Indian investors are increasingly turning to international markets, with the US stock market being a favored choice for diversifying their portfolios. However, a critical factor often overlooked is the inheritance tax imposed by the US government. This tax can create unexpected financial challenges for heirs if the value of US-based assets exceeds $60,000 (approximately ₹51 lakh). Understanding this tax and planning accordingly is vital for wealth preservation.

At Dinesh Aarjav & Associates, we specialize in advising clients on cross-border investments, ensuring they are well-prepared to manage their global tax obligations.

Why Inheritance Tax is a Concern for Indian Investors

The Reserve Bank of India (RBI) offers the Liberalised Remittance Scheme (LRS), allowing Indian residents to remit up to $250,000 (approximately ₹1.87 crore) abroad annually. This facilitates investments in global stocks, bonds, and properties. While this scheme empowers Indian investors to diversify internationally, it also introduces potential inheritance tax liabilities in the US.

What is US Inheritance Tax?

If an individual passes away holding US-based assets—such as stocks—with a combined value exceeding $60,000, their heirs may be required to pay inheritance tax to the US government. This tax applies regardless of the citizenship of the investor or their heirs, making it an essential consideration for those with substantial overseas holdings.

Tax Implications for US Stock Investments

When investing in US stocks, it is crucial to account for tax liabilities during the investment and inheritance stages. Here’s a detailed breakdown:

1. Tax on Dividends
Dividends earned from US stocks are subject to a flat 25% withholding tax in the US. For instance, if a company declares a $100 dividend, the investor receives $75 after deductions. The DTAA between India and USA allows investors to offset this tax against their Indian tax liabilities.

In India, dividends are added to the investor’s taxable income and taxed according to the applicable income-tax slab. For example:

• Dividend Declared: $100
• US Tax Withheld: $25
• Indian Tax Liability: $30 (on $100)
• Final Payment in India: $5 (after offsetting $25 paid in the US).

2. Capital Gains Tax
In the US:
No tax is levied on capital gains from US stocks for non-resident investors.

In India:
Capital gains from US stock sales are taxable as per Indian tax laws:

• Long-Term Capital Gains (LTCG): Stocks held for more than 24 months are taxed at 12.5% without indexation, plus applicable surcharges and cess. Example: For a $300 gain, the tax liability is $37.5 (12.5% of $300).
• Short-Term Capital Gains (STCG): Stocks held for less than 24 months are added to the investor’s taxable income and taxed according to their income-tax slab.

How Returning NRIs Are Affected

The same tax rules apply to NRIs who return to India but continue holding US stocks through their brokerage accounts. Dividends remain subject to US withholding tax, while capital gains are taxable in India based on the holding period.

Example Scenarios:
Long-Term Capital Gain:

• Purchase Price: $500
• Sale Price: $800 (after 30 months)
• Capital Gain: $300
• Indian Tax Liability: $37.5 plus surcharges.

Short-Term Capital Gain:

• Purchase Price: $500
• Sale Price: $800 (after 20 months)
• Capital Gain: $300
• Indian Tax Liability: Added to taxable income and taxed as per slab.

Mitigating Inheritance Tax and Other Liabilities

At Dinesh Aarjav & Associates, we have over 25 years of experience assisting Indian investors and NRIs with cross-border tax planning, including NRI tax planning, and compliance. Here’s how we can help:

• Comprehensive Tax Advisory: Ensure you are fully aware of your tax liabilities in India and abroad.
• Utilizing DTAA Benefits: Leverage tax treaties to reduce double taxation and lower overall tax burdens.
• Estate Planning: Protect your heirs from unforeseen liabilities with strategic estate planning.
• Custom Solutions for NRIs: Tailored advice for NRIs returning to India or holding international investments.

Secure Your Wealth with Expert Guidance

Investing in US stocks offers significant diversification opportunities but comes with its share of tax complexities. Dinesh Aarjav & Associates are here to help you navigate these challenges with ease. Whether you’re an Indian investor exploring global markets or an NRI managing your cross-border assets, we provide end-to-end solutions to safeguard your wealth and optimize your tax strategy.

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