Withholding Tax on US Stocks: Claiming FTC in Tax Year 2026

Key Takeaways

• Foreign Tax Credit (FTC) is Critical: The 25% tax withheld in the U.S. on dividends from U.S. stocks is not a final loss. Under both the current 1961 Act and the proposed 2025 Code, this amount can be claimed as a credit against your Indian tax liability, preventing double taxation.
• Mandatory Disclosure in Schedule FA: Reporting all foreign assets, including stocks, RSUs, and foreign bank accounts, in Schedule FA of your Income Tax Return (ITR) is non-negotiable. The proposed Direct Tax Code 2025 is expected to tighten these provisions, increasing penalties for non-disclosure.
• Form 67 is a Prerequisite for FTC: To claim the Foreign Tax Credit, filing Form 67 is mandatory. This form must be submitted online via the e-Filing portal on or before the due date of filing your ITR. This procedural requirement is expected to continue under the new tax regime.
• No U.S. Tax on Capital Gains for Indian Residents: Due to the India-US Double Taxation Avoidance Agreement (DTAA), capital gains from the sale of U.S. stocks by Indian residents are not taxed in the U.S. The entire capital gains tax liability lies in India.

PART 1: EXECUTIVE SUMMARY

This guide provides a detailed compliance framework for global tech employees navigating the tax implications of U.S. stock holdings, focusing on the transition from the Income Tax Act, 1961 to the proposed Direct Tax Code, 2025. It specifically addresses the withholding tax on U.S. stock income and the procedure for claiming Foreign Tax Credit (FTC) for the tax year 2026.

• The Old Law (Income Tax Act, 1961): Under the 1961 Act, Indian residents are taxed on their global income. For U.S. stocks, this means dividends are subject to a 25% withholding tax in the U.S. This withheld tax can be claimed as a credit (FTC) in India against the Indian tax liability on that same income, by filing Form 67 before the ITR deadline. Capital gains are taxed only in India, with a holding period of over 24 months qualifying as long-term. All foreign assets must be reported in Schedule FA.

• The New Law (Direct Tax Code, 2025): The proposed DTC aims to simplify and streamline the 1961 Act. While specifics are evolving, the core principles regarding foreign income are expected to remain consistent: global income of Indian residents will be taxable in India. The primary changes are anticipated to be procedural, focusing on enhanced digital compliance and stricter reporting for foreign assets. The mechanism for claiming FTC via Form 67 (or a renumbered equivalent) will continue, but with potentially more stringent documentation requirements and data cross-verification.

• Who is Impacted: This transition primarily affects Indian tax residents, particularly employees in the technology sector who receive Restricted Stock Units (RSUs), Employee Stock Purchase Plans (ESPPs), or directly invest in U.S. stocks. The heightened focus on foreign asset reporting and digital scrutiny means that accurate and timely compliance is more critical than ever to avoid substantial penalties under laws like the Black Money Act.

PART 2: DETAILED TAX ANALYSIS

1. The Challenge for Global Tech Employees

For tech professionals in India, compensation is increasingly global. RSUs and ESOPs from U.S. parent companies are standard, creating a complex cross-border tax situation. The primary challenge lies in navigating two different tax systems and ensuring that income is not taxed twice.

Key issues include:

• Dividend Taxation: A flat 25% tax is withheld by the U.S. on any dividends paid by U.S. companies. Indian employees must then declare this gross dividend as 'Income from Other Sources' in their Indian ITR and pay tax at their applicable slab rates. The core compliance task is to correctly claim the 25% U.S. tax as a Foreign Tax Credit.
• Complex Reporting: The compliance burden is significant. It involves meticulous record-keeping and reporting across multiple schedules in the ITR, namely:
  • Schedule FA (Foreign Assets): For disclosing all foreign holdings.
  • Schedule FSI (Foreign Source Income): To detail the income earned from these assets.
  • Schedule TR (Taxes Relief): To claim relief under the DTAA.
  • Form 67: A mandatory prerequisite for the FTC claim.
• Capital Gains Calculation: While capital gains are not taxed in the U.S. for Indian residents, correctly calculating them for Indian tax purposes is crucial. This requires tracking acquisition dates, sale dates, and applying the correct exchange rates (Telegraphic Transfer Buying Rate) as prescribed. The holding period for U.S. stocks to qualify as long-term is more than 24 months.

2. Statutory Changes: 1961 Act vs 2025 Act

The transition to the Direct Tax Code, 2025 is aimed at simplification and modernization. While the foundational principles of taxing foreign income for residents are unlikely to change, the procedural and compliance landscape will be altered.

