Indian investors are subject to a flat tax rate of 25% on earnings from dividends of US stocks, which is comparatively lower than the tax treatment for other foreign investors due to the US-India tax treaty. US companies withhold this dividend tax, deducting 25% before paying the remaining 75% as dividends to the investor.
If the investor chooses to reinvest the dividend, it is added to their income and taxed at the regular income tax slab rates. The Double Tax Avoidance Agreement (DTAA) allows for the adjustment of US withholding tax against any tax liability in India, providing relief to Indian investors.
Let’s say you invest in Google stocks, for which you receive a dividend income of $1,000. The company retains 25% or $250 out of this amount as tax. Thus, the net dividend comes up to $750.
During the financial year, you declare an income of $2,000 through an income tax return. This income will be taxed as per the applicable income tax slab. On your total taxable income, you can claim a credit for the dividend retained or $250 being tax withheld by Google. Hence, out of the total tax payable by you, $250 will be deducted, and the balance will be taxable.