All you need to know about Capital Gains taxation and DTAA for your Indian and US investments
Capital Gains taxation To ensure that residents do not end up paying taxes at two different places, several countries get into a mutual agreement. The Double Taxation Avoidance Agreement is one such example. The United States of America and India have a rather comprehensive DTAA.
The DTAA is applicable to any individual, company, trust or partnership who have taxable income in both India and the USA. As per the agreement, the following taxes are levied by both countries.
- The United States of America imposes the Federal taxes as per the Internal Revenue Code. It doesn’t include any accumulated earning taxes, social security taxes and personal holding taxes. The taxes are also applicable to insurance premiums paid to insurers in India as well as any private foundations.
- India levies the Income Tax on the income that you a taxpayer earns in the country. It includes any surcharges but excludes undistributed income declared by some companies.
There are three major ways in which the DTAA can come into the picture.
In the tax credit mechanism, your country of residence will offer you with tax credits for the taxes paid in the foreign country. This usually is divided as Tax Reserve method, Underlying Tax Credit method or Ordinary tax credit method.
In the tax exemption mechanism, the country of your residence exempts any income from the foreign country.
In this mechanism, the taxes that you pay in the country where your source of income is then deducted from your total global income and you need to pay taxes only on the residual amount.
Your residential status plays a crucial role in determining which country you should pay your taxes in or how to file your returns. According to Indian laws, if any individual stays for 182 days or more for a financial year, he/she is liable to pay taxes. Similarly, if they have stayed in the country for more than 365 days in the last 4 years and at least 60 days in the current taxable year, they need to pay taxes.
For the USA, the citizenship decides whether or not they should pay taxes. If a person is not a citizen, he/she is a non-resident alien. In such cases, either the substantial presence test or the green card test comes into the picture.
If you have any immovable property such as real estate, the income generated on selling the same or other incomes from it such as forestry or agriculture will be taxed in the same State. This means, that your property and any earnings from it for a specific financial year will be taxed in India if it were done in India or the USA if it were present in the USA.
Income Through Interest
Any interest that you earn from financial institutions is subject to taxation in the country of residence. However, you might end up paying taxes in the country that you earn the interest owing to certain conditions. For example, if the interest that you earn does not exceed 15% of the gross interest amount that you earn.
If are a resident of the USA and earn dividends from an Indian country, it will be taxed in the USA. However, it might be subject to taxation in India if it doesn’t exceed certain levels. These include:
- 15% of the gross dividend amount if the individual own at least 10% of the stocks in a company.
- 25% of the gross dividend in all other cases.
Being aware of the DTAA will help you avoid paying double taxes in both the countries.