One of the key considerations for Indian investors in US stocks is dividend taxation. The US imposes a withholding tax on dividends paid to foreign investors, and understanding it is crucial for accurate returns.
For those investing in US stocks from India, understanding how withholding tax works and how to claim credits in India can help optimize returns and avoid unexpected tax liabilities.
Step 1: Know the Withholding Tax Rate
- Under the US-India tax treaty, the US generally imposes a 25% withholding tax on dividends paid to Indian residents.
- This means that if a US company pays a $100 dividend, $25 is automatically deducted before it reaches your account.
Example:
- Dividend declared: $200
- US withholding tax (25%): $50
- Amount received: $150
Step 2: Understand Indian Tax Implications
- Dividends received from US stocks must also be reported in India.
- Tax treatment depends on your income slab under Indian tax laws:
- In India, dividends are added to an investor’s total taxable income.
- You can claim a foreign tax credit for the US withholding tax paid, avoiding double taxation.
- In India, dividends are added to an investor’s total taxable income.
Pro Tip: Retain dividend statements from your US broker as documentation to claim credits.
Step 3: Calculate Net Dividend Income
Here is an example of calculating net income after US and Indian taxes.
Scenario:
- Dividend received: $1,000
- US withholding tax: 25% → $250 deducted → $750 received in India
- Convert to INR at 82 INR/USD → ₹61,500
- Indian tax slab: 20% → ₹12,300
- Foreign tax credit for $250 already paid → ₹20,500
- Tax payable in India: ₹12,300 – ₹20,500 → ₹0 (no additional tax liability).
Observation: The foreign tax credit ensures you are not taxed twice.
Step 4: Minimise Tax Impact
- Use a reputable broker that files the required W-8BEN form to ensure the correct treaty rate (25%) is applied.
- Keep detailed records of dividends received and taxes paid.
- Plan investments to balance dividend yields and capital gains, depending on your tax slab.
Step 5: Consider Reinvestment Strategies
- Dividends can be reinvested into the same stock or other US stocks.
- Reinvestment can enhance compounding of returns over time, even after accounting for withholding tax.
- Some brokers offer automatic dividend reinvestment plans (DRIPs), simplifying this process.
Key Takeaways
- US dividends are taxed at 25% at source for Indian residents.
- Indian residents report dividends as part of taxable income, but can claim foreign tax credit.
- Proper documentation and forms (W-8BEN) ensure correct tax treatment.
- Reinvesting dividends can maximize long-term portfolio growth.
By understanding withholding tax and planning your strategy for investing in US stocks from India dividend income can serve as a strong component of your global portfolio.
