Navigating US Stock Dividend Taxation for Indian Residents: Understanding FTC and New Procedural Requirements

Indian residents receiving dividends from US stocks face taxation in both countries, but the Indian tax system, through the Foreign Tax Credit (FTC) mechanism, aims to prevent double taxation. Recent updates to the Income-tax Act, 2025, introduce new procedural requirements, including mandatory CA certification for higher FTC claims, which are crucial for taxpayers to understand to ensure compliance and maximize their tax relief.

Understanding the Taxation of US Stock Dividends

When you, as an Indian Resident and Ordinarily Resident (ROR), receive dividends from your US stock investments, these dividends are subject to tax in both the United States and India. The US levies a withholding tax, while India taxes your global income. To mitigate the burden of paying tax twice on the same income, India provides relief through the Foreign Tax Credit (FTC).

US Withholding Tax on Dividends

The United States imposes a withholding tax on dividends paid to foreign investors. While the default rate is 30%, the India–US Double Taxation Avoidance Agreement (DTAA) caps this rate at 25% for Indian residents. Typically, your broker applies this lower treaty rate automatically if you furnish the W-8BEN form when opening your account. This 25% withheld is generally considered a final US tax on the dividend, meaning you usually aren’t required to file a separate US tax return for this income.

Indian Taxation of US Dividends

For an Indian Resident and Ordinarily Resident, dividends from US stocks are part of your global income and are taxable in India. As per Section 6 of the Income-tax Act, 2025 (and Section 6 of the Income-tax Act, 1961 for FY 2025-26), an ROR is taxed on their worldwide income. The US dividend income is added to your total income and taxed at your applicable slab rates, which can range from 5% to 30%, plus any applicable surcharge and cess. There is no special lower rate for foreign dividends; they are treated as ordinary income.

Foreign Tax Credit (FTC) in India: Mechanism and Limitations

India’s Foreign Tax Credit (FTC) mechanism is designed to provide relief from double taxation. This relief is provided under Section 159 of the Income-tax Act, 2025 (and Section 90 of the Income-tax Act, 1961, read with Rule 128 of the Income-tax Rules, 1962, for FY 2025-26), given the DTAA between India and the US.

The mechanism allows you to subtract the US tax already paid on the dividend from your Indian tax liability on the same income. However, it’s crucial to understand the FTC cap: the credit is limited to the amount of Indian tax payable on that specific dividend income. If the foreign tax paid exceeds your Indian tax liability on that income, the excess foreign tax credit cannot be claimed and is effectively lost.

For example, if your gross US dividend is ₹86,000, and US tax withheld is ₹21,500 (25%), and your Indian tax at a 30% slab rate is ₹25,800, the net Indian tax payable after FTC would be ₹4,300 (₹25,800 – ₹21,500). In this scenario, the total tax paid (US + India) equals your Indian tax liability. However, if your Indian tax at a 20% slab rate on ₹86,000 is ₹17,200, but US tax withheld is ₹21,500, the FTC would be capped at ₹17,200. The remaining ₹4,300 of US tax paid would not be creditable in India.

Distinguishing Dividends from Capital Gains

It is important to differentiate between the taxation of dividends and capital gains from US shares. The 25% US withholding tax applies only to dividends. When you sell US shares at a profit, the US generally does not tax such gains for a non-resident investor. However, India does tax these gains. Gains on foreign shares held for over 24 months are considered long-term capital gains, while those held for 24 months or less are short-term capital gains and taxed at your slab rates.

Procedural Requirements for Claiming Foreign Tax Credit

To successfully claim the Foreign Tax Credit, you must adhere to specific procedural requirements:

1. Obtain Broker’s Tax Statement: Collect the year-end tax statement from your broker (e.g., Form 1042-S or a consolidated statement) which clearly shows the gross dividend amount and the US tax withheld.
2. File Form 44 (or Form 67): For Tax Year 2026-27 onwards, Form 44 must be filed on the e-filing portal before filing your Income Tax Return (ITR). For Financial Year 2025-26, Form 67 (under Rule 128 of the Income-tax Rules, 1962) must be filed. Failure to file the prescribed form will result in the denial of the Foreign Tax Credit.
3. Schedule FA Disclosure: As an Indian resident, it is mandatory to disclose all foreign shares and accounts in Schedule FA (Foreign Assets) of your Income Tax Return. Non-disclosure can lead to significant penalties.
4. CA Certification for High FTC Claims: Under the Income-tax Rules, 2026 (applicable from Tax Year 2026-27 onwards), if the total foreign tax credit claimed exceeds ₹1 lakh, a Chartered Accountant’s certification is required. For FY 2025-26, the Income-tax Rules, 1962 applied, and Form 67 did not have such a ₹1 lakh certification threshold.