Hi pk-ji:
Below is what I got for a cross-border tax attorney. Net: One CANNOT take credit for taxes paid in India on capital gain from sale of stocks. See below for details.
I am interested in your views as well.
According to Article 25 of the DTAA. the US shall allow its residents or citizens to claim a tax credit in the US on income tax paid to India. Therefore, accordingIy this Article 25, taxes paid In India on capital gain on shares and securities (in the form of TDS or otherwise) should be allowed to be claimed as tax credit in the US. However, there is more to this.
Article 25 Further slates that 'the determination of the source of income for purposes oF this Article shall be subject to such source rules in the domestic laws of the Contracting States as apply for Ihe purpose of limiting the foreign tax credit. And here is where the trouble begins. According to the US tax code, in order to claim a tax credit or taxes paid in another country, the income must be “foreign sourced." According to IRC Sec 865, income from sale of personal property by a US resident shall be sourced in the U.S. So if you are a US person (that is US citizen, resident or green card holder) and you sell securities in anoiner country they will be treated as US sourced. So foreign tax credit will not be available on such income. What this means Is that you will pay tax in India on your capital gains. You will also end up paying tax In the US on this income with no benefit of tax credit.
