Income Tax Rules On Overseas Investment And Capital Gains: What You Need To Know

Under the Liberalised Remittance Scheme (LRS), Indian residents can remit up to $2.5 million in overseas investments every fiscal year. They are permitted to invest abroad, subject to the LRS limit. Foreign investment depends on various criteria, including portfolio diversification, returns, and risk. Depending on the returns, a resident's overseas investments are also taxable in India.

Overseas Equity Investments: These investments are taxed under short-term capital gains and long-term capital gains. Capital gains arise when investments in stocks in US markets generate profit when selling them at a higher price than their buying cost.

"When the stock is held for more than 24 months, the gains on the sale of the stock are long-term capital gains and will be taxed at 20 per cent plus applicable surcharge and fees. On the other hand, when the stocks are held for less than 24 months, the gains on the sale of the stock are short-term capital gains and will be taxed as per slab rates applicable to the investor," says Archit Gupta, CEO, Clear.

There is also a tax on dividends received at a flat rate of 25 per cent. The amount of tax is withheld by US companies, and the investor gets 75 per cent as a dividend. The dividend that the Indian investor receives will be added to the investor's income and taxed at regular tax rates. However, due to the double Tax Avoidance Agreement (DTAA), between US and India, the tax withheld in the US can be set off against tax payable in India.

Overseas Debt Investments: Foreign debt behaves similarly to Indian debt mutual funds. It is considered long-term if the resident holds the foreign debt for more than 36 months. "Otherwise, it is temporary. Short-term gains from foreign debt will be taxed at individual slab rates, while long-term gains will be taxed at 20 per cent after indexation. Interest and dividends from foreign debt are likewise subject to individual tax rates," says Suneel Dasari, founder and CEO, EZTax.in, an online income tax filing portal.

Overseas Real Estate Investments: Foreign property will be taxed in the same manner as Indian property. "The long-term holding duration is two years. After indexation, short-term gains will be taxed at individual slab rates, while long-term gains will be taxed at 20 per cent. After using the standard deduction, rental income from foreign real estate is also subject to individual slab taxation rates," says Dasari. Foreign REIT dividends and rental income are likewise taxed at specific slab rates.

Dasari adds that taxpayers must record their total assets on their income tax return after the fiscal year. Also, if any taxes have been deducted in a foreign nation, the taxpayer may claim a foreign tax credit in India, subject to TRC and Form 67 filing.