- Wealth PMS (50L+)
Investing in Tesla, Apple, or Amazon shares is no longer reserved for the big Indian fund houses and HNIs. At least that’s what some of the popular YouTube and/or Instagram influencers will have you believe. They routinely recommend to their followers investing in international markets via apps
While on the face, it may seem like an interesting idea, but as with everything in life, the devil is in the details.
This post talks about everything an Indian resident needs to know about investing in international markets.
When we talk about international investing, there are two terms you would come across. FEMA and LRS – Here’s what they are.
First things first. FEMA – FEMA which stands for Foreign Exchange Management Act is the umbrella law under which all cross-border transactions and payments made by Resident Indians (RI) fall.
The second is, LRS – Within the ambit of FEMA, RBI (Reserve Bank of India), India’s central bank, has launched a scheme called LRS (Liberalised Remittance Scheme).
This scheme allows resident individuals, including minors, to remit up to US $2,50,000 per person per financial year for any permitted current or capital account transactions. Any investment over and above the prescribed limit requires an RBI approval, though.
$ 2,50,000, which is approximately Rs. 1.87 Cr is the maximum a resident individual can transfer abroad for any permitted transactions. Transactions can either belong to a Current account – includes expenses, or a Capital account – includes investments.
For instance, in a given financial year, you may have spent $ 20,000 (Rs. 15 Lakhs) on a foreign trip (Current account transaction – as its an expense), so now for any further transactions, all you have left with you is $ 2,30,000, you can use this balance either for current or capital account transactions.
A couple of more things to remember.
One, there are no restrictions on the frequency of transactions in a year, and
Two, even if you bring the remitted funds back to India, no further remittances are allowed in the same year, as it’s a single-use limit for each financial year.
To sum it up, RBI, through its LRS scheme, allows up to USD 2,50,000 for you to invest in international markets.
Ways to get exposure to international markets?
Just the way you would need a brokerage account to invest in stocks in India, you would need a brokerage account that allows you to invest in international markets unless you want to invest indirectly through India-based ETFs and Mutual funds.
There are primarily four ways of investing in international markets.
While these are the four ways to get exposure to international markets and indices, each of these approaches has its pros and cons.
The right approach for you could vary depending on your individual preferences & goals.
Let’s now look at how each of these approaches compare.
The high-intensity marketing by apps like INDMoney and Vested would make you believe that there’s no other way of investing in the international markets other than going through them. But, in reality, you can go directly to brokers such as TD Ameritrade, Charles Schwab, IBKR, or the new age ones like Webull. Outside of the US, you can also open an account with Saxo, Degiro & HSBC Singapore.
We’ve listed these brokers specifically as we know they allow Indian Residents to open an account with them, and not all brokers do. One way to know who allows and who doesn’t is – if they mandatorily ask for any Country specific details like (SSN) Social Security Number, you know they don’t allow international investors.
There are many advantages of going direct.
Choice of investment products – These brokers allow you to invest in a full range of listed ETFs, stocks, and other products, including crypto and derivatives. Typically Indian apps publish a list of allowed securities like this one by Vested.
Even with direct brokers, there could be differences in terms of the allowed securities between them. If you are very particular about any specific security, it is better to check with the broker before you open an account.
Do note that funds through LRS cannot be used to invest in levered products. However, if you have an additional non-Indian source, you could use that to trade in derivatives.
Superior trade execution platforms – All brokers offer much more sophisticated trade execution features than third-party apps from India.
Lesser intermediaries – Your stocks are held directly with the broker-dealer. You don’t have to deal with a third party.
However, the account opening process, especially for traditional full-service brokers from US/Europe, may seem more challenging than third-party apps from India.
But that’s not always true. Among all brokers, Webull has a relatively easy and smooth account opening process.
Fund transfers – With direct brokers, you need to follow the good old way of wire transfers, which may be the case with some Indian apps, but some Indian apps have tied with banks to make the transfer process more straightforward and economical. For instance, IndMoney and Vested have tied up with SBM (State Bank of Mauritius) to allow easier cross-border transfers.
Customer Service – Service levels would depend on the broker you go with. For instance, full-service brokers like TD Ameritrade and Schwab would offer both telephonic and other online ways to connect with them. In contrast, brokers like Webull would not offer telephonic support.
