US stocks vs Nifty: Why the falling rupee can turbocharge your returns & complicate your taxes

For an Indian investor buying US stocks, the return on the investment is not determined by the stock market alone. There is another variable working in the background — the rupee-dollar exchange rate.  

Chartered accountant Nitin Kaushik recently highlighted this often-overlooked factor in a post on X (formally twitter), explaining why the performance of a US investment can look substantially different when measured in rupees rather than dollars.  

Over the past decade, the S&P 500 has delivered stronger returns than the Nifty 50 when measured in their respective local currencies. But for an Indian investor, the rupee return can be amplified further when the dollar strengthens against the Indian currency.  

Two engines drive the return

A US investment effectively exposes an Indian investor to two sources of return. The first is the performance of the underlying asset. If a US stock rises in dollar terms, the investment gains value.  

The second is the movement in the USD/INR exchange rate. If the rupee weakens against the dollar while the US investment appreciates, the investment becomes worth more when converted back into rupees.  

That currency effect can work in the opposite direction too. A stronger rupee can reduce the rupee-denominated return from an otherwise profitable US investment.  

Kaushik noted that this does not mean US equities will always outperform Indian markets. Market leadership changes over time, and there have been prolonged periods when Indian equities have outperformed US stocks.  

The broader case for investing overseas, therefore, is diversification rather than trying to predict which country's market will deliver the best returns next.  

Tax rules are different for US stocks

For Indian residents, investing in US equities also brings a different tax treatment from that applicable to Indian listed shares.  

Under the current rules, the holding period relevant for long-term capital gains on foreign securities is generally more than 24 months. Long-term gains are taxed at 12.5% without indexation under the post-July 2024 regime.  

Importantly, the ₹1.25 lakh annual exemption available for long-term capital gains on specified Indian listed equity investments does not apply in the same manner to US stocks. As a result, investors need to account for taxable gains on foreign equity separately.  

Dividend income is another consideration. US dividends can be subject to withholding tax in the US under the India-US tax treaty. The income is also taxable in India according to the investor's applicable tax rate.  

However, eligible taxpayers can generally claim credit for taxes paid overseas through the Foreign Tax Credit mechanism, subject to the applicable rules and filing requirements, including Form 67.  

LRS, TCS add another layer

Indian residents investing directly in overseas securities also have to consider the Reserve Bank of India's Liberalised Remittance Scheme, or LRS.  

Where Tax Collected at Source applies to overseas remittances, it is important to distinguish TCS from a final tax liability. TCS is generally treated as a credit against the taxpayer's eventual tax liability and can be adjusted while filing the income-tax return, subject to the applicable rules.  

It can nevertheless affect cash flow because the money is collected upfront.  

Foreign assets must be reported

There is also a compliance obligation that investors can easily overlook.  

Resident taxpayers who are required to disclose foreign assets must report their overseas holdings in the relevant sections, including Schedule FA, of the Indian income-tax return. Foreign asset reporting follows the calendar-year framework specified in the tax rules, rather than simply mirroring India's April-March financial year.  

This makes overseas investing more than a simple decision about whether the S&P 500, Nasdaq or an individual US stock will rise.  

For an Indian investor, the final outcome depends on market performance, currency movements, taxation and compliance. The dollar can amplify returns when the rupee weakens, but it can also work against the investor when exchange rates move the other way.  

(Tax treatment can vary depending on the investor's residential status, security, transaction and applicable tax rules. Investors should verify the latest rules with a qualified tax professional before making investment or filing decisions.)