Updated August 2026.
Tax is where most of the confusion around US investing sits, and a lot of it comes from merging two separate questions: what the United States takes, and what India takes.
The short version is that the United States does not tax an Indian resident's capital gains on US shares. It does withhold tax on dividends. India taxes both — capital gains at rates that depend on how long you held, and dividends at your slab rate, with credit available for the tax already withheld in the US.
This article is the starting point for the whole tax cluster. Each section links to a deeper treatment.
Capital gains on US stocks and ETFs
For an Indian resident, capital gains on directly held US stocks and ETFs are taxed in India as follows:
| Holding period | Classification | Rate |
|---|---|---|
| More than 24 months | Long-term capital gains | 12.5% without indexation, plus surcharge and cess |
| 24 months or less | Short-term capital gains | Your applicable slab rate |
The 12.5% long-term rate applies to transfers on or after 23 July 2024, following Budget 2024, which reduced it from 20% and removed indexation. It is unchanged for FY 2026-27.
There is no US capital gains tax for an Indian resident on these holdings. Capital gains are taxed only in India.
The ₹1.25 lakh exemption does not apply
This is the single most common error. The ₹1.25 lakh long-term capital gains exemption applies to Indian listed equity and equity-oriented mutual funds only. Gains on US stocks and ETFs do not benefit from it.
Long-term gains on US holdings are therefore taxable from the first rupee. Anyone planning around an exemption that does not exist will under-provision for tax.
Converting USD gains into rupees
Gains arise in dollars but are taxed in rupees, so the conversion rate matters and it is prescribed rather than chosen.
The generally applied basis is the SBI TT buying rate on the last day of the month immediately preceding the month of sale. Using the rate on the transaction date, or an average for the year, is a frequent source of mismatch with the department's own computation.
One consequence worth noting: because both the purchase and the sale are converted, rupee depreciation can create a taxable gain even where the dollar value barely moved. Currency is part of your taxable return, not a separate matter. See Currency Risk Explained.
Dividends
Dividends work differently from capital gains because both countries take a share.
- The US withholds first. The default rate for a non-resident is 30%. With Form W-8BEN on file, the India–US treaty rate of 25% applies. You receive the dividend net of this.
- India taxes the gross dividend. The full pre-withholding amount is added to your income and taxed at your slab rate.
- You claim credit for the US tax. The foreign tax credit mechanism prevents the same income being taxed twice in full.
The 15% treaty rate that sometimes gets quoted requires holding at least 10% of the voting stock of the paying company. It is not available to retail investors.
See Dividend Tax on US Stocks and The India–US DTAA and Foreign Tax Credit.
Which ITR form, and what goes in it
Holding foreign assets rules out ITR-1 and ITR-4. Most investors with US holdings file ITR-2; those with business or professional income file ITR-3.
Three schedules matter:
- Schedule CG — capital gains on disposals during the year.
- Schedule FSI and Schedule TR — foreign-source income and the tax relief claimed on it.
- Schedule FA — the foreign assets themselves, disclosed whether or not you sold anything or made any gain.
See How to Report US Stocks in Your ITR.
Schedule FA is a separate obligation
It is worth stating plainly because it is so often missed: disclosure is triggered by holding the asset, not by profiting from it. An investor who bought US shares, held them all year, sold nothing and received nothing still has a Schedule FA obligation.
Non-disclosure carries exposure under the Black Money (Undisclosed Foreign Income and Assets) Act, where the consequences are considerably more serious than the tax at stake. See Schedule FA and Foreign Asset Reporting.
TCS is not a tax on your investment
When you remit money abroad under the LRS, your bank collects TCS at 20% on the amount exceeding ₹10 lakh of cumulative remittances under your PAN in a financial year. The threshold rose from ₹7 lakh on 1 April 2025.
Budget 2026 reduced the rate to 2% for education and medical remittances. Investment remittances remain at 20%.
TCS is collected in advance and is adjustable against your income-tax liability, or refundable if your liability is lower. The real effect is on cash flow and timing, not on total cost. See TCS on LRS Remittances.
The estate tax question
Rarely discussed and worth knowing about above a certain portfolio size. The IRS treats Indian residents as non-resident aliens, and US-situs assets above a USD 60,000 exemption can attract US estate tax at rates up to 40%.
India does not have an estate tax treaty with the United States that meaningfully raises that threshold, unlike some other countries. See US Estate Tax for Indian Investors.
A worked example
An investor buys USD 10,000 of a US ETF and sells three years later for USD 14,000.
- Holding period is more than 24 months, so the gain is long-term.
- Both legs convert at the prescribed SBI TT buying rates, so the rupee gain reflects both the USD 4,000 appreciation and any rupee movement over the period.
- The rupee gain is taxed at 12.5% plus applicable surcharge and cess, with no ₹1.25 lakh exemption available.
- Any dividends received along the way were separately taxable at slab rate each year, with credit for the 25% withheld in the US.
- The holding appeared in Schedule FA every year it was held, including years with no transaction.
This is illustrative only. Actual liability depends on your slab, surcharge, the specific rates on the relevant dates, and your overall tax position.
Common mistakes
- Assuming the ₹1.25 lakh LTCG exemption applies to foreign shares.
- Using the 12-month holding period that applies to Indian equity. For US holdings it is 24 months.
- Converting at the transaction-date rate instead of the prescribed month-end rate.
- Reporting the net dividend received rather than the gross.
- Treating TCS as a sunk cost rather than claiming it.
- Filing ITR-1 while holding foreign assets.
- Skipping Schedule FA in a year with no sale.
Conclusion
The tax treatment of US holdings is more involved than that of Indian equity, but it is entirely knowable. The rates are fixed, the forms are specified, and the reporting obligations are clear. What causes problems is applying Indian-equity intuitions — the 12-month period, the ₹1.25 lakh exemption — to assets they were never written for.
Keep records from day one, and take professional advice for anything material.
Disclaimer: This article is for educational purposes only and is not tax, legal, investment, or financial advice. Rates and thresholds are stated as of August 2026 and can change with each Finance Act. Tax treatment varies with residential status, income level, surcharge, cess, product structure and individual facts. Please consult a qualified CA or tax advisor before acting, and read our Risk Disclosure and Disclaimer.