Gains on the sale of shares, whether they result from shares listed in India or overseas, are taxed in both scenarios. However, the taxation of foreign stocks is different from the way the Indian shares are taxed in the hands of the investors. The difference in the calculation of tax is primarily on two counts – holding period and tax rate.
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In the case of shares listed on Indian stock exchanges, the short-term capital gains (STCG) are taxed at 15% while long-term capital gains (LTCG) are taxed at 10% (above Rs 1 lakh per financial year) after a holding time of 1 year.
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However, in the case of foreign shares listed on the US stock market or any global stock exchange, the gains from stocks are taxed similarly to gains from unlisted shares, for which a holding period of 2 years is used for calculations. And, therefore, gains realised till 24 months are taxed fully but they stand to gain from the benefit of indexation only after a holding period of over 2 years.
“As per the provisions of income tax laws, the tax treatment of foreign stocks is similar to that of unlisted equity shares in India. As per the provisions of section 2(42A) of the IT Act, if a foreign stock is held for up to 24 months then the gains derived from such stocks would be treated as short-term capital gains, otherwise, such gains would be long-term in nature.
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Accordingly, as per the provisions of section 112 of the IT Act, the long-term capital gains derived from foreign stocks would be taxable at 20% (with indexation benefit) whereas the short-term capital gains would be taxed as per the slab rates applicable to the Indian investor. The base tax rate would be further increased by the applicable cess and surcharge, if any,” says Dr Suresh Surana, Founder, RSM India.
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Effectively, LTCG on the sale of foreign shares is taxed at 20% tax with the benefit of indexation, while the STCG on the sale of foreign shares is taxed at 15% when securities transaction tax is applicable.
