Investing Abroad Through a PMS: The Choices that MatterInvesting Abroad Through a PMS: The Choices that Matter

In August, we wrote about SEBI's proposal to let portfolio managers invest client money directly in foreign markets (Read our post on what direct foreign investing means for PMS). The new regulations are out, and from April 2027 that will be allowed. Which leaves a practical question for anyone who wants some of their money outside India: how should you actually do it, and where does a PMS fit?

This piece covers the routes available today, what a PMS can build with its new permission, and three things that matter far more than most investors expect. Those are tax, where the underlying fund is domiciled, and the RBI's remittance limit. The operational side, covering brokers, custody, and reporting, is complex enough to need its own article, which will follow this piece.

Four Ways to Invest Abroad

An Indian resident has four ways to get money into global markets today. All four work. Each comes with a catch, and which catch bothers you most depends on how much you're investing and how hands-on you want to be.

• Route 1: Indian funds that invest abroad

This is the route most people already know. You buy units of an Indian ETF or Fund of Funds that holds foreign securities, through the same demat or mutual fund folio you use for everything else. Rupees go in, rupees come out, and there's no remittance paperwork on your side.

The catch is the one we covered last time. The RBI caps overseas investment by Indian mutual funds at USD 7 billion for the entire industry. When the industry runs into that ceiling, ETFs can't create new units and therefore start trading at a premium to NAV, and active funds stop taking fresh money. So you either overpay for an ETF without it showing up on any statement, or you wait for a subscription window for funds that opens for a few days and shuts again. If you've ever tried to start an international SIP and found the door closed, you know the feeling.

• Route 2: Your own foreign brokerage account

You open an account with a foreign broker, or one operating out of GIFT City, send money under the Liberalised Remittance Scheme (LRS), and buy what you like. It's the most direct route and usually the cheapest. The shares are yours, in your name, on the actual exchange.

It's also entirely do-it-yourself. You pick the securities and rebalance them. You track how much of your annual LRS limit is left, and you report the holdings in the foreign assets schedule of your tax return every year. If you hold US-listed stocks or ETFs, the US estate tax exposure (more on that below) is yours to manage too. Plenty of investors are happy doing all this. Plenty of others open the account, buy a few shares of a company they like, and don't log in again for a year.

• Route 3: A GIFT City fund

Category III-style funds set up in GIFT City (IFSCA calls them restricted schemes) can invest across global markets and handle execution, custody, and reporting for you. The money still goes out under your LRS limit, but someone else does the work.

The entry ticket is the problem. These schemes generally require USD 150,000 per investor, about Rs. 1.4 crore at current exchange rates. While investors often stretch this across two financial years under LRS or pool within a family, it still rules out most individuals, and the fees are steep for what is often a fairly vanilla global portfolio. Most AIF managers charge a management fee of 1-2% and a performance fee on top of that.

• Route 4: A PMS investing directly

This is the new option from April 1, 2027. Under the new regulations, a PMS will be able to invest client money in foreign securities, including listed equities, ETFs, index funds, and overseas mutual funds, subject to SEBI's prescribed conditions and the client's LRS limit. A portfolio manager handles selection and rebalancing, and the minimum is the regular PMS ticket of Rs. 50 lakh, well below the GIFT City threshold.

The permission with the new PMS regulations is broad. What a PMS actually builds with it is where things get interesting.

What a PMS can Build for Clients

A PMS investing abroad can offer one of two things. It can hold a basket of foreign ETFs or funds, or it can run an actively managed portfolio of individual foreign stocks. Both are legitimate ways to get global exposure. They behave very differently once you own them, and most of that difference comes down to how often things get sold.

• A basket of funds/ETFs

A handful of well-chosen ETFs or funds gives you diversification without anyone having to work for it. One broad US ETF already spreads your money across hundreds of companies, every major sector, and large, mid, and small caps. Add an ETF/fund or two covering other regions and you're diversified across geographies as well. The manager's job is mostly allocation: how much goes where, and when the mix has drifted far enough to need a nudge.

That means very few trades. When a company inside the ETF/fund is added, dropped, or trimmed, the fund does the buying and selling internally. You still hold the same units, and nothing has been sold in your name.

A portfolio of ETFs/funds doesn't need someone picking stocks every day. But that doesn't mean there are no decisions to make. How much should you allocate to the US versus the rest of the world? How should you balance equity exposure across regions, sectors, and factors? When should allocations change, and when is it better to leave them alone?

A PMS can take responsibility for those decisions, while handling the execution, rebalancing, and reporting that come with maintaining an overseas portfolio.

• An active stock portfolio

An actively managed stock portfolio is a different animal. The manager picks companies, sizes positions on conviction, and changes their mind when the facts change. That's the point of paying for active management, and done well, it can beat the index.

It also means churn. Winners get trimmed, losers get cut, new ideas replace old ones. A portfolio of 20 to 30 foreign stocks will see a lot more selling over two years than a basket of four ETFs. And in a PMS, that selling has a cost most investors don't see coming.

