There was a long period of time when Indian citizens couldn’t invest in the US stock market. It was a bummer as the US Stock Market makes up almost 54% of the global equity market with the second largest shareholder at just 7%. As a matter of fact, the avenues only started opening up when In 2004, the Reserve Bank of India introduced the Liberalised Remittance Scheme (LRS). This move was made to facilitate current and capital account transactions for individuals. Capital account transactions include things like transferring or issuing of any foreign security by an Indian resident (section 6(3), Foreign Exchange Management Act, 1999). As things stand today, the current limit per resident individual per financial year is $2,50,000. This limit includes private visits, gifts and education expenses. Medical treatment is given some exceptions though. The permissible capital transactions includes a provision of making investments abroad vide section 6(iii) of the LRS. Under this scheme, the acquisition and holding of both listed and unlisted shares, mutual funds, qualification shares, unrated debt securities, shares issued as remuneration for services are allowed. Section 16 of the LRS also allows reinvestment of any income earned through investments in US stocks. Let’s find out more about this.
Can an Indian Invest in US Stocks: All You Need to Know
How can Indians invest in the American Stock market?
There are two chief ways to do that, the first is to invest in a Global Mutual Fund or an Exchange Traded Fund (ETF) through your demat account Broker (eg. ICICI Securities, SBI Securities or Kotak Securities). If you don’t possess a demat account, you can also go to an Asset Management Company (AMC) to directly purchase a mutual fund of your choice. This transaction will be made on paper and bypass the need for a demat account.
The second method requires you to open a demat account with any Indian brokerage house that is tied up or has an MoU (memorandum of Understanding) with a US brokerage firm and a banking account with an Indian bank listed as an authorized person of LRS (most of the major brokerage houses run by the banks listed under Authorized Dealer Category I, are authorized persons under the LRS)
However, if all you want to do is invest in a Global Mutual Fund or an ETF, you can just forget about LRS or FEMA. The regulations won’t be applicable to you if you go for the first method. However, if you are looking to create your own portfolio made up of equities like Google, Facebook or Apple and you do not want your money to be wasted on AMC’s increasing tax liabilities due to GST. In that scenario, you should go with the second method.
Top Indian brokerages have tie -ups with US brokerage firms that allow Indian customers to trade American stocks. These brokerages also integrate their banking facilities with demat services which makes the whole process a lot more easier.
How to create your own foreign equity portfolio?
- Fill the forms, submit the documents and open a demat account with your broker in India (who has a tie-up with a US brokerage house). You can also directly open a demat account with a US based broker.
- Fill out the Form A2 and send it to your bank(in India); this is an application for drawal of foreign exchange and a declaration required by the FEMA from the individuals to be submitted to their bank. And that’s it, you are ready to invest in US stocks
However, before you start investing your money in shiny new American stocks, you should be mindful of the tax implications as well.
What are the tax implications of investing in US stocks?
Income from sale of foreign securities is taxable in India.
Whenever an Indian citizen sells shares, the money generated from the transaction amounts to “transfer” of “Capital Asset” and is taxable as per the provisions of Section 45 of the Income Tax Act, 1961(IT Act) and will be taxable under the head “Income from Capital Gains.”
However, if you hold domestic equities for over a year, the income generated from it falls under long term capital gains and for domestic equities there is no tax levied on it while short term capital gains attract tax. Your foreign equity holdings don’t give any such benefits to you though, and will be taxed by the government.
Taxes on dividends
Section 5 of the IT Act, 1961 provides a “scope of total income” as elucidated under;
“All income received from all sources is, which received or is deemed to receive in India, accrues or arises or is deemed to accrue or arise in India or accrues or arising outside India, is taxable in India.”
All dividends, whether earned through foreign or domestic investments, are liable to be taxed. The earlier position under the IT Act, exempted profits earned from dividend pay-outs from any kind of taxes(section 10(34), IT Act). This particular section has been amended recently and as a result of that, dividends exceeding 10 lakhs will be taxed at a rate of 10 percent u/s section 10(34) and 115BBDA of the IT Act.
All exceptions applied to dividend payouts of domestic securities are not applicable to dividends earned over foreign securities. Hence, the dividend generated from foreign equity is taxable under the head “Income from other sources” under the IT Act.
Will you be taxed in India and in the US as well?
Thankfully, no. The Double Taxation Avoidance Treaty between the two countries is the reason behind this benefit. The US-INDIA GTAA leads to the tax on dividend only being deducted at source. So if you’re investing in a US stock, you will have to pay between 15 to 25 percent tax at the source, which happens to be the United States of America in this case.
Can you short sell American stocks?
To allow investors to short sell stocks, brokerage houses require a margin account for the investor. Margin calls are essentially a form of collateral which the investor needs to provide in order to short stocks. However, section 5 of the LRS which reads as follows;
“[a]ll other transactions which are otherwise not permissible under FEMA and those in the nature of remittance for margins or margin calls to overseas exchanges/ overseas counterparty are not allowed under the Scheme” bars Indian individuals from setting up margin calls. Hence, Indian investors can’t short sell their American stocks.
So that was a brief look into the world of investing in US Stocks from India. Hopefully, you have a career idea of the subject matter and you are ready to start researching more about investing in the US stock market now. Just getting to know that something “can be done” is a crucial part of getting something done after all.