Many Indian professionals building wealth through US-listed stocks or employee stock options are unaware of a significant financial risk that could impact their family's inheritance. The United States estate tax presents a hidden threat that could claim up to 40% of their American investments upon their death.
The Unseen Cross-Border Tax Threat
Consider the case of Rahul, a senior professional based in Bangalore working for Broadcom. Like numerous Indian tech professionals employed by global companies, he has accumulated substantial wealth through stock options from his US-listed employer. Until recently, he never imagined that assets he built while living and working entirely in India could be subject to taxation by the US government after his death.
The reality is stark: any form of US-listed securities, whether direct stock purchases or employee stock options (ESOPs), fall under US estate tax regulations. This affects not only professionals receiving ESOPs from companies like Microsoft, Google, or Broadcom but also retail investors who directly purchase US stocks through various investment platforms.
Understanding US Estate Tax Rules for Non-Residents
The US federal estate tax applies to the transfer of property following the owner's death. For individuals who are neither US citizens nor Green Card holders, this tax specifically targets assets situated within the United States. This category includes shares of US corporations, which explains why ESOPs from American companies and directly purchased US stocks qualify.
The surprising aspect for many Indian investors is that the estate tax threshold for non-residents is remarkably low—only $60,000 (approximately ₹5 million). If the total value of their US-situated assets exceeds this amount at the time of death, the estate becomes subject to US taxation.
The tax rates are progressive, beginning at 18% and reaching a maximum of 40% for taxable amounts exceeding $1 million in 2025. The responsibility for filing the necessary US tax forms (specifically Form 706-NA) and paying the estate tax falls to the estate administrator, who must complete this process within nine months of the death before shares can be transferred to heirs.
Protection Strategies for Indian Investors
Since India lacks an estate or inheritance tax treaty with the United States, non-resident Indians cannot claim relief from US estate taxes. However, several planning strategies can help mitigate this exposure.
Some investors choose to hold US investments through foreign funds or ETFs that provide exposure to American companies without direct ownership of US shares. Others establish ownership structures using non-US companies or irrevocable trusts, which, when properly configured, can shield these assets from US estate taxes.
A notable provision that offers some relief for heirs is the step-up in basis rule. When inheriting qualifying assets like stocks, mutual funds, or ETFs, the cost basis resets to the fair market value on the date of the original owner's death. This means heirs can sell these assets shortly after inheritance with minimal capital gains tax liability.
For example, if you purchased US stocks for $20,000 and they're valued at $80,000 at your death, your heirs inherit them with a new cost basis of $80,000. If they sell when the value remains around this amount, they pay little to no capital gains tax. While this doesn't eliminate estate tax, it reduces the impact of double taxation.
As more Indian professionals participate in global equity markets and receive compensation through ESOPs, understanding these cross-border tax implications becomes crucial for effective estate planning. Proactive measures today can ensure that wealth accumulated over a lifetime benefits intended family members rather than becoming subject to unexpected foreign taxation.
