US Stock Tax in India 2026: A Guide to Claiming Foreign Tax Credit

Key Takeaways

• No "Direct Tax Code 2025" Yet: As of mid-2026, the Income Tax Act, 1961, remains the governing law for all income tax matters in India, including foreign income. The proposed Direct Tax Code (DTC) has not been enacted. All compliance for the tax year 2026 must adhere to the 1961 Act.
• Foreign Tax Credit (FTC) is Crucial: Indian residents are taxed on their global income. To prevent double taxation on US stock dividends, where a 25% tax is typically withheld in the US, you must claim a Foreign Tax Credit (FTC) in your Indian tax return.
• Mandatory Filing of Form 67: Claiming FTC is not automatic. It is mandatory to file Form 67 electronically on the income tax portal. This form details the foreign income earned and taxes paid. Crucially, for income earned in the Financial Year 2025-26 (Assessment Year 2026-27), Form 67 must be filed on or before the end of the assessment year, which is March 31, 2027.
• Schedule FA Reporting is Non-Negotiable: All foreign assets, including US stocks and brokerage accounts, must be declared in Schedule FA of your Income Tax Return (ITR), irrespective of their value or whether any income was earned.

PART 1: EXECUTIVE SUMMARY

This guide provides a detailed compliance framework for global tech employees and other Indian resident investors on managing US tax withholdings and claiming Foreign Tax Credit (FTC) for the tax year 2026 (Assessment Year 2027-28). The analysis is based on the prevailing Income Tax Act, 1961, as the proposed Direct Tax Code 2025 has not replaced it.

• The Old Law (1961): This is the current and continuing law. Under Sections 90 and 91 of the Income Tax Act, 1961, read with Rule 128, a resident taxpayer can claim a credit for taxes paid in a foreign country. For income from US stocks, this is governed by the Double Taxation Avoidance Agreement (DTAA) between India and the US. The mechanism requires the taxpayer to report global income, file Form 67 to substantiate the foreign tax paid, and report all foreign assets in Schedule FA.

• The "New Law" (Direct Tax Code 2025): The Direct Tax Code (DTC) has been a long-standing proposal aimed at simplifying India's direct tax laws. Various drafts have been discussed over the years with objectives like reducing exemptions and enhancing transparency. However, as of the current date, the DTC has not been enacted by Parliament. Therefore, any reference to a "Direct Tax Code 2025" or an "Income Tax Act 2025" refers to a proposed, not an active, legal framework. All tax compliance for 2026 will be governed by the Income Tax Act, 1961.

• Who is Impacted: This primarily affects Indian residents who receive income from US-domiciled stocks. This includes a large number of tech employees receiving Restricted Stock Units (RSUs) and Employee Stock Option Plans (ESOPs) from US parent companies, as well as retail investors who invest directly in the US stock market. These individuals face a default 25% withholding tax on dividends from US companies and must undertake specific compliance steps to avoid double taxation.

PART 2: DETAILED TAX ANALYSIS

1. The Challenge for Global Tech Employees

Global tech employees, particularly those with RSUs and other equity awards from US-based multinationals, face a unique set of tax challenges. The primary issue is double taxation. When a US company pays a dividend, it is required to withhold tax at a source. For Indian residents who have correctly submitted Form W-8BEN to their broker, this rate is set at 25% under the India-US DTAA.

This dividend income is also taxable in India as part of the employee's global income, taxed at their applicable slab rate. Without a proper relief mechanism, the same income would be taxed twice. The key challenges include:

• Compliance Burden: The onus is on the taxpayer to claim relief. This involves meticulous documentation, filing Form 67 before the deadline, and accurately reporting income and assets across multiple schedules (FA, FSI, TR) in the ITR.
• FTC Limitation: The Foreign Tax Credit is capped at the lower of the foreign tax paid or the Indian tax payable on that foreign income. If an individual's effective tax rate in India is lower than 25%, the excess tax paid in the US cannot be refunded in India and becomes a loss.
• Information Mismatch: Discrepancies between the income and tax details reported in Form 67 and the ITR can lead to automated rejection of the FTC claim by the Central Processing Centre (CPC), pushing the taxpayer into a lengthy appeal process.

2. Statutory Changes: 1961 Act vs. Proposed 2025 Code

It is critical to distinguish between the law in force and proposals for reform. All compliance for the tax year 2026 will be governed by the Income Tax Act, 1961. The following table contrasts the existing, certain provisions of the 1961 Act with the general objectives of the proposed Direct Tax Code.

3. Schedule FA & Foreign Asset Reporting

For the tax year 2026, the reporting of foreign assets in Schedule FA is a mandatory and high-scrutiny compliance requirement for all "Resident and Ordinarily Resident" (ROR) individuals.

