Demystifying Capital Gain Reporting for Your US Stock Holdings

Learn the steps to accurately report capital gain for foreign stocks, avoiding common mistakes and ensuring compliance when filing your income tax return.

Until a few years ago, owning stocks listed in foreign stock exchanges was a privilege reserved for few. Today, with many US-based companies establishing offices in India, more companies adding RSUs (restricted stock units) as part of their compensation packages, and the rise of fintech companies allowing anyone to purchase shares in foreign markets, the number of people holding foreign shares has increased significantly.

However, this comes with added compliance requirements when filing income tax return, which, unfortunately not many are aware of.

capital gain cartoon

So, I am sharing my understanding of the finer nuances of filing income tax return when holding foreign stocks. While I have taken great care to be accurate in my understanding – spending considerable time poring over various articles, rules and notices – the fact remains that I am not a tax expert. If, despite all my research and thoroughness, there is an error in my own IT return, I take responsibility for that and its consequences. But, as I hope you understand, I cannot take responsibility for any issues you might face after following what I have written. Use this article as a reference, but when in doubt, please do your own research or, better yet, hire a professional.

Note: this article is applicable for foreign stocks that you directly hold (such as Microsoft, Apple, Alphabet etc) and not Indian Mutual Funds that invest in foreign stocks. For such mutual funds, normal income tax rules apply.

What to Declare When Filing Income Tax Returns with Foreign Stocks

When filing your income tax return with foreign stocks, you need to declare two main things:

  1. Capital Gain/Loss: Applicable only if you sold some shares.
  2. Schedule FA: Applicable if you have any foreign stocks, even if you didn’t sell anything. I have covered this in detail here.
See also  Everything You Need To Know About Selling Your Uber RSUs & ESPP

Reporting Capital Gain When You Sell Foreign Stocks

There are three ways you can acquire foreign shares (other than through mutual funds or ETFs):

  1. through RSUs (restricted stock units) or ESOPs that your company offers as part of compensation
  2. through ESPP (employee stock purchase plan) that allows you to purchase your company shares at a discount
  3. purchasing shares directly through various fintech companies

The underlying concept remains the same for all three. Here are the steps to calculate capital gain:

  1. Find the FMV (fair market value) of your equity
  2. Convert it to INR as per IT rules
  3. Find the Selling Price of your equity
  4. Convert it to INR as per IT rules
  5. Capital Gain in INR = (4) – (2)

If held for >= 2 years this is considered a long-term gain, otherwise it is a short-term gain

Note: FMV of the stock is the price at which it is trading in the market. If you purchased it directly, it is the price you bought the stock at. If you received it as RSU, or at a discount through ESPP plan of your company, it is the price at which it was available to the general public (aka the market price).

It is in steps 2 and 4 where most people make mistake. Those unaware of the rules might use the conversion rate on the day of transaction, or the rate that their bank used when transferring funds to their account. However, as per the Income Tax rules, you need to use the SBI TT Buy Rate on the last day of the month immediately preceding the month in which the purchase/ sale takes place. (IT Rule for reference – Rule 115 and Rule 26).

Example Scenario

Let’s look at the following example to understand this.

See also  Decoding Schedule FA - Reporting Foreign Assets in ITR form

Say, you work at Uber and received some stocks as RSUs. You also enrolled in ESPP, which lets you purchase Uber shares at 15% discount to the market price. Additionally, you have purchased some Meta shares. The table below has the details for these transactions.

Purchase Data
[1] StockUberUberMeta
[2] TypeRSUESPPDirect Purchase
[3] Purchase Date / Vested Date for RSU16/08/202320/11/202314/12/2023
[4] No. of shares purchased (released to you in case of RSU)654
[5] FMV$43.65$54.75$333.17
[6] Actual Cost to You$0.00$46.54$333.17
[7] Total Cost Price in USD (for taxation) [4] x [5]$261.90$273.75$1,332.68
[8] Date to be considered for SBI TTBR31/07/202331/10/202330/11/2023
[9] SBI TTBR on that day81.8282.8682.92
[10] Total Cost Price in INR (for taxation) [7] x [9]₹21,428.66₹22,682.93₹110,505.83

Row [5] in the table above shows the actual price of the stock on the purchase date. RSUs are part of your compensation, and you don’t pay anything for these shares, hence the actual cost in Row [6] for this is 0. This difference is the monetary benefit you received due to your employment and is taxed like your salary. Most companies sell a portion of your RSUs to cover this tax liability so you don’t pay tax on receiving RSUs but you pay capital gain tax on selling them.

With your ESPP benefit, you get a 15% discount on the actual share price and hence the actual cost to you in row [6] is lower than the FMV. This discount is a monetary benefit that your company gives you and is taxed as such. Your company would deduct income tax, which you will notice in your salary slip. You pay capital gain tax when you sell these shares.

Row [8] shows the date that you need to consider for conversion – it is the last day of the month preceding the month in which the purchase transaction happened.

See also  Decoding Schedule FA - Reporting Foreign Assets in ITR form

Now, let’s assume you sell these shares after a few months. For simplicity, let’s assume you sold all the shares and on the same day. The table below shows the transaction:

Sale Data
[1] StockUberUberMeta
[2] TypeRSUESPPDirect Purchase
[3] Sale Date08/02/202408/02/202408/02/2024
[4] No. of shares sold654
[5] FMV$71.61$71.61$470.00
[6] Total Sale Price in USD [4] x [5]$429.66$358.05$1,880.00
[7] Date to be considered for SBI TTBR31/01/202431/01/202431/01/2024
[8] SBI TTBR on that day82.7282.7282.72
[9] Total Sale Price in INR (for taxation) [6] x [8]₹35,541.48₹29,617.90₹155,513.60

Row [7] shows the date that you need to consider for conversion – it is the last day of the month preceding the month in which the sale transaction happened.

The difference between the sale and purchase transaction gives the capital gain.

Capital Gain
[1] StockUberUberMeta
[2] TypeRSUESPPDirect Purchase
[3] Shares Purchased654
[4] Shares Sold654
[5] Total Purchase Price in INR₹21,428.66₹22,682.93₹110,505.83
[6] Total Sale Price in INR₹35,541.48₹29,617.90₹155,513.60
[7] Capital Gain₹14,112.82₹6,934.97₹45,007.77

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How to find the SBI TT Buy Rate?

SBI publishes TTBR each day on its website. Unfortunately, there is no archive to get historical data. However, a few good men have created a repository of historical TT Buy Rates that you can use:

There are 2 rates for each day, use the one that’s in the table titled “to be used as reference rate”.

Investing in foreign stocks comes with a lot of compliance requirements related to capital gain reporting and schedule FA. So, unless you plan to invest a decent percentage of your networth in foreign equity for diversification, the headache might not be worth the gain (if any). But then, I prioritize my mental peace over a few additional percentage points of returns. You choose your poison.

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