With the new financial year kicking off, taxpayers need to wrap their heads around how different investment assets are taxed. Capital gains from selling assets like real estate, gold, or crypto have seen some changes. Following the Budget 2024 announcement, long-term capital gains (LTCG) are now taxed at a flat rate of 12.5%, without the indexation benefits. This rule applies to foreign stocks and ETFs as well, thanks to the Finance Bill 2025. On the flip side, short-term capital gains (STCG) on these assets are hit with a 20% tax, plus surcharge and cess. Since foreign securities don’t fall under Section 112A, the Rs 1.25 lakh LTCG exemption is a no-go, and gains are taxed under Section 112 instead.
Foreign investments are a whole other ball game for Indian residents, governed by the Foreign Exchange regulations and rules set in India. CA (Dr.) Suresh Surana emphasizes the importance of understanding the Liberalized Remittance Scheme (LRS) for resident Indians looking to invest outside the country. Under the LRS, Indian residents can remit up to US$ 250,000 per financial year for permitted current or capital account transactions. For the FY 2025-26, Indian resident investors diving into foreign investments like stocks, mutual funds, and ETFs need to be aware of the tax implications.
**Capital Gains Taxation**
When it comes to foreign stocks, the Income Tax Act deems shares of a company not listed on Indian stock exchanges, like foreign shares, as long-term capital assets if held for over 24 months. Long-term capital gains from selling these foreign shares are taxed at a rate of 20% under Section 112 of the IT Act, benefiting from indexation. Short-term capital gains, however, are taxed at the investor’s applicable income tax rates.
For foreign mutual funds and ETFs, gains from units acquired after April 1, 2023, are considered short-term capital gains, regardless of the holding period. These gains are taxed according to the investor’s slab rate, without the indexation benefit. Specified mutual funds, investing more than 65% in debt and money market instruments, fall under these rules. Selling units of foreign mutual funds or ETFs after 24 months results in long-term capital gains taxed at 12.5% without indexation, while short-term gains are taxed as per the investor’s slab rate.
**Tax on Dividends**
Dividends received from foreign equities and mutual funds are fully taxable in India under the “Income from Other Sources” category. Investors may also face taxes in the foreign country where the stocks or units are held. To alleviate double taxation, investors can claim tax credit under the Double Taxation Avoidance Agreement (DTAA) or unilateral relief under Section 91 of the IT Act.
Navigating through foreign investments requires Indian investors to disclose foreign assets in their tax returns under Schedule FA. This includes details like the country of investment, asset nature, acquisition cost, and earned income during the year. TCS rates apply to remittances under the LRS, with no TCS for remittances up to Rs. 10 lakhs in a financial year. Claiming foreign tax credit for taxes paid abroad is possible, provided the income is taxable in India, with Form 67 submission to support the claim.
Understanding the tax implications of foreign investments is crucial for Indian residents venturing into global markets. From capital gains taxation to reporting foreign assets, investors need to navigate these rules to stay compliant and make informed financial decisions. So, if you’re considering investing abroad, buckle up and dive into the nitty-gritty of foreign investment taxation.