Who Must Report? Any ROR who has held any foreign asset at any time during the relevant financial year. This includes being a legal owner, beneficial owner, or having signing authority. Filing is required even if your total income is below the taxable limit.

What to Report for US Stocks? The disclosure requirements are extensive. For tech employees and investors, this typically includes:

• Table A2: Foreign Bank Accounts: Details of the foreign brokerage account, including the peak and closing balance during the calendar year.
• Table A3: Foreign Equity and Debt Interest: Details of each US stock held, including the company name, initial investment value, peak value, closing value (as of Dec 31), and any income derived.

Key Compliance Points:

• Valuation Currency: All values must be converted to Indian Rupees (INR) using the Telegraphic Transfer Buying Rate issued by the State Bank of India (SBI) for the specific date (e.g., date of investment, date of peak value, Dec 31 for closing value).
• No Threshold: Even a single fractional share must be reported. There is no minimum value exemption.
• Penalties: Failure to report or inaccurate reporting can attract severe penalties, including a flat penalty of ₹10 lakh under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

4. Scenario Analysis

Let's analyze a typical scenario for a tech employee for the Financial Year 2025-26 (Assessment Year 2026-27).

Assumptions:

• Taxpayer: An Indian resident software engineer.
• Indian Income Tax Slab: 30% (plus 4% cess, effective rate 31.2%).
• US Stock Event: Received a gross dividend of $1,000 from US company shares (e.g., vested RSUs).
• US Tax Withholding: Tax of $250 (25%) was withheld in the US. The net dividend received is $750.
• Exchange Rate: Assume 1 USD = ₹85 for calculation.

Tax Compliance Steps:

1. Calculate Indian Taxable Income: The entire gross dividend must be reported as "Income from Other Sources" in the Indian tax return.

   • Gross Dividend in INR: $1,000 * ₹85 = ₹85,000.

2. Calculate Indian Tax Liability on Dividend: Apply the taxpayer's effective tax rate to this income.

   • Indian Tax Due: ₹85,000 * 31.2% = ₹26,520.

3. Calculate Foreign Tax Paid in INR:

   • US Tax Withheld in INR: $250 * ₹85 = ₹21,250.

4. Determine Admissible Foreign Tax Credit: The FTC is the lower of:

   • Indian tax payable on the foreign income (₹26,520).
   • Foreign tax actually paid (₹21,250).
   • In this case, the admissible FTC is ₹21,250.

5. Final Indian Tax Payment: The taxpayer's total Indian tax liability (on all income) will be reduced by the FTC amount. The net tax payable on this dividend income is ₹26,520 - ₹21,250 = ₹5,270.

This credit can only be claimed if Form 67 is filed correctly and on time.

5. Compliance Checklist 2026

For income earned in FY 2025-26, to be filed by the ITR due date in 2026, and FTC claimed by March 2027.

• Step 1: Collate Documents (January-March 2026):

  • Obtain Form 1042-S from your US broker. This is the official statement of US-source income and tax withheld.
  • Download your brokerage statements for the entire financial year (April 1, 2025, to March 31, 2026).
  • Ensure you have a record of having filed Form W-8BEN with your broker to avail the 25% DTAA rate (instead of the default 30%).

• Step 2: Calculate Foreign Income and Tax (April-June 2026):

  • Convert all dividend income and tax withheld figures from USD to INR using the correct exchange rates.
  • Calculate the total foreign source income to be reported in your ITR.

• Step 3: File Form 67 (Before Filing ITR):

  • Log in to the income tax e-filing portal.
  • Navigate to e-File > Income Tax Forms > File Income Tax Forms.
  • Select "Form 67".
  • Fill in Part A with details of foreign income and taxes paid, and Part B if applicable.
  • Attach a copy of Form 1042-S (or other proof of tax payment) and a self-declaration.
  • Submit the form using an Electronic Verification Code (EVC) or Digital Signature Certificate (DSC).

• Step 4: File Income Tax Return (ITR-2 or ITR-3) (By July 31, 2026):

  • Report the gross foreign dividend income in Schedule OS (Other Sources).
  • Fill Schedule FA with details of all foreign assets (brokerage account, stocks).
  • Fill Schedule FSI (Foreign Source Income) with a breakdown of country-wise income.
  • Fill Schedule TR (Tax Relief) to claim the FTC amount calculated in Form 67.
  • Ensure the figures in Schedule TR, FSI, and Form 67 match perfectly.

• Step 5: Final Deadline Reminder:

  • The absolute final deadline to file Form 67 for income of FY 2025-26 is March 31, 2027. However, filing it after the ITR may lead to processing issues. The best practice is to file Form 67 before filing your ITR.

💡 Tech Employee Tip: Restructuring your salary or vesting RSUs? Understand the new capital gains rules for 2025.