Buying US stocks via GIFT City? Know the tax implications

Investing in US stocks is now possible through GIFT City. Regulated by the International Financial Services Centres Authority (IFSCA), several stock investment platforms in GIFT City have enabled investors to undertake fractional investing in US stocks with as little as $1.

If you are also planning to invest in US stocks through GIFT City, you might be wondering about tax implications. This article explains the most critical ones based on inputs from CA Dr Suresh Surana.

What are the tax implications?

The tax implications for Indian retail investors investing in US stocks through GIFT City based brokers would primarily depend on the legal and operational structure through which such investments are offered.

In general, retail investors are taxed as Indian residents on their global income. The key tax treatment is as follows:

For Indian tax residents, capital gains arising from investments in US-listed stocks are taxable in India.

Direct investments in US equities are treated as investments in unlisted foreign securities for Indian tax purposes. Accordingly, a holding period of 24 months applies to determine the nature of capital gains. The 12 months threshold applicable to listed Indian securities does not extend to foreign equities.

Gains from shares held for more than 24 months are classified as long-term capital gains (LTCG) and taxed at 12.5%, whereas gains from shares held for 24 months or less are treated as short-term capital gains (STCG) and taxed at the investor’s applicable income tax slab rates.

Dividends received from US stocks are generally subject to a withholding tax in the United States. However, Indian investors can claim a Foreign Tax Credit (FTC) in India for the tax withheld in the U.S., thereby avoiding double taxation.

For Indian tax purposes, the gross dividend amount (i.e., before deduction of U.S. withholding tax) must be reported as income and is taxable at the investor’s applicable slab rate.

The FTC is usually claimed by filing Form 67 along with the income tax return. Additionally, the details of foreign taxes paid and credit claimed must be disclosed in Schedule TR (Tax Relief), which provides a summary of tax relief claimed for taxes paid outside India (applicable only to residents).

Mandatory ITR filing and foreign asset disclosure

Individuals holding foreign stocks, overseas bank accounts, or any financial interest in offshore entities are generally required to file an income tax return in India, even where income falls below the basic exemption threshold.

Additionally, taxpayers are required to disclose such holdings under Schedule FA (Foreign Assets) and Schedule FSI (Foreign Source Income) in their income tax return, where applicable.

Failure to disclose foreign assets may result in penalties and other consequences under applicable Indian laws governing undisclosed foreign income and assets.

Does TCS apply if investments cross ₹10 lakh in a year?

Suppose a person is buying fractional US stocks at $1 or $10 through Gift city-listed platforms and his total annual investment through this route crosses ₹10 lakh. In this case, will TCS apply to all his transactions, or after the total investment crosses ₹10 lakh?

Well, under the Liberalised Remittance Scheme (LRS) regulations governed by the Reserve Bank of India, TCS is not triggered by the value of a specific trade, but rather by the aggregate amount of foreign currency remitted out of India within a single financial year.

For investments made through international platforms, including GIFT City-listed brokerages, a statutory threshold of ₹10 lakh applies per financial year. Remittances up to an aggregate of ₹10 lakh incur a nil TCS rate. Once the total accumulated remittances across all banking channels and platforms exceed this ₹10 lakh limit, a 20% TCS rate is applicable.

Is fractional investments through Gift City also subject to RBI's LRS limit?

Fractional investments in overseas securities through GIFT City (IFSC) brokers are generally subject to the RBI’s Liberalised Remittance Scheme (LRS) limit of USD 250,000 per financial year for resident individuals.

The regulatory treatment is driven by the nature of the overseas investment and remittance, not by whether the investor purchases a full share or a fractional share.

Where a resident Indian remits funds for investing in foreign listed securities via a GIFT City platform, the remittance is typically counted within the individual’s LRS limit. Fractional ownership does not create a separate regulatory exemption.

Key takeaways