India is always known to be a savings nation, our savings to GDP is around 30 per cent in 2019, though it has gradually declined from 36 per cent in 2007- to give a perspective, most of the European nations hover around 3-15 per cent and the US is at 2.6 per cent. Given this backdrop and the fact that the flow of information globally is almost in real-time, cross-border investing across asset classes has been of interest especially for the upwardly mobile Indians. Resident Indians, invested $18.75 bn under the Liberalised Remittance Scheme (LRS), for 2019-20. However, unlike domestic investing, there are certain restrictions in global investing as it involves the selling of precious foreign exchange, which is a strategic resource of the nation.
Options for investing in overseas equity:
Invest directly: This is similar to investing in direct equities in India. In this case, the resident investor needs to open an international broking account with an Indian broking firm (which has such an arrangement) or open an account with an international broking house/apps. Funds are then transferred to the respective broking account in compliance with the LRS regulations of RBI. This offers a gateway to invest in multiple global exchanges including commodities.
Indirect investment: In this option, the investor invests in Indian mutual funds having exposure to global markets. This is an indirect way of investing in global equities and may also be cost-efficient, given that investors need not have to open a separate trading account or maintain a minimum deposit. Since investment is made domestically, the restrictions of LRS do not apply.
Investment in global Exchange-Traded Funds (ETF): An ETF is the pool of securities that trade on an exchange, represented in the form of a share. An investor can buy global ETFs available on international indices which gives requisite exposure to a basket of international stocks. Generally, the expense ratio of ETFs is significantly lesser than that of a mutual fund.
What is the procedure for investing through LRS?
Overseas investments by resident individuals can be made only under LRS and are subject to a limit of $250,000 per person per financial year.
Investors will have to designate a bank branch through which all the capital account remittances under LRS would be made. The applicant should have maintained the said account with the bank for a minimum period of one year before the remittance.
Form A2, specifying the purpose of remittance, should be furnished to the bank for transfer of funds.
Taxation of Global Investments in India:
Transaction | Income | Tax Rate |
Sale of equities / ETFs | Capital Gains | 20% for long term Slab rates for short term |
Dividends and Interest | Income from other sources | Applicable slab rates |
Tax Collected at Source (TCS): Effective 1st of October, 2020, LRS remittances of over Rs 7 lakh per annum attracts TCS at 5 per cent (10 per cent for investors without PAN). TCS can be claimed as a tax credit.
The foreign tax credit shall be allowed on both capital gains tax and dividend tax based on the Double Tax Avoidance Agreement (DTAA) with the respective country.
Caveats for Investing in Global markets
Maximum Limit: Investment by individuals under LRS is limited to $ 250,000 i.e. Rs 1.8 crore. (1$=Rs.72)
Risk of currency exchange: Even if the investor earns profit from the foreign stocks, fluctuation in exchange rates can affect their eventual results in rupees.
High transactional costs: International trading accounts are significantly more expensive to open and maintain than trading with Indian brokers. Further, apart from a variable broking fee, there could also be a fixed transaction fee which makes the overall transactional costs high for small-value trades.
Increased tax and regulatory compliance: All overseas investments and assets need to be specifically disclosed in tax returns. Further, compliance with RBI and respective disclosure to bankers under FEMA needs to be additionally done.
While the world is becoming more interconnected by the day, the movement of money has become seamless. Indian regulators have gradually opened up their strings and have made it easier for Indians to participate in global markets. With the right advice and clear understanding of risks, global investing offers a certain path to diversification, expanded participation in global prosperity, and minimising wealth concentration risk for Indian investors.
The author is Founder and Managing Partner, DVS Advisors
DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.