Why Tax Shapes The Design

• The 24-month rule

In a PMS, the securities sit in your name, so every sale the manager makes is your sale. Whatever gain it throws up lands in your tax return that year.

Indian tax law treats foreign shares like unlisted shares, since they aren't listed on an Indian exchange. That has two consequences. A gain becomes long-term only after 24 months, compared to 12 months for Indian listed equity. Until it crosses that line, the gain is added to your income and taxed at your slab rate, which for most PMS investors means 30% plus surcharge and cess. After 24 months, it drops to a flat 12.5%.

Let's say the manager puts Rs. 10 lakh into a US stock, and it rallies 60% in 14 months. Good call. The manager sells the position, and you have a Rs. 6 lakh gain. At the 30% slab, that's Rs. 1.8 lakh in tax before surcharge and cess. Hold it for 24 months and the tax is Rs. 75,000. The stock-picking worked, and the timing of the sale handed more than Rs. 1 lakh of it to the taxman. This is the tax equivalent of getting run out on 99.

An active manager can work around this to an extent, by holding winners longer or harvesting losses to offset gains. But that ties their hands. The more a portfolio is built around dodging the 24-month line, the less it behaves like the active strategy you signed up for.

A fund basket mostly avoids the problem. Rebalancing happens inside the funds, the few allocation-level trades can be timed, and most holdings sit long enough to qualify as long-term.

• Dividends and the paperwork

Then there are dividends. If the PMS holds stocks directly, or ETFs/funds that pay out their dividends (distributing funds), that income lands in your account through the year, and India taxes it as income at your slab rate.

The tax is only half of it. The US withholds tax on dividends before you see them (25% for Indian residents under the tax treaty). To avoid paying twice, you claim a credit for that in India, which means filing a separate form before your return. Every payout has to be converted to rupees at the prescribed rate, reported in the foreign income and foreign asset schedules, and matched against what was withheld. Twenty stocks paying quarterly dividends could mean reconciling 80 separate payments a year, each potentially requiring currency conversion and foreign tax credit documentation. Your CA will notice, and so will their invoice.

An accumulating fund reinvests dividends inside the fund, so there's no dividend income to report. The holding still has to be disclosed as a foreign asset, but that's one line, not 80.

• The feeder fund route

There is a way to get active stock-picking without a tax bill on every trade. The PMS invests your money in units of an offshore fund (domiciled in Cayman, say) that runs the active stock portfolio itself and accumulates rather than distributes.

There's one condition. The new PMS framework explicitly permits investment in overseas mutual funds, alongside listed foreign securities and ETFs. The offshore fund must qualify as a permissible overseas mutual fund or ETF under SEBI's framework, with its regulatory structure and eligibility satisfying the applicable requirements.

The manager still trims winners, cuts losers, and rotates into new ideas. Those trades happen inside the fund, though. They're the fund's transactions, so they don't show up in your tax return, and the dividends stay in the fund too. What you own is units of one fund. When you sell them, the gain is taxed once: at 12.5% if you've held the units for more than 24 months, at slab rate if you haven't.

Go back to the earlier example. The US stock that rallied 60% and got trimmed at 14 months is now just a higher NAV. Hold the fund units for 25 months, and the whole gain, trim included, is taxed at 12.5%.

There are costs. The offshore fund has its own expenses, and a fund in a jurisdiction without a US tax treaty pays a higher withholding rate on US dividends than an Irish fund would. For an investor who wants a manager actively picking global stocks, though, the structure moves the tax bill from every trade to a single exit, on a timeline the investor controls.

US Listed or UCITS

Once you've settled on the ETFs or funds you want to invest in, there's one more choice most investors don't realise they're making: where the fund itself is domiciled. The same index can usually be bought two ways, as a US-listed ETF or as a UCITS fund (a European fund structure, usually domiciled in Ireland or Luxembourg and listed in London or elsewhere in Europe). The two can track the same index and hold the same stocks and still be treated very differently when the investor dies.

• The estate tax problem

A US-domiciled ETF is generally a US-situs asset. When someone who is neither a US citizen nor domiciled in the US dies holding more than USD 60,000 in US-situs assets, their estate can become subject to US estate tax filing requirements. The tax can reach 40%, and the exemptions available to US citizens generally don't apply. That threshold is low for HNIs. Rs. 60 lakh in a few US ETFs crosses it comfortably.

Then there's the process. Before a US broker or custodian releases the holdings to your heirs, the estate usually has to file a US estate tax return and get clearance from the IRS. For a family in Pune that has never dealt with the US tax system, that means months of paperwork and US advisors, at the worst possible time.

Holding US investments in a joint account is often suggested as a workaround. On the tax side, it does less than people expect. For non-US persons, the US counts the full value of a joint holding in the estate of the first holder to die, except for whatever share the surviving holder can show they paid for themselves. So if one spouse funded the whole account from their own LRS limit, added the other as joint holder, and then died first, the entire account is exposed.

