Buying US stocks via GIFT City? Here’s how capital gains and dividend tax work

As more Indian investors look beyond domestic markets, has emerged as a new gateway to global investing. The platform allows investors to access international securities, including shares of US companies, through the International Financial Services Centre (IFSC) framework.

But while the route to investing may be getting simpler, the tax treatment remains far from straightforward. Depending on who is investing and how the transaction is structured, gains from US stocks traded through GIFT City may either qualify for a tax exemption or be taxed under the rules applicable to unlisted securities. and remittance-related tax provisions can further affect the overall tax liability.

Chandni Anandan, Tax Expert at ClearTax, explains how capital gains, dividend income, and the Tax Deducted at Source (TDS ) provisions apply to investments in US stocks through GIFT City.

Here’s a closer look at how the tax rules work.

When selling US stocks may not attract capital gains tax

Capital gains tax is generally triggered when an investor sells an asset at a profit. However, the Income-tax Act provides certain exceptions under which a transaction is not treated as a transfer.

According to Anandan, one such exception is available under Section 47(viiab).

She says that in the case of US stocks listed on an IFSC exchange and sold by a non-resident through a recognised stock exchange located in GIFT City, where the sale consideration is received in foreign currency, the transaction is not regarded as a transfer under Section 47(viiab).

“The provision specifically refers to a foreign currency-denominated equity share of a company, which would cover such shares. Accordingly, no capital gains tax liability arises on such a transfer,” she says.

Anandan adds that the applicability of capital gains provisions is generally determined by the facts and circumstances prevailing at the time of transfer, rather than at the time of acquisition.

In other words, whether the exemption is available depends on whether the conditions prescribed under the law are satisfied when the shares are sold.

What if the exemption is not available?

Not every transaction will necessarily qualify for the exemption.

According to Anandan, where the exception under Section 47(viiab) is unavailable, the shares would generally be treated as unlisted securities for tax purposes.

In such cases, the tax treatment changes.

She says long-term capital gains (LTCG) would be taxed at 12.5%, while short-term capital gains (STCG) would be taxed at the investor’s applicable income tax slab rate.

Anandan further notes that no indexation benefit or capital gains exemptions are available in such cases.

The eventual tax liability, therefore, depends on whether the transaction qualifies for the exemption available under Section 47(viiab) or falls under the general tax framework applicable to such securities.

Dividend income has a separate tax treatment

Tax implications are not restricted to capital gains alone. Investors holding US stocks may also receive dividends from the underlying companies.

According to Anandan, the tax treatment of dividend income differs from that of capital gains and may involve multiple jurisdictions.

She says that for non-residents, dividends from a foreign company typically have no Indian tax incidence and no tax is deducted at source in India. However, if the dividend becomes taxable due to a business nexus, a permanent establishment, or similar reasons, a 20% withholding tax applies.

For resident investors, Anandan says a 10% tax deduction at source (TDS) applies on dividends exceeding ₹10,000 in a financial year.

At the same time, she notes that the US withholding tax applies separately to dividends paid by US companies. This means investors may have to account for taxes deducted overseas and comply with reporting requirements in India.

To address this, Anandan recommends claiming the Foreign Tax Credit (FTC) on Form 67 when filing the income-tax return. The foreign tax credit mechanism allows taxpayers to claim credit in India for taxes paid overseas, subject to the applicable rules.

TCS rules continue to apply

Another aspect investors should be aware of is Tax Deducted at Source (TDS) on foreign remittances under the Liberalised Remittance Scheme.

According to Anandan, investments routed through GIFT City do not automatically exempt them from the applicability of TCS provisions.

She says the current framework is as follows:

Importantly, Anandan notes that the threshold is calculated on aggregate remittances made during the financial year across all channels, not just a particular investment transaction.

Why investors should pay attention to the details

The tax treatment of US stocks acquired through GIFT City is influenced by multiple factors, including the investor’s residential status, the nature of income earned and the applicability of specific provisions of the Income-tax Act.

As Anandan points out, certain transactions undertaken by non-residents may qualify for the available under Section 47(viiab), while others may fall under the tax framework applicable to unlisted securities. Dividend income and remittance-related provisions may also have separate tax consequences.

For investors evaluating international investment opportunities through GIFT City, understanding these tax rules is likely to be as important as assessing the investment itself.