Investing in foreign stocks has become a new trend in India after the 2020 market crash. Many new investors across India seek ways through which their stock portfolio can be diversified locally as well as internationally. One of the pros that are associated with foreign stocks is high returns which perhaps attracts investors. However, such investment comes with certain consequences as well like high brokerage charges and international trading rules. Well, if you can invest in foreign stocks like Apple and Microsoft, it is necessary to remember that the RBI or Reserve Bank of India has capped the investment amount under the Liberalised Remittance Scheme for Indian residents up to $250,000.
Why should you invest in foreign stocks from India?
Needless to say, the strategic investment itself is a form of art. With increasing awareness about equity investments, many people are indeed looking for different ways through which their invested money can be multiplied by investing in foreign company stocks and shares. With economic recovery seen in various nations, Indian retail investors to are getting attracted to diversify their stock portfolio as well as widen their investment horizon to accumulate more profits from foreign stock markets.
Similarly, if you are looking for ways through which you can invest in foreign stocks from India across geographies, starting with the US market can be a good idea. And if you are thinking about investing in US stocks from India, you will be amazed to know that the investment process is quite simple and easier than expected. However, the buying process might involve some international brokerage charges and you must comply with the foreign exchange rules as set by the RBI. But your main focus must be on buying good foreign stocks even though it comes with multiple legalities to ascertain good returns in future.
Cons that must be considered before you invest in foreign stocks from India
As discussed earlier, it is easier to invest in foreign stocks from India but you need to pay heed to high brokerage charges kept by international brokers. For example, if you trade in any of the U.S. stocks, the foreign brokers may ask you to pay higher than their domestic retailers. Another con is profits will be always subject to the foreign exchange rate. For instance, if you invest $10 in 2021, the Indian currency may reflect 729 INR. But a year later, if the Indian currency gets stronger, then you may have invested more money previously than the upcoming year.
Other than this, you will have to be mindful of the taxes charged by both Indian and U.S. taxation laws. After the RBI’s issuance of Liberalised Remittance Scheme (LRS), Indian residents are allowed to invest $250,000 only without any special permission and after fulfilling LRS application forms.
Here’s how you can invest in foreign stocks from India
A typical international investment platform is the one that provides every foreign investor with the best brokerage offers and a hassle-free account for international trade. Some of the basic steps that apply to every international brokerage firms include the following:
1. Opening a new account
After fulfilling every legality in India such as LRS you need to find a good brokerage account in India that allows users to buy foreign stocks. You can register with the brokerage firms online or by visiting them physically with mandatory documents. Opening an account online is much easier and quicker. You just need to enter your details like mobile number, name and email to start. Once completing the initial state, your brokerage firm may provide you with a passcode and other necessary credentials related to account opening.
2. Fulfilling documentation criterion
When opening a fresh account, you will be asked to provide certain documents that establish your identity as an Indian citizen long with your residential address proof. The documentation process is simpler and may include basic requirements like a combination of ID proofs and address proof such as an Aadhaar card, Voter’s ID, Passport, Driver’s licence and a photo. Your utility bill such as phone and electricity bill or bank and credit card statement also act as address proof. Alternatively, you may provide the company with your driving licencing in which your photo has attached that act as a photo identity.
3. Depositing initial amount
Once your account is opened with a broker after approval, you may be asked to make an initial deposit amounting to a certain limit by your brokerage firm.
4. Completing Forex formalities
Before you add funds and start to invest in foreign stocks from India, you must go through the RBI rules related to Forex and what LRS is all about. Being an Indian resident, you must buy dollars or other currency applicable to your selected foreign stock by converting Indian rupees with the help of an authorised dealer in India. The remitted or exchanged amount can be then used for buying new stocks you seek to invest in. At present, any Indian resident under the LRS scheme cannot invest more than $250,000 in a financial year. So, a bit of paperwork and legal formalities is all you need to spread your wings across global stock exchanges.
5. Compare forex rates
When you transfer your money from an Indian bank account to your broker’s account in the US, the foreign exchange rate needs to be analysed. To ascertain which exchange rate is more favourable, you can compare international brokerage platforms where the brokerage firm you are working with have ties. You can also find nationalised banks that offer low forex rates to Indian citizens. Other than this, you can contact your bank manager for transferring funds at low rates.
Facts associated with foreign stock investments
When you decide to invest in foreign stock from India, three important things need to be considered by every Indian investor.
Currency and country selection: When you invest in foreign stock, you need to comprehend that certain risk is associated with every country trading system along with the foreign exchange that is prone to political and economic uncertainties. Similarly, foreign currency rates fluctuation is inevitable and unpredictable. Experts believe that even if an investor has booked profit in real-time, the investor may have to bear loss because of changing currency rates. So, it is always better to invest in that country where the currency is strong and fluctuates less according to the Indian currency system.
Tax Collection at Source: Every Indian citizen investing in foreign exchange or using LRS are subjected to TDS or Tax Collection at Source amounting to 5% of the amount remitted and exceeding the threshold of 700,000 INR per financial year. The taxes are collected by the authorised dealer bank under the Liberalised Remittance Scheme while making the remittance on payments that exceed 700,000 INR. The tax rates can further exceed 10% or more if the applicant fails to provide PAN or Aadhaar. Though, the amount of TCS can be claimed by the investors during the time he/she files tax under income tax filing systems applied in India.
Transaction costs: This factor must be considered before selecting a brokerage firm as being an investor you will have to pay significant transaction costs associated with foreign stock investments. You will find that when you invest in foreign stocks from India, you have to pay higher as compared to investing in Indian stocks.