Let’s be honest. Investing in global giants like Meta, Tesla, or Alphabet is exhilarating, but navigating the tax maze back home can feel like walking through a minefield blindfolded. You’ve got US withholding tax, Indian tax slabs, LRS limits, and then—the ultimate headache: How do I handle the capital gains I made abroad, especially when I incurred some heavy losses right here in the Indian market?
The fear is real: will my foreign profits get taxed at the maximum slab rate, while my Indian losses just sit there, useless?
The good news is that the Indian Income Tax Act provides a clear mechanism to ensure you don’t pay tax on paper gains when you have real losses elsewhere. We are here to remove the clutter and provide absolute clarity on how to adjust your capital gains outside India with capital loss in India—a powerful, legal tax-saving strategy often overlooked by global investors.
The Golden Rule: Yes, You Can Net Them Off
Forget the notion that your domestic portfolio and foreign portfolio are separate tax entities. For a resident Indian, your global income is taxed in India. This unified approach is precisely what allows you to set off losses from one market against gains from another.
This principle works both ways, giving you maximum flexibility:
1. Indian Loss vs. Foreign Gain: A capital loss incurred by selling Indian shares (e.g., Nifty stocks) can be adjusted against a capital gain made from selling foreign stocks (e.g., US stocks).
2. Foreign Loss vs. Indian Gain: A capital loss incurred by selling foreign stocks can be adjusted against a capital gain made from selling Indian shares.
This is a massive relief for investors who use global diversification, as it ensures you are only taxed on your net worldwide capital gains.
Decoding The Set-Off Rules: The Flexibility Constraint
While the netting is allowed, it is governed by a fundamental rule concerning the type of capital gain or loss. This rule is consistent whether the transaction is domestic or foreign. Simply put: Short-Term Capital Loss is flexible, but Long-Term Capital Loss is restrictive.
Before applying these rules, remember how foreign equity is classified: any foreign stock or asset held for 24 months or less generates a Short-Term Capital Gain (STCG) or Loss (STCL), while anything held for more than 24 months falls under Long-Term Capital Gain (LTCG) or Loss (LTCL).
Here is how the adjustment works:
1. The Power of Short-Term Capital Loss (STCL):
An STCL, whether it originated from a loss on Amazon shares (held for 10 months) or a quick loss on an Indian mid-cap stock, is your most flexible tool. It can be set off against any capital gain—be it a Short-Term Capital Gain or a Long-Term Capital Gain, and regardless of whether that gain came from the Indian or the foreign market.
2. The Restriction on Long-Term Capital Loss (LTCL):
An LTCL, such as a multi-year loss on a stock like Microsoft or a similar long-held Indian share, is highly constrained. It can only be adjusted against a Long-Term Capital Gain (LTCG). For instance, if you have an LTCL, you cannot use it to reduce a Short-Term Capital Gain (STCG) you made on a quick, profitable trade.
What if the loss can’t be set off?
If, after applying all these adjustments, you still have a remaining loss, don’t worry—it doesn’t vanish. It can be carried forward for up to eight subsequent assessment years. In the future, the carried-forward STCL can be set off against any capital gain, but the LTCL remains restricted to being set off only against future LTCGs.
Execution Steps: How to Report and Execute the Netting
The actual execution of this set-off happens when you file your Income Tax Return (ITR). Since you hold foreign assets, you must file ITR-2.
1. Currency Conversion (The Starting Point)
Before anything else, all your foreign transactions (purchase cost, sale proceeds, dividends, taxes paid) must be converted into Indian Rupees (INR). For tax computation in India, you must use the exchange rate prescribed by the State Bank of India (SBI) on the last day of the month immediately preceding the month in which the sale or dividend receipt took place.
2. Mandatory Disclosure Schedules
As a resident, you must compulsorily fill out three key schedules in ITR-2:
Schedule FSI (Foreign Source Income): Used to report capital gains and dividend income earned from foreign sources.
Schedule FA (Foreign Assets): Used to report details of all foreign assets held during the calendar year (stocks, bank accounts, etc.).
Schedule TR (Tax Relief): Used if you paid any tax in the foreign country (like US withholding tax). You claim credit for this tax here, using the Double Taxation Avoidance Agreement (DTAA) provisions.
3. Performing The Set-Off
The final adjustment happens within the relevant Capital Gains schedules of the ITR-2 form. You will enter the domestic and foreign short-term and long-term gains/losses separately. The ITR utility is designed to automatically apply the set-off rules (STCL against anything, LTCL only against LTCG) across all categories (India and Foreign) to arrive at your final taxable capital gain.
By meticulously reporting your transactions and adhering to the set-off rules, you effectively minimize your tax liability and utilize your capital losses to the fullest extent, ensuring you pay tax only on your true economic profit. It’s the difference between paying a hefty tax bill and investing those savings back into your next growth stock.
