Investing abroad? How foreign stocks, mutual funds, ETFs will be taxed in FY2025-26? 

With the new financial year underway, taxpayers should understand how various investment assets are taxed. Capital gains from selling assets like real estate, gold, or crypto are now taxed differently. Post-Budget 2024, long-term capital gains (LTCG) are taxed at a flat 12.5% without indexation benefits. 

This also applies to foreign stocks and ETFs, as per the Finance Bill 2025. Short-term capital gains (STCG) on these assets are taxed at 20%, plus surcharge and cess. Foreign securities are not covered under Section 112A, so the Rs 1.25 lakh LTCG exemption does not apply, and gains are taxed under Section 112 instead.

"It is important to note that investment outside India is governed by the Foreign exchange regulations in India and rules made thereunder. Permissibility of investments outside India in foreign stock is provided under the Liberalized Remittance Scheme (LRS), which is applicable to resident Indians. Under the LRS, an Indian resident individual is permitted to remit upto US$ 250,000 per financial year for any permitted current or capital account transaction or a combination of both," said CA (Dr.) Suresh Surana. 

For FY 2025-26, the tax implications for Indian resident investors who invest in foreign investments such as stocks and mutual funds, ETFs would be as follows:

(i)      Capital Gains Taxation

Ø  Taxation of Foreign Stocks

In accordance with third proviso to Section 2(42A) of the Income Tax Act, 1961 (hereinafter referred to as ‘the IT Act’), shares of a company that are not listed on a recognised stock exchange in India such as foreign shares/ stocks are considered long-term capital assets if held for a period exceeding 24 months. Accordingly, an investment in foreign equities will be classified as a long-term capital asset if the holding period is more than 24 months; otherwise, it will be treated as a short-term capital asset.

Long-term capital gains (LTCG) arising from the sale of such foreign shares are taxable at the rate of 20% u/s 112 of the IT Act, with the benefit of indexation. Short-term capital gains (STCG), on the other hand, are taxed at the applicable marginal income tax rates of the investor.

Ø  Taxation of Foreign Mutual Funds and ETFs

In accordance with section 50AA of the IT Act, any gain or income arising on transfer, redemption or maturity of units of such specified mutual funds (wherein not more than 35% of the total proceeds are invested in equity shares of domestic companies), acquired on or after 1 April 2023, will also be considered as short-term capital gains, and taxable at the applicable slab rate of the investor, irrespective of the period of holding. Further, indexation benefit would not be available in case of such short-term capital gain. W.e.f. FY 2025-26, Specified Mutual Fund would mean a mutual fund that invests more than 65% of its total proceeds in debt and money market instruments or a fund that invests 65% or more of its total proceeds in units of such aforementioned fund.

Further, units of foreign mutual funds or ETFs disposed off or sold after 24 months from the date of its acquisition, it will lead to long term capital gains, otherwise the same would be categorized as short term in nature.  Long-term and short-term capital gains on such units are leviable to tax 12.5% without indexation u/s 112 of the IT Act and as per the investor’s applicable slab rate, respectively.

(ii)  Tax on Dividends

Dividends received from foreign equities and foreign mutual funds are fully taxable in India under the head "Income from Other Sources" and are taxed at the investor’s marginal slab rate. Further, the investor may also be required to pay tax in the country of the Foreign company whose stocks/ units are held by him. In such case, he can claim tax credit of such taxes which are paid by him in the foreign country in accordance with the Double Taxation Avoidance Agreement (DTAA) entered by India with such foreign country. Moreover, in case there exists no DTAA between India and the foreign country, the resident investor can avail unilateral relied u/s 91 of the IT Act.

>  Discover the taxation specifics concerning your investments in foreign shares, mutual funds, and ETFs for the upcoming fiscal year 2025-26, in accordance with the most recent tax regulations.

Apart from the aforementioned tax implications, Indian investor intending to invest in foreign shares, mutual funds and ETFs are also required to consider the following tax aspects:

Ø Reporting of foreign assets in the Income Tax Return in India

In case of a person who is an Indian resident (and ordinarily resident) who holds, as a beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside India or has signing authority in any account located outside India or is a beneficiary of any asset (including any financial interest in any entity) located outside India would be required to mandatorily furnish the details in schedule FA, while filing their tax return in India.

As such, Indian investors are obligated to report their foreign holdings, including shares and mutual funds/ ETFs, under Schedule FA “Details of Foreign Assets and Income from any source outside India” of the Income Tax Return. Comprehensive details such as the country of investment, nature of the asset, acquisition cost, and income earned during the year must be accurately reported.

Further, such taxpayers would also be required to disclose their foreign sourced income details in Schedule FSI “Details of Income from outside India and tax relief”. In this Schedule, the taxpayer would be required to report the details of income, which is already included in total income, accruing or arising from any source outside India. It is pertinent to note that such income should also be separately reported in the head‐wise computation of total income.

Ø Applicability of TCS on foreign remittances for investment purpose:

The Tax Collected at Source (TCS) rates for remittances made under the Liberalised Remittance Scheme (LRS) for investment purposes varies depending on the amount being remitted. In case such amount of remittance is upto Rs. 10 lakhs in a particular financial year, no TCS would be applicable on the same. However, if the remittance exceeds Rs. 10 lakhs in a financial year, TCS at the rate of 20% would be applicable.

Although the investor may claim a credit for the TCS amount while filing their Income Tax Return (ITR), it is pertinent to note that this collection impacts the cash flow at the time of remittance. Therefore, the TCS liability should be factored in while planning the quantum of foreign remittances, particularly for high-value investments, to ensure appropriate financial provisioning.

Ø Claiming Foreign Tax Credit

Where income from foreign investments has been subjected to taxation abroad, the Indian investor may claim a credit for such foreign taxes paid, provided the corresponding income is taxable in India. To claim FTC, Form 67 must be furnished electronically on or before the end of an assessment year if the return of income for that year was filed within the time stipulated in Section 139(1). Additionally, supporting documentation such as proof of tax paid in the foreign jurisdiction and the corresponding income offer must be maintained and made available for scrutiny, if required.