For Indian residents using Interactive Brokers (IBKR) to invest abroad, several tax considerations come into play:
- Liberalised Remittance Scheme (LRS): Under the LRS, Indian residents are allowed to remit up to USD 250,000 per financial year for various purposes, including investments abroad. This limit is set by the Reserve Bank of India (RBI) and is subject to change.
- Tax Residency: Your tax residency determines where your income will be reported and how it will be taxed. Since IBKR is based in the U.S., it uses the U.S. definition of tax residency. However, as an Indian resident, you’ll be subject to Indian tax laws on your global income.
- Capital Gains Tax:
- Short-Term Capital Gains (STCG): If securities listed on recognized stock exchanges in India are held for less than one year (for listed equity shares or equity-oriented mutual funds), gains are taxed as per your income tax slab rate. If STT (Securities Transaction Tax) is paid, STCG from equity shares is taxed at 15%.
- Long-Term Capital Gains (LTCG): For listed securities held for more than one year, LTCG up to INR 1 lakh is exempt; beyond this, it’s taxed at 10% without indexation benefit.
- Tax on Dividends and Other Income:
- Dividends from foreign stocks might be subject to withholding tax in the source country, typically at a rate of 25% unless reduced by a tax treaty. In India, this income would be added to your total income and taxed at your slab rate.
- Interest income or any other income might also be taxed based on your income tax slab.
- Tax Treaties: India has Double Taxation Avoidance Agreements (DTAA) with several countries. If there’s a tax treaty between India and the country where you’re investing, you might be able to claim relief or credit for taxes paid abroad on income from those investments.
- Reporting in ITR: Income from investments abroad must be reported in the Indian Income Tax Return (ITR). This includes detailing capital gains, dividends, and interest in the Schedule FA (Foreign Assets) if applicable.
- Withholding Tax by IBKR: For non-US persons, IBKR might withhold tax on dividends and certain other distributions at the U.S. rate of 30%, which could be reduced under a tax treaty if you provide the appropriate W-8BEN form to claim benefits.
- GST, STT, and Other Charges: While these are not taxes on income, they affect the overall cost of trading. Indian traders might notice that trading through foreign brokers like IBKR could bypass some local charges like STT, but they should account for GST on brokerage and other transaction costs.
- Tax on Trading as Business Income: If trading activities are substantial, they might be considered as business income rather than capital gains, leading to different tax implications where profits could be taxed as business income.
- FBAR and FATCA Compliance: Although this is more about reporting than taxation, Indian residents with foreign accounts might need to comply with U.S. regulations like FBAR (Report of Foreign Bank and Financial Accounts) if their account values exceed certain thresholds, due to IBKR’s U.S. operations.
When investing through platforms like IBKR, Indian residents should keep meticulous records of all transactions for tax filing purposes and might consider consulting with a tax advisor specializing in international taxation to optimize their tax liabilities and ensure compliance with both Indian and foreign tax laws.