Investing in foreign stocks? Missing dividend reporting in your ITR could cost you 200% penalty; her

In recent years, investing in US stocks has become almost routine for many Indian investors. With just a few clicks on international investing platforms, you can own shares of global tech giants like Apple, Microsoft, Tesla and Nvidia.

But while buying foreign stocks has become easier, the tax rules around them remain complicated. One common mistake is becoming more frequent.

While many investors correctly disclose their foreign shares in Schedule FA of their income tax return, they often forget to report the dividend income earned from those shares.

At first glance, it may seem like a minor oversight. But if ignored, it can lead to additional tax demands, penalties and even scrutiny from the income tax department. Understanding how foreign dividends are taxed and what to do if you missed reporting them can save you from bigger trouble later.

Why foreign dividends must be reported in India

One key rule of Indian taxation is that resident taxpayers are taxed on their global income. This means income earned anywhere in the world including dividends from foreign companies must be reported in India.

Under the Income-tax Act, the total income of a resident includes all income accruing or arising outside India, irrespective of where it is received, says CA Mohit Gupta, Partner, PNAM & Co LLP.

Consequently, dividend income earned from foreign companies—including US listed companies—is fully taxable in India, even if such income has already been subjected to withholding tax in the United States,” he says.

This often confuses investors because tax may already have been deducted abroad.

For instance, dividends paid by US companies to non-resident investors are usually subject to withholding tax in the US, typically around 25% under the India–US Double Taxation Avoidance Agreement (DTAA).
However, this does not eliminate the tax liability in India.

If a US company declares a dividend of $10, the broker may deduct $2.5 as US tax and credit $7.5 to the investor’s account. For Indian tax purposes, however, the investor must still report the entire $10 dividend in the income tax return.

Such dividend income is taxed under the head “Income from Other Sources” and is added to the investor’s total income. The tax rate applied is simply the investor’s applicable income-tax slab rate.

To avoid double taxation, India allows investors to claim Foreign Tax Credit (FTC) for the tax already paid abroad.

If an investor falls in the 30% tax bracket, the Indian tax on a $10 dividend would be $3. Since $2.5 has already been deducted in the US, the investor would only need to pay the remaining $0.5 in India after claiming the credit, explains Gupta.

“In order to claim this credit, the taxpayer is required to file Form 67 and disclose the foreign income and foreign tax paid in the relevant schedules of the income-tax return,” he says.

The paperwork foreign investors should not ignore

For investors holding foreign shares, documentation also plays an important role in staying compliant.

Experts recommend collecting detailed statements from foreign brokers each year.

Investors should keep records such as transaction statements, Form 1099 issued by US brokers, annual stock summaries and dividend payout details, along with information on US taxes deducted, according to Deepashree Shetty, Partner, BDO India.

These documents help substantiate both the income earned and foreign tax paid, which is necessary while filing the return and claiming foreign tax credit.

Global investing has opened new opportunities for Indian investors, but it has also introduced new layers of tax compliance.

For investors who may have missed reporting them in the past, correcting the error early through an updated return is often the simplest and least painful solution.

Source: Economic Times