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Investing in shares outside India through various means, but first we need to understand the process and regulatory requirements. There are some steps for investing the shares in international shares.
Indian investors are looking beyond domestic markets to diversify their portfolios and growth opportunities.
To invest in shares listed on a foreign exchange, first we need to open an account with an international brokerage or can pay to an Indian brokerage that provides access to the global market.
Once you choose a broker, then you need to open a trading and demat account. Some Indian brokers also provide a dedicated NRE/NRO trading account for international investing. These accounts allow you to trade on foreign exchanges such as the NYSE, NASDAQ, LSE, etc.
Before investing in international shares, first we need to complete the KYC documentation, like proof of identity and address. Then there are some additional forms that have to be submitted, like the W-8BEN form, for US markets to comply with foreign tax regulations. The W-8BEN is an important form for any non-US taxpayer who has earned interest in the US over a calendar year.
Through bank transfers, you can transfer funds from an Indian bank to an international trading account. Depending on the platform for investing shares by way of wire transfer or in respect of money transfer service like transfer wise.
Currency conversation: If trading account is in different currency, then first we need to convert currency INR into specific currency.
Once accounts have been set up and funded in relevant currency, you can start buying shares in foreign markets and place an order through the broker platform. You can then choose the stock, quantity, and price.
There are some specific implications for investing shares in foreign markets that have to be followed by the Indian residents.
Capital Gain Tax: Any gain that has arisen through selling shares in international markets is subject to capital gain tax, whether it can be short-term capital gain or long-term capital gain.
Short-Term Capital Gains: Tax rate is 15% (if sold within 24 months).
Long-Term Capital Gains: Taxed at 10% (if held for more than 24 months)
Filling of tax in India: we need to report foreign income and gains before filling income tax return. If we have tax paid abroad (without holding tax on dividends), then we can claim relief under the DTTA (Double Taxation Avoidance Agreement).
ETFs trade through online brokers and traditional broker dealers. It is an indirect method of international investment. ETFs are issued by Indian fund houses, which ensures the investors that can invest in these funds without the need of special accounts. This simplifies the taxation and the problems of currency conversion.
A single investment amount is invested in multiple mutual fund schemes that allow investors to maximize returns, and investors can also get benefits of portfolio diversification with a single investment.
This scheme provides very convenient international investment options for retail investors in international mutual funds. You can easily set up Systematic Investment Plan (SIP) investments in these schemes and create a healthy, divergent investment portfolio over a long investment horizon. These schemes are very safe and less volatile compared to individual stock purchases, as these funds are managed by market experts. You can easily invest in international mutual fund schemes on the Sharekhan platform.
As an investor, what if you don’t want to invest in foreign companies through foreign stock exchanges? If you want to invest in the Indian stock exchange, but those are the foreign stocks, so there are two stock exchanges: the first is the National Stock Exchange, and the second is the Bombay Stock Exchange. Well, Indian Depository Receipts are a great way for investors to do exactly that. IDRs allow foreign companies to raise capital from Indian investors without listing their stocks on the domestic stock exchange. As a retail investor, you can invest in an IDR and purchase foreign company stocks without needing to convert currency. However, it should be noted that foreign companies need to issue IDRs before you can invest in them, so they are not available at all times.
Similar to the way IDRs have been described above, GDRs enables the companies to access capital from foreign investors and without necessarily have their stocks trading on the domestic stock market of that country. For instance, this auto giant floated seven million GDRs in 2018 in the Luxembourg stock exchange. The company floated GDRs worth $ 124.5 million without making Tata Motors list their stocks on the domestic stock exchange. Since Tata Motors is an Indian company, one does not have to purchase GDRs of the car manufacturing giant. However, you can purchase the GDR of other international company in the Foreign Market through the online investment sites such as Sharekhan.
ADRs are generally floated in the US by the firms’ depository banks that hold a share of the international firm. This makes it possible for American investors to venture in foreign markets without having to struggle with trying to learn about the foreign Exchanges and currencies. They take pride in the fact that even an Indian can buy an ADR with an online investment firm such as