Tax on US & Foreign Stocks for Indian Investors: Dividends, Capital Gains & ITR-2 Filing Guide (AY 2026-27)

Investing in US and foreign stocks has never been easier for Indians. Platforms like Vested, INDmoney, Groww, and interactive brokers let you buy shares of Apple, Tesla, or any S&P 500 company in minutes. But when tax season arrives, many investors discover that reporting foreign stock income in India is far more involved than domestic equity.

If you hold or have sold US or other foreign stocks during FY 2025-26, here is exactly how your income is taxed, what you must report, and how to claim DTAA relief so you are not taxed twice on the same income.

Why Foreign Stocks Are Taxed Differently in India

Indian tax law treats US-listed stocks (and stocks listed on any foreign exchange) as unlisted securities. This is because they are not listed on a recognised stock exchange in India (BSE or NSE). The distinction matters because unlisted securities have different holding periods, tax rates, and exemption rules compared to domestic listed equity.

Additionally, any income you earn abroad — dividends or capital gains — is taxable in India if you are a Resident and Ordinarily Resident (ROR) taxpayer. India taxes your global income. The silver lining is the Double Taxation Avoidance Agreement (DTAA), which ensures you can claim credit for taxes already paid in the foreign country.

How Dividends from US Stocks Are Taxed

When a US company pays you a dividend, the US government withholds tax at source before the money reaches your brokerage account. Under the India-US DTAA, this withholding rate is 25% of the gross dividend (reduced from the statutory 30%).

In India, this dividend is added to your total income and taxed at your applicable slab rate. However, you can claim a foreign tax credit (FTC) for the 25% US tax already paid, so you are not taxed twice.

Practical Example

Suppose you received $1,000 in dividends from US stocks during FY 2025-26:

The DTAA credit is limited to the lower of the tax paid abroad or the Indian tax rate on that income. Since 25% (US rate) is lower than 30% (Indian slab), you can claim the entire US tax as credit. If your Indian slab rate were 20%, you could only claim credit up to 20% — the remaining 5% withheld in the US becomes a cost.

Key Point on Currency Conversion

Convert dividends to INR using the SBI Telegraphic Transfer Buying Rate (TTBR) on the date the dividend was credited to your account. Your brokerage platform may provide this, but verify independently — the Income Tax Department uses SBI TTBR as the benchmark.

How Capital Gains on Foreign Stocks Are Taxed

When you sell US or foreign stocks at a profit, the capital gains taxation depends on how long you held the shares.

Holding Period and Tax Rates (AY 2026-27)

These rates reflect the changes introduced in Budget 2024. Previously, LTCG on unlisted securities was taxed at 20% with indexation benefit. From FY 2024-25 onwards, the rate has been reduced to 12.5%, but indexation benefit has been removed entirely.

Important: No Rs 1.25 Lakh LTCG Exemption

The Rs 1.25 lakh annual LTCG exemption under Section 112A applies only to listed Indian equity shares and equity-oriented mutual funds where Securities Transaction Tax (STT) is paid. Since foreign stocks are unlisted in India and no STT is paid, this exemption does not apply. Even Rs 1 of LTCG on foreign stocks is taxable.

Computing Capital Gains: A Step-by-Step Example

Suppose you bought 10 shares of a US company at $150 per share in June 2023 and sold them at $200 per share in October 2025.

Note how the currency conversion is done separately for purchase and sale dates. You convert the purchase cost at the SBI TTBR prevailing on the purchase date, and the sale proceeds at the rate on the sale date. This means rupee depreciation against the dollar can increase your taxable gain in INR even if your dollar-denominated return is modest.

US Capital Gains Tax

The US generally does not withhold tax on capital gains for non-resident aliens (Indian investors) on stock sales. This means there is no DTAA credit to claim on capital gains — the full tax is payable in India. If your broker does withhold any US tax on gains (rare, but possible in certain situations), you can claim DTAA credit for it.

Schedule FA: Mandatory Foreign Asset Reporting

If you hold any foreign asset at any point during the financial year — including a single share of a US company, a US brokerage account, or even a foreign bank account used for funding — you must report it in Schedule FA (Foreign Assets) of your ITR.