It’s unlikely that you have not come across apps like INDMoney or Vested. They are, for lack of a better word, a front-end for Drivewealth like API-based brokers.
Even HDFC Securities works similarly, where it acts as an introducing broker, and then you are off to Stockcal, which curates portfolios for you. Then you have Drivewealth in the background as a broker.
Kristal.AI has a similar approach where it curates international ETFs for you and uses Saxo Singapore as the broker.
Superior user interface
The good thing about this category is that they are designed to make it as easy as possible to invest in international markets. They have easy-to-use UI, and all of them allow you to buy fractional shares. We will talk more about fractional shares later in the post.
Easy cross border transfers
Tie up with banks make it easy for users to transfer money abroad and at better exchange rates.
Limited choice of instruments
These apps have limitations in terms of the instruments/products that you can invest in through them. Usually, they publish a list of what’s allowed. Here’s one such list by Vested. And in other cases, the platform allows you to invest only in curated portfolios or exclusively in ETFs.
These are India-based full-service brokers who tie up with the US or Europe-based full-service brokers.
ICICI Direct, for instance, offers international investing through Interactive Brokers (IBKR). This is perhaps the only such tie-up in India.
The primary advantage here is easier fund transfers & customer service. However, you end up paying substantially more for transactions and brokerage.
Frankly, we do not see a major advantage going this route, especially when you have IBKR based in India and it allows you to open an account with them directly.
The fourth approach to getting exposure is through ETFs and Mutual funds listed in India. We’ve discussed this extensively here.
This approach does not fall under LRS and gets treated like debt in terms of taxation. Also, this is technically not a direct investment approach; we don’t spend much time on it in this post.
Here is a list of possible charges that you may need to incur when transferring money abroad.
This can be anywhere from Zero to Rs. 1000 + GST. It depends on two factors.
One – Does the platform/app/broker you are using to invest have any tie-up with any of the Banks in India. For instance, Vested has a tie-up with the Bank of Mauritius, which helps as you pay only a 1.2% remittance charge.
Two – If you are going to transfer directly and there is no special tie-up between the bank and broker, you can end up paying Rs. 1000 + GST (Fixed) to a minimum of 0.8 % of the transferred value as a remittance charge.
You can also negotiate a better rate with your bank, depending on how much and how frequent your remittances will be. Even if you do at best, you can get a rate close to 0.8% of the transferred value.
Assuming you don’t make any gains from your investment and stay flat, you would incur approximately 2% in remittance charges. That’s what you would need to make to stay flat—more about total costs later in the post.
The bottom line, you end up losing a % of your funds to charges even before your investments start making money for you. Hence its recommended that you transfer in and out in bulk rather than follow a SIP kind of approach to transferring money. This is especially applicable for smaller accounts.
Taxes collected at source (TCS)
The Union Budget 2020 introduced a tax on forex transactions. A 5% tax collected at source (TCS) will be applicable on all remittances above ₹7 lakh under RBI’s Liberalized Remittance Scheme (LRS).
TCS will apply only to over Rs. 7 lakh in a fiscal year and not on the total amount. For instance, if you remit ₹10 lakh in a financial year, TCS will apply to the balance of 3 lakhs at a rate of 5% and thus will incur a tax of Rs. 15,000
The taxpayer will get a TCS certificate and can claim a refund while filing the annual IT returns.
It is more of a cash management problem than an additional cost for the investor.
Taxes in the home country, i.e. India
Shares held outside of India by a resident Indian for more than 24 months are treated as long-term capital assets, and others are treated as short-term capital assets.
Capital gains from the sale of shares held for greater than two years would be taxed at 20% with the indexation benefit on the purchase price or 10% without such indexation benefit.
Indexation is the process of adjusting the income for inflation over the period of holding an asset.
Capital gains from the sale of short-term holdings would be taxed at the slab rates applicable for the individual.
From a compliance standpoint, it’s important to note that as an investor, you must furnish Form A-2 to the authorized dealer and Income Tax forms (Form 15CA and/or 15CB) as applicable to each transaction while making the outward remittances.
Taxes in US, DTAA & W-8 BEN
In the US, IRS (Internal Revenue Service) is the department that tracks and manages taxes; they are the same as our Income Tax Dept.
