The taxation of foreign shares in India has become an important subject as more individuals invest in global markets through international brokerage accounts, employee stock plans, and foreign portfolio platforms. Understanding how these investments are taxed is essential for accurate reporting and compliance with Indian income tax laws. This topic covers several related areas such as the tax treatment of capital gains, foreign dividend income in India, foreign income in India, and the rules surrounding foreign tax credit.
This blog provides a detailed, simple-language explanation of these concepts while following a fully neutral, informational approach. It explains how foreign share transactions are taxed, how income must be reported, and what documentation is necessary under Indian regulations.
1. Overview of Taxation of Foreign Shares in India
Foreign shares owned by a resident taxpayer are treated similarly to Indian listed shares in terms of basic tax principles, but with important differences in classification, holding period, and documentation. Indian residents are taxed on their global income. This means:
Capital gains from selling foreign shares are taxable in India.
Dividends received from foreign companies are taxable in India.
Any other foreign income in India, such as interest or rights payments linked to foreign shares, must also be reported.
Because foreign shares are not listed on Indian stock exchanges, they are treated as unlisted shares for tax purposes, which affects the holding period and applicable tax rates.
2. Classification and Holding Period
Under Indian tax rules, foreign shares fall under the category of capital assets. The tax classification depends on how long the shares are held:
Short-Term Capital Asset: Held for up to 24 months.
Long-Term Capital Asset: Held for more than 24 months.
This classification is important because the tax rate differs for short-term and long-term capital gains.
3. Taxation of Capital Gains
Short-Term Capital Gains (STCG)
If foreign shares are sold within 24 months, the profits are considered short-term capital gains. These gains are taxed at the individual’s applicable slab rate. There is no special concessional rate for these transactions because the shares are unlisted.
Long-Term Capital Gains (LTCG)
If foreign shares are held for more than 24 months, the gains become long-term capital gains. LTCG on unlisted shares is generally taxed at 20% with indexation. Indexation allows the purchase cost to be adjusted for inflation, which reduces taxable gains.
Currency Conversion for Gains
The Income Tax Act requires converting values into INR using specific rules:
Purchase cost is converted using the exchange rate on the date of purchase.
Sale value is converted using the exchange rate on the date of sale.
This ensures consistency in calculating gains or losses.
4. Foreign Dividend Income in India
Dividends received from foreign companies are fully taxable in India. There is no exemption or reduced rate for foreign dividends. This category of income is included under Income from Other Sources and taxed at the individual's slab rate.
Many foreign jurisdictions deduct withholding tax on dividends before paying them to the shareholder. This withheld amount may be eligible for foreign tax credit, depending on the applicable Double Taxation Avoidance Agreement (DTAA). Taxpayers must maintain proof of the tax withheld, such as statements issued by the foreign broker or company.
5. Foreign Income in India and Reporting Requirements
Foreign income in India includes capital gains, dividends, interest, and any other amounts earned from foreign assets. As Indian residents are taxed on global income, every category of foreign income must be:
Reported in the income tax return, and
Disclosed in the Schedule FA (Foreign Assets) of the ITR.
Schedule FA requires details such as:
Country of investment
Type of asset (e.g., equity shares)
Initial acquisition date
Peak value during the year
Closing balance
Income earned from the asset
This disclosure requirement applies even if the foreign income is exempt or results in losses. It is designed to maintain transparency in overseas investments held by Indian residents.
6. Foreign Tax Credit (FTC) Rules
The concept of foreign tax credit is relevant when foreign authorities deduct tax on dividends or capital gains. India allows residents to claim credit for such taxes under Rule 128 of the Income Tax Rules, subject to certain conditions.
Eligibility for FTC
A taxpayer can claim foreign tax credit only when:
The foreign income is also taxed in India, and
The tax has been deducted or paid in the foreign country.
Documents Required for FTC
Rule 128 specifies documentation such as:
A statement containing foreign tax details in Form 67
Proof of tax deduction or payment
Relevant income statements from the foreign broker or company
Form 67 must be filed before filing the income tax return for the year in which the benefit is being claimed.
Limit on FTC
The foreign tax credit cannot exceed the Indian tax payable on the same foreign income. If the foreign tax rate is higher than the Indian tax rate, the excess amount cannot be claimed as a refund.
7. Currency and Documentation for Compliance
Maintaining proper documentation is essential when dealing with foreign assets. Records may include:
Contract notes
Dividend statements
Foreign brokerage statements
Tax withholding certificates
Currency conversion details
All foreign income, expenses, and taxes must be converted to INR. The method of conversion depends on the type of income and is guided by the Income Tax Rules.
8. Double Taxation Avoidance Agreement (DTAA)
India has DTAAs with many countries. These agreements help prevent double taxation of the same income. DTAA provisions typically define:
Taxability of dividends
Taxability of capital gains
Maximum withholding tax limits
Eligibility for foreign tax credit
Understanding the DTAA applicable to the country where the foreign shares are held is essential for correct tax compliance.
9. Treatment of ESOPs and RSUs
Many employees receive foreign shares as part of compensation through Employee Stock Option Plans (ESOPs) or Restricted Stock Units (RSUs). These have unique tax implications:
At vesting/exercise: The difference between the fair market value and exercise price is taxed as salary.
At sale: Capital gains tax applies, based on the holding period after allotment.
This makes it important to track timelines and maintain documentation from the employer and broker.
10. Common Compliance Considerations
Taxpayers dealing with foreign shares should pay careful attention to:
Accurate reporting in ITR and Schedule FA
Timely filing of Form 67 for claiming foreign tax credit
Correct application of exchange rates
Classification of short-term and long-term capital gains
Verification of foreign tax withheld
These steps help ensure alignment with Indian tax laws and reduce the chances of errors or mismatches during assessment.
Conclusion
Understanding the taxation of foreign shares in India is essential for any resident taxpayer who invests in global markets. Foreign dividend income in India, foreign income in India, and foreign tax credit rules all contribute to the overall compliance framework. Through clear interpretation of tax laws and regulatory requirements, individuals can achieve accurate reporting of overseas assets and income.
This informational discussion is presented in a neutral, factual manner consistent with ICAI ethical guidelines, and the subject is explained with reference to the procedures generally followed for foreign taxation matters within the scope of Mohit S. Shah & Co as a contextual mention.