This applies even if:

• You made no gains or losses during the year
• The value of your holdings is very small
• You have already paid all applicable taxes

Schedule FA requires you to disclose:

• Country and name of the entity
• Account number or identification
• Date of opening/acquisition
• Peak balance or investment value during the year
• Closing balance as on 31st March
• Total income earned from the asset

Penalty for non-disclosure: Under the Black Money Act, failure to report foreign assets in Schedule FA can attract a penalty of Rs 10 lakh per year of non-compliance. The Income Tax Department cross-references your disclosures with information received through the Common Reporting Standard (CRS) and FATCA data exchange with other countries. Non-disclosure is easily caught.

Filing Form 67 for DTAA Credit

To claim foreign tax credit on dividends (or any other income where foreign tax was paid), you must file Form 67 on the income tax e-filing portal. This is a prerequisite — without Form 67, your DTAA credit claim will be rejected.

How to File Form 67

1. Log in to the income tax e-filing portal (eportal.incometax.gov.in)
2. Navigate to e-File > Income Tax Forms > Form 67
3. Enter details of foreign income and tax paid, country-wise
4. Attach a tax residency certificate (TRC) or tax payment proof from the foreign country (your US brokerage statement showing tax withheld is usually sufficient)
5. Submit Form 67 before or along with filing your ITR

Form 67 can be filed after the ITR is submitted but must be filed before the ITR is processed. However, best practice is to submit it before or simultaneously with your return.

Which ITR Form to Use

If you have foreign stock investments, you must file ITR-2 (not ITR-1). ITR-1 does not have schedules for capital gains or foreign assets. This applies even if your only other income is salary — the moment you have foreign stocks, you move to ITR-2.

The key schedules you will fill in ITR-2:

• Schedule CG: Report capital gains from sale of foreign stocks
• Schedule OS: Report dividend income under "Income from Other Sources"
• Schedule FA: Disclose all foreign assets
• Schedule FSI: Report foreign source income
• Schedule TR: Claim tax relief under DTAA

LRS and TCS: Impact on Your Tax Liability

When you remit money abroad to buy foreign stocks through the Liberalised Remittance Scheme (LRS), your bank collects Tax Collected at Source (TCS) at the following rates for FY 2025-26:

This TCS is not an additional tax — it is an advance tax payment. You can claim it as credit against your total tax liability when filing your ITR. It will appear in your Form 26AS and Annual Information Statement (AIS). If the TCS exceeds your total tax liability, the excess is refunded.

Common Mistakes to Avoid

1. Forgetting Schedule FA: Many investors correctly report capital gains but forget to fill Schedule FA. The penalty for non-disclosure is steep and the department actively cross-checks through FATCA data.

2. Using wrong conversion rates: Always use SBI TTBR, not your bank's retail rate or Google's exchange rate. The dates matter — use the purchase date rate for cost and the sale date rate for proceeds.

3. Not filing Form 67: Without this form, your DTAA credit is denied even if you have proof of tax paid abroad. Many investors discover this only after receiving a demand notice.

4. Claiming the Rs 1.25 lakh LTCG exemption: This exemption is exclusively for Indian-listed equity. Applying it to foreign stock LTCG will trigger a mismatch notice.

5. Ignoring dividend reinvestment (DRIP): If your US broker automatically reinvests dividends, each reinvestment is a new purchase with its own cost basis and holding period. The reinvested dividend is still taxable as income in the year received.

Tax-Efficient Strategies for Foreign Stock Investors

Harvest losses intentionally: If you hold foreign stocks at a loss, consider selling them before March 31 to book short-term capital losses that can be set off against other capital gains. The loss can be carried forward for up to 8 years if not fully utilised.

Time your purchases around the LTCG threshold: Since foreign stocks need a 24-month holding period for LTCG treatment, plan your sales accordingly. The difference between STCG at 30% slab rate and LTCG at 12.5% on a Rs 5 lakh gain is Rs 87,500 in tax savings.

Actionable Takeaway

Foreign stock investing is tax-efficient if you plan the holding period (24+ months for 12.5% LTCG), file Form 67 to claim DTAA credit on dividends, and never skip Schedule FA. The single most expensive mistake is forgetting to report foreign assets — it costs Rs 10 lakh in penalties versus a few minutes of disclosure. 49Tax's AI can extract your brokerage statements and pre-fill Schedule FA, FSI, and capital gains schedules in your ITR-2, so you don't have to do the currency conversions manually.