3. Schedule FA & Foreign Asset Reporting

This is a cornerstone of compliance for any individual holding foreign assets. Under both the old and new acts, failure to report is a serious offense.

What must be disclosed in Schedule FA?

• Foreign Bank Accounts: Details of all bank accounts held outside India, including those with signing authority.
• Financial Interests: This includes stocks, securities, and any interest in a foreign entity (e.g., partnership firm, LLC). This is where RSUs and vested stocks are reported.
• Immovable Property: Any real estate held abroad.
• Other Capital Assets: Any other assets held outside India.
• Trusts: Details where the assessee is a trustee, beneficiary, or settlor.

A crucial point often missed is that disclosure in Schedule FA is required even if no income was generated from the asset during the year. For instance, vested RSUs that have not been sold must still be reported. The reporting must be done for the calendar year (Jan 1 - Dec 31) that falls within the financial year.

4. Scenario Analysis

Let's consider a practical example for the Tax Year 2026 (Financial Year 2025-26).

Assumptions:

• An employee at a U.S. tech company is an Indian resident.
• Total Indian salary income: ₹40,00,000.
• Received gross U.S. dividend: $1,000.
• Tax withheld in the U.S. @ 25%: $250.
• Sold U.S. stocks held for 30 months (Long-Term Capital Gain): $5,000.
• Exchange Rate: ₹84 per USD.

Tax Compliance Steps:

1. File Form W-8BEN: This form must be submitted to the U.S. broker to ensure the dividend withholding tax is capped at the 25% treaty rate, instead of the default 30%.
2. Calculate Total Income:
   • Salary Income: ₹40,00,000
   • Dividend Income (Income from Other Sources): $1,000 * ₹84 = ₹84,000
   • Long-Term Capital Gain: $5,000 * ₹84 = ₹4,20,000
   • Gross Total Income: ₹45,04,000
3. Calculate Indian Tax Liability:
   • Tax on Salary and Dividend (assume 30% slab + 4% cess): This will be calculated as per the applicable slabs.
   • Tax on LTCG from U.S. Stocks: ₹4,20,000 * 12.5% (plus cess) = approx. ₹54,600 (rate may vary based on specific provisions).
   • Let's assume the total tax liability on the dividend portion (₹84,000) is higher than the tax paid in the U.S.
4. Claim Foreign Tax Credit (FTC):
   • Tax Withheld in U.S.: $250 * ₹84 = ₹21,000.
   • Indian tax payable on the foreign dividend income.
   • The FTC allowed will be the lower of the two amounts.
   • File Form 67 online before filing the ITR, detailing the dividend income and the U.S. tax paid.
   • The final Indian tax payable will be reduced by ₹21,000.
5. ITR Filing (using ITR-2 or ITR-3):
   • Schedule FA: Report the U.S. brokerage account and stock holdings.
   • Schedule FSI: Report the dividend income of ₹84,000 and the capital gain of ₹4,20,000.
   • Schedule CG: Detail the calculation of the long-term capital gain.
   • Schedule TR: Claim the tax relief of ₹21,000.

5. Compliance Checklist 2026

For the Tax Year 2026, tech employees should follow this checklist to ensure full compliance under the new Direct Tax Code, 2025 framework.

• [ ] Documentation Gathering (Jan-Mar 2026):
  • Collect U.S. broker statements (e.g., Form 1042-S, 1099-DIV).
  • Compile records of all RSU vesting schedules and ESPP purchase dates/prices.
  • Maintain proof of foreign tax payment (the broker statement usually suffices).
• [ ] File Form 67 (Before ITR Filing):
  • Log in to the e-Filing portal.
  • Accurately fill in details of foreign income and taxes paid for FY 2025-26.
  • Submit and verify the form online. This is a mandatory step before claiming FTC in the ITR.
• [ ] Select the Correct ITR Form (July 2026):
  • Use ITR-2 for salary, capital gains, and foreign income.
  • Use ITR-3 if you also have income from a business or profession.
  • Do not use ITR-1 (Sahaj) if you hold any foreign assets, irrespective of value.
• [ ] Accurate ITR Schedule Filling:
  • Schedule FA: Disclose all foreign assets held during calendar year 2025.
  • Schedule FSI: Report dividend and capital gains income country-wise.
  • Schedule TR: Ensure the FTC claimed here matches the amount in Form 67.
  • Schedule CG: Provide a full breakdown of the capital gains calculation.
• [ ] Timely Filing and Verification:
  • File the ITR on or before the due date (typically July 31, 2026, unless extended).
  • E-verify the return to complete the filing process.

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