ITR Filing: Taxation on foreign income for Indian individual taxpayers; all you need to know

Income tax on foreign shares needs to be reported while filing returns in India. If you have earned dividends from foreign shares or booked capital gains or losses, they have to be accordingly reported to the tax authorities. Dividends refer to the distribution of a company’s profits to its shareholders. The term dividend is defined in Section 2(22) of The Income Tax Act, 1995 in an inclusive manner which includes “Distribution of accumulated profits to shareholders”. Here is what all you need to know about taxation of foreign income for Indian individual taxpayers.

Capital gain tax rate:

Long-term capital gain from the sale of foreign stocks (not listed on the Indian exchange) is taxed at the flat rate of 20 percent along with health and education cess (also surcharge, if applicable). The short-term capital gain from the selling of foreign shares will be added to total income and taxable at the individual’s slab rate.

ITR Form:

A taxpayer making investments in US Stocks or any other foreign asset, cannot file ITR-1 (SAHAJ). He/she needs to file in ITR-2/ITR-3/ITR-5/ITR-6 and ITR-7 depending upon applicability to it.

Disclosing foreign investments:

Gain or loss on the sale of investments is reported in ITR 2 under the category “Capital Gains or Loss”. Income in the form of dividend from investments is required to be reported under the category “Other Sources”. Schedule FA of the ITR-2 needs to be filled for the disclosure of foreign investments.

Capital gains holding period:

The period for holding foreign stocks is the same as that for unlisted Indian stocks. If the holding duration of stock is less than 24 months, it is classified as short-term capital gain. If the duration is more than 24 months, then it shall be called long-term capital gain.

Set-off:

Short-term (ST) loss can be set off with the balance of gains in ST/LT gains, whereas long-term (LT) gains can only be set off with LT gains.

Carry Forward:

Short-term or Long-term losses booked on transfer of such shares can be carried forward (c/f) to eight assessment years.

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