Investing in US stocks? This overlooked 40% tax could ambush Indian investors

As Indian investors rush to cash in on US stocks, few realize a hidden tax trap could wipe out 40% of their overseas holdings.

Samir Arora, founder of Helios Capital, issued a stark warning on X about the US estate tax that applies to foreign investors, including Indian residents, who hold US stocks directly. “Hope these investors are aware of the 40% estate tax if they pass away,” he posted, referring to a little-known provision that can hit heirs with a steep bill.

Under US tax law, non-residents are only exempt up to $60,000 in US-situated assets. Everything above that is potentially taxed at rates as high as 40%. The kicker? There’s no estate tax treaty between India and the US to ease the burden.

Consider this: an Indian investor holding $200,000 in US shares would be liable for $56,000 in estate tax if they pass away, leaving only $144,000 for their heirs.

This risk is often overlooked, especially by new-age retail investors and fund managers pushing direct US exposure through PMS accounts and global trading platforms. But there are strategies to avoid it:

• Foreign-Domiciled Funds: Investing through mutual funds or ETFs based in Ireland or Luxembourg avoids US estate tax, since these aren’t considered US assets.
• Offshore Vehicles like GIFT City Funds: When shares are held by a pooled fund structure based in India’s GIFT City, individual investors aren’t deemed US asset owners.
• Corporate and Trust Structures: Using a non-US “blocker” company or an irrevocable foreign trust can legally move ownership away from the individual.
• Life Insurance: For those unwilling to restructure, a policy covering the projected estate tax offers a financial safety net for heirs.

Each of these methods comes with regulatory complexities in both India and the US. Legal and tax experts strongly advise professional guidance before implementation.