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

As more Indian investors look beyond domestic markets, GIFT City 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. Dividend income 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.

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.

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.

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.

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