₹1 lakh in a financial year) without indexation benefits.

2. Claiming Foreign Tax Credit (FTC)

India offers a mechanism to avoid double taxation through the Foreign Tax Credit (FTC) under Section 91 of the Income Tax Act. This allows you to claim credit for taxes paid in foreign countries (like the U.S.) against the Indian tax liability on the same income.

Here’s how it works:

• Eligibility for FTC: You can claim a credit for taxes paid in the U.S. (or any other foreign country) if:

  • You are a resident of India.

  • The income in question is taxable in both the U.S. and India (i.e., capital gains on the sale of shares).

  • You have actually paid taxes in the U.S. on this income (e.g., capital gains tax on the sale of shares).

• How FTC Works: The tax credit you can claim is the lower of the following two amounts:

  1. The amount of foreign tax paid on the income (i.e., the taxes you paid in the U.S.).

  2. The amount of Indian tax payable on the same income (i.e., the Indian tax you would owe on the same capital gains).

  So, if you paid $1,000 in U.S. taxes on your capital gains, and your Indian tax liability on the same gains is ₹50,000, you can only claim a credit of ₹50,000 (the lower of the two). If your U.S. tax exceeds your Indian tax liability, you can carry forward the excess credit to future years.

• Procedure to Claim FTC:

  • You need to fill out Form 67 and submit it to the Income Tax Department along with your Income Tax Return (ITR). This form helps in claiming the FTC for taxes paid abroad.

  • The tax credit will only be given after verification by the Indian tax authorities, so ensure you have proof of foreign taxes paid (such as a tax receipt or Form 1040 from the U.S.).

3. Double Taxation Avoidance Agreement (DTAA)

India has a Double Taxation Avoidance Agreement (DTAA) with the U.S. to help mitigate double taxation. Under this agreement:

• Taxable Event: Both countries have the right to tax the gains, but the taxpayer can claim relief (in the form of FTC) for taxes paid in the foreign country (U.S.) when filing taxes in the country of residence (India).

• Dividend Taxation: If you received dividends from the shares, India will give a credit for any U.S. withholding tax paid on dividends.

• Capital Gains: Capital gains taxes paid in the U.S. can be set off against your Indian tax liability through the FTC mechanism.

4. How to Calculate and Claim FTC for U.S. Taxes Paid

Assuming you have made capital gains on U.S. shares and paid U.S. taxes on the gains, here is how you can calculate and claim the credit:

• Step 1: Determine the amount of capital gains (STCG or LTCG) earned on the sale of U.S. shares.

• Step 2: Calculate the tax due in the U.S. (e.g., based on the U.S. tax rate applicable to capital gains).

• Step 3: Determine the Indian tax liability on the same income.

• Step 4: File your income tax return in India and submit Form 67 to claim the FTC.

• Step 5: Attach the relevant documents, such as a tax receipt from the U.S. showing the taxes you paid.

Example

Let’s consider an example:

• Capital Gain in U.S.: ₹10,00,000

• U.S. Tax Paid: ₹50,000 (equivalent to 5% tax on capital gain)

• Indian Tax Due on Capital Gain:

  • Since the gain is more than ₹1 lakh, let’s assume your Indian tax due is ₹1,00,000 (10% LTCG tax).

You can claim an FTC of ₹50,000 (the lower of U.S. tax paid and Indian tax due). In this case, the Indian tax payable will be reduced by ₹50,000 due to the FTC.

Key Takeaways

1. Double Taxation: As an Indian resident, you must pay tax on your global income, including capital gains on U.S. shares. However, you can claim a Foreign Tax Credit for taxes paid in the U.S.

2. FTC Mechanism: The tax credit you can claim is the lower of the foreign tax paid and the Indian tax due.

3. Form 67: To claim the FTC, you need to file Form 67 along with your ITR and provide proof of taxes paid in the U.S.

4. DTAA: India and the U.S. have a DTAA that allows you to avoid being taxed twice on the same income. The credit mechanism helps reduce the tax burden.

Conclusion

Even though you’ve paid taxes in the U.S. on your capital gains from the sale of shares, you will need to pay tax in India as well. However, through the Foreign Tax Credit mechanism, you can reduce your Indian tax liability by the amount of tax already paid in the U.S. Always keep proper documentation, including proof of foreign tax paid, and ensure that you follow the correct procedures for claiming the credit in your tax return.