How to File Taxes on Foreign Capital Gains and Dividends: A Detailed Guide for Resident Indians

The task of filing taxes on foreign capital gains and dividend income is an involved one. If you are not careful, you could either end up in breach of tax law or end up overpaying, neither of which is pretty. Though hiring a CA can be helpful, understanding the calculations and process yourself allows you to verify their work .

Note: Everything below is based on my experience of reporting foreign income as an employee of a US-listed company, and as someone who has other US equity holdings. It also assumes that you are a resident Indian.

When calculating your taxes, you would need:

1. Foreign brokerage statements (trade settlements and quarterly balances) for the financial year
2. IRS Form 1042-S, if you have US investments

If you sold some RSUs, it is also helpful to keep salary slips handy.

Dividends

If the foreign company distributed dividends, your brokerage statement would have two line items for dividend income: “gross” (pre-tax) and “net” (post-tax). This is because most countries mandate withholding some tax at the time of dividend payment, similar to Tax Deducted at Source (TDS) on dividends in India, even for foreign investors. For instance, the USA charges a 25% tax on the gross dividend income of Indian investors¹.

Brokers typically handle the tax withholding on your behalf: they deduct the tax and deposit it with the respective foreign government. However, since this tax is paid to a foreign government, it does not show up in your Indian tax documents such as Form 16, Form 26AS or AIS. For US investments, brokers provide IRS Form 1042-S as proof of the tax deposited.

As a resident Indian, you must pay taxes on all your income, including what you earn outside India, such as foreign dividends. But thankfully, India has agreements with over 90 countries, allowing you to claim credit for the tax already paid to the foreign governments and avoid getting taxed twice. These treaties are called Double Tax Avoidance Agreements (DTAA).

At a high level, to file taxes on foreign dividends one needs to:

1. Calculate the total tax liability to Indian govt. based on “gross” dividend income
2. Claim Foreign Tax Credit for the amount already paid to the foreign government
3. Pay the remaining amount if the total liability exceeds the withheld tax, or claim a refund if the withheld tax exceeds the total liability.

Dividends: Calculating Total Tax Due

To determine your total tax liability, you must first convert the foreign income to INR. Rule 115 of the Income Tax Rules, 1962, states that you should use the exchange rate as on the last day of the month immediately preceding the month in which the dividend is declared, distributed or paid by the foreign company. The rule advises using SBI’s Telegraphic Transfer Buying Rate (TTBR) as a reference. I have collected SBI’s daily FX rates, which you can access here.

The rule is a mouthful and is best understood via an example. Let us consider you have some US investments and received $75 as net (gross income being $100) dividend income on 10th October ’23. To convert the gross and net income in INR, you need to use SBI’s USD/INR TTBR as of 30th September ’23 (last day of the previous month).

*As of June 2024, foreign dividend income is treated and taxed as regular income. Assuming that your marginal slab rate is 30%.

Capital Gains

Calculating foreign capital gains is similar to dividends but a little more complex. You cannot just consider the price appreciation in foreign currency and multiply it with the exchange rate on the day of selling. Instead, you need to convert both the purchase and selling values to INR, and then subtract them to determine the capital gains.

The rule for which exchange rate to use is similar to that of dividends: use the rate as on the last day of the month immediately preceding the month in which the capital asset is transferred.

Foreign shares are a type of capital asset and both buying and selling are considered as transfer of assets. The date of selling is considered as the “Transfer Out” date, while the “Transfer In” date depends on how you acquired the shares:

For RSUs, the date and price of allotment are irrelevant for calculating capital gains. Instead, the vesting date is used for deciding the purchase price as because employers deduct the applicable taxes on the total value of RSUs at the time of vesting, typically by selling some of the shares. Your Form 16A, provided by the employer, would list the pre-tax value of RSUs under Share Perquisites.

Capital Gains: Calculating Total Tax Due

Until March ’23, foreign investments were eligible for a LTCG rate of 20% along with the Indexation benefit, provided they had been held for more than two years. The Finance Act 2023 withdrew the LTCG and indexation benefits for foreign investments. All foreign capital gains are now considered as short-term gains and taxed at the slab rate, irrespective of the holding period. However, you can still apply the old rules for shares purchased before March 31 2023, though.

Let us understand via an example. Assume that you made the following transaction in AAPL shares, which are listed in USA:

1. Bought 10 shares on 9th May 2022
2. Bought 10 shares on 8th June 2023
3. Sold everything on 15th May 2024

The 10 AAPL shares bought in May 2022 qualify for 20% LTCG and the indexation benefit as they were acquired before April 1 2023 and were held for more than 24 months:

^#CII for 2022 and 2024 is 331 and 363, respectively. Source: CII table published by Income Tax Department

^##Since SBI did not publish rates between 27th April and 1st May 2024, I have used the average of rates on 26th April and 2nd May. The difference in rates between two close-by dates is usually negligible, so a little approximation does not significantly change your tax liability. Minor approximations like this are generally acceptable to the IT department.

The gains on the 10 AAPL shares bought in June 2023 would be categorised as STCG and taxed at the marginal slab rate since the shares were purchased after April 1, 2023:

^*Assuming that your marginal slab rate is 30%
Your total tax liability would be ₹9293 (=₹6530 + ₹2763).

Tip: Subtracting wire transfer charges and brokerage commissions as transaction costs from dividend income or capital gains helps reduce the tax outgo.

The US government does not withhold any tax on capital gains for foreign investors, unlike that on dividends. As a result, you need to pay the entire due amount directly to the Indian government—DTAA is not applicable.

Declaration of Foreign Assets (FA)

Even if you have not have made any transactions but held foreign shares during the year, it is mandatory to disclose the ownership under Schedule Foreign Assets (FA).

Non-declaration of foreign assets can be considered as hiding, and risks being charged under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

Schedule FA requires one to specify the following: foreign account number, institution address, peak and closing balance of the account.