India has a tax treaty with the US called DTAA (Double Tax Avoidance Agreement). DTAA does not mean that Indians can completely avoid paying taxes in the US, but Indians can avoid paying higher taxes in both countries.
As a foreigner, your tax liability in the US is different than that of a US resident. Declaring that you are a foreigner through the Form W-8 BEN helps you avoid withholding taxes when you book any gains on your stock market holdings.
It also helps in the case of dividends; Indian residents, for example, pay a flat 25% withholding tax on dividends in the US. It’s the W-8 BEN form that confirms the individual’s eligibility for this reduced rate.
Interest income from debt market investments earned by an Indian resident is reportable on Form 1042-S but nontaxable.
On the other hand, if a US bank pays the interest income, a US savings & loan company, a US credit union, or a US insurance company, it is nontaxable and non-reportable (no 1099 or 1042-S reporting) unless the interest income is related to a US trade or business.
We Indians are not used to this, but in the US, Estate tax is payable by the heirs on the estate of a deceased individual, which can be as high as 55%. The estate tax can arise by way of investing in US assets. So your stocks and other capital market investments in the US are subject to estate tax when they are passed on as inheritance. As an Indian, the best thing is to buy term insurance to cover this tax liability.
Usually, people set up joint accounts to deal with Estate taxes, so in the event of the death of one of the account holders, its estate tax is levied only on the portion of the asset held by the deceased. Now, if you are a UHNI (Chances are you would not be reading this, still) and looking at better ways of managing all of this, setting up an offshore trust to invest in the US seems to be the recommended route.
We are being extremely cautious here, but this needs to be said. The income tax officials in India look at all people holding foreign assets as potential tax evaders.
Technically they don’t differentiate between you and someone else holding a bank account in the Cayman Islands, for you know what.
You never know when and why you may get scrutinized by the income tax authorities, perhaps just because you hold foreign assets. In the worst case, you may receive a notice from the tax department’s investigation wing seeking to cross-verify the information about your foreign assets. It becomes a bigger pain when you receive dividends from your US stocks since part would be withheld there. You need to pay taxes on the balance amount and get a tax credit for the withheld part.
Getting to the specifics of compliance.
To be on the safer side, it would make sense for you to hire a Charted Accountant who is well versed with foreign asset compliance, and since this is a fixed cost, it would make sense only if your investments and the expected returns from those investments are large enough.
We ask a simple question over here.
What would be my net returns if I make 15% on my International/US Stocks over two years?
Here we look at it for two different allocation sizes, 1 Lakh and 5 Lakhs.
2 years because that is the minimum time period required for international investments to qualify as long-term.
If you invest 1 Lakh and make 15 on it, your net returns would be close to 10.5%, a deviation of 4.5%, and if you invest 5 Lakhs instead, the deviation reduces to 3.30 %, that’s approximately 25% lower. Either way, at max, you can bring it down to 3%.
Compare that to a 10% capital gains tax on an Indian equity investment which applies only upwards of 1 Lakh of long-term capital gains.
With an increased upfront investment, we gain a bit, but that has its limit; you would still end up with a 3% deviation minimum. I am not even including other administrative and compliance costs here.
You must have heard the Instagram influencers say you can buy a fractional share of Starbucks for less than the price of a Tall Latte. Well, yes, you can. But should you?
Here’s what we suggest, if you are in the states and you have a zero-cost brokerage plan, fractional shares are fine. They still have some drawbacks, but we can live with them. But as an Indian Resident, the costs don’t justify such small ticket investments.
In other words, if it’s the concept of fractional shares that’s making you invest in international markets, you are better off avoiding it.
Yes, it’s absolutely legal for Indian residents to invest in International markets. But the costs and the legal obligations attached to it don’t justify the expected returns, especially for small-ticket investments. Even for larger investments, up to 10 Lakhs, you may want to weigh the pros and cons.
Given the way things are, the best choice for Indian residents is to choose the indirect way of investing in international markets. The increasing number of mutual funds and ETFs from Indian AMCs makes investing in international markets easier and cost-efficient.
We thank Jay for taking time out to share his perspective on international investing. He is an active CM Premium Community member and an investor across several different international markets.
Capitalmind received no payment or compensation for this post, neither do we have any affiliation or relationship with the owners of the products or services being referred to in the post.
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