A few decades ago, investing abroad was mostly a game for the super-rich or large companies. The average person couldn’t even think about buying shares in Apple or Amazon. Why? Because the process was complicated and resources were scarce.
However, getting exposure to foreign markets has become way easier today. Many brokers in India allow you to invest in foreign shares, mutual funds and even ETFs.
Now, if you are a resident of India, investing in foreign shares, or any other asset for that matter comes with 2 compliances.
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One, you’ll have to pay taxes on the profits that you make from these assets and,
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Two, unlike other assets that you only report when you generate income from them, foreign assets need to be reported in your ITR even if they have not generated any income for you.
We’ll discuss both of these aspects in this thread. Let’s start with the taxation. I’ve listed down the various foreign assets people invest in, and the tax rates applicable on them in India.
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Foreign listed shares: If you invest directly into stocks listed in foreign exchanges, capital gains on these are taxed at slab rate if they are short-term (holding period < 24 months) and 12.5% if they are long-term (holding period > 24 months).
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Foreign MFs/ETFs: Mutual funds and ETFs are essentially a collection of different assets they invest in, and some of them may have allocations into foreign markets as well.
*New rates will come into effect from April 1, 2025
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Foreign ESOPs: Many people work in Indian subsidiaries of foreign companies and receive ESOPs as a part of their compensation. In such cases, because the company is headquartered abroad, these ESOPs will be considered foreign assets.
Taxation on ESOPs happens twice. One, when you exercise the options and second, when you sell the stocks.
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At the time of exercise: The difference between the Fair Market Value (FMV) of the stocks and the predetermined price paid by the employee is taxed as a perquisite in the hands of the resident employee.
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At the time of sale: The capital gains will be taxed similar to that in the case of foreign equity stocks. STCG will be taxed at slab rate and LTCG at 12.5%.
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Now, if you have income from any of these foreign sources, these need to be reported under schedule FSI (Foreign source income) while filing your ITR.
Moreover, because the income was earned in a different country, it’s highly likely that you’ll be liable to pay tax in that country as well. In such cases, to avoid double taxation, the Indian government has treaties with many countries wherein you can claim the taxes paid outside as tax credits in India. This is called DTAA, Double Tax Avoidance Agreement.
So, if you have paid some taxes on your foreign income you can claim the credits under section TR (Tax relief) when filing your ITR.
Let’s come to reporting of foreign assets now.
Being an Indian Resident, you need to disclose your foreign assets in India even if no income is being earned from them. Non-disclosure of these assets can result in a penalty of up to ₹10L, and you wouldn’t want this.
These assets include any property or investments held outside India, such as shares, bonds, life insurance, real estate, or other valuable assets. Lastly, if you hold any bank accounts outside of India, those need to be reported as well.
Here’s a video on everything you need to know about reporting foreign assets.