In practice, a surviving holder may try to sell the securities and bring the money home before the broker learns of the death. But that doesn't make the estate tax liability disappear. The tax may still be owed, and once the death is on record, the broker may require IRS clearance before releasing the deceased holder's assets. That's a lot riding on nobody noticing, when a UCITS fund removes the underlying US estate tax exposure altogether.

In a PMS, all of this lands on you directly, because the securities are held in your name.

• Why UCITS avoids it

Units of an Irish or Luxembourg fund are not US assets, even when the fund holds nothing but US stocks. There's no US estate tax on them, and no IRS clearance needed to pass them on.

There are quieter advantages too. An Irish fund pays 15% US withholding tax on dividends from its US holdings, thanks to the Ireland-US tax treaty, against 25% if you held the US stocks yourself. And many UCITS funds come in accumulating share classes, which spare you the dividend paperwork described above.

• Where UCITS falls short

The catch is choice. The US ETF market is far bigger, both in the number of funds and in the money they manage. Plenty of US ETFs have no UCITS equivalent: some niche sector funds, certain factor tilts, newer or narrower themes. Sometimes a UCITS version exists but is small and thinly traded, costs more, or only comes in a share class that pays out dividends.

However, for the building blocks of a broad global basket, the gap mostly closes. US large caps, US tech, emerging markets, Japan, and even themes like global defence all have UCITS options with reasonable size and liquidity. The gaps show up at the edges, which is where most investors don't need to be.

The LRS ceiling

Every rupee a PMS invests abroad for you goes out under your LRS limit: USD 250,000 per person per financial year, or roughly Rs. 2.4 crore at today's exchange rate.

Think of LRS as one thali that everything eats from. Forex for the family holiday, your child's university fees and living costs, money sent to a relative overseas, the flat in Dubai, and your foreign investments all come out of the same USD 250,000.

Let's say your daughter is at a US university, and fees plus living costs come to USD 80,000 a year. The family takes one trip abroad and spends USD 20,000. That leaves USD 150,000 for investing that year, and less if you've already put money into a foreign brokerage account or a GIFT City fund.

Of the four routes we started with, Indian mutual funds and ETFs are the only ones that don't touch your LRS limit, because the fund remits under its own allocation. A PMS, your own brokerage account, and a GIFT City fund all draw on your personal limit.

There's also a cash-flow cost. Overseas investment remittances under LRS generally attract 20% tax collected at source (TCS) on the amount above Rs. 10 lakh in a financial year, and that Rs. 10 lakh threshold is shared across all your LRS remittances, college fees and travel included. Let's say you send Rs. 50 lakh abroad in a year to invest. The bank collects Rs. 8 lakh on top of it. That isn't a final tax, since you can generally claim it as a credit against your income tax liability. But it locks up a meaningful amount of capital until you do, particularly for investors making large overseas allocations.

The limit is set by the RBI, and the RBI can change it. It has, in both directions. LRS started in 2004 at USD 25,000 and was raised in steps over the years. In 2013, with the rupee falling sharply, the RBI cut the limit from USD 200,000 to USD 75,000 and raised it again (to USD 125,000) the following year. More recently, the RBI has said it is reviewing the LRS framework, including the annual limit. The LRS limit is ultimately a policy decision, not a permanent entitlement. Anyone building a long-term overseas portfolio is relying on a limit that could shrink.

Capitalmind Wealth’s View

For most investors who want global exposure through a PMS, we think a basket of UCITS funds, ideally in accumulating share classes, is the sensible default. It's diversified from day one, needs few trades and little paperwork, and stays clear of US estate tax. A US-listed ETF earns a place only where there's no reasonable UCITS equivalent and the exposure is worth the estate tax risk.

For investors who want active stock-picking, a feeder into an accumulating offshore mutual fund keeps the tax bill to a single exit. Directly held foreign stocks, churned inside a PMS account, are the hardest version to make work after tax.

And whatever the structure, the LRS limit is the outer wall. It's worth knowing how much of it is already spoken for before deciding how much goes abroad.

Next Up: The Plumbing

There's one more piece, and it decides what investing abroad through a PMS feels like day to day. A PMS investing abroad needs a broker to execute trades on foreign exchanges and somewhere to hold the securities in your name. It needs a way to move rupees out and money back, within your LRS limit. And it needs reporting that turns foreign trades, currency conversions, and dividends into something your CA can put into an Indian tax return without losing a weekend to it.

Custody shows how quickly this gets complicated. Indian stocks and mutual fund units sit in your demat account with NSDL or CDSL, with the PMS's custodian working on top of that. Foreign securities, however, need an overseas holding arrangement, typically involving an international custodian or broker. The new regulations don't explicitly specify how custody arrangements will work for foreign securities. Many international brokers hold client assets within their own custody structures rather than working with independent custodians appointed by investment managers. Whether these arrangements can satisfy SEBI's requirements, or whether a separate custody relationship will be necessary, is an operational question that needs clarification.

Each of these has more moving parts than it seems. As we said last time, SEBI's permission was the easy part. We'll walk through the operational build in our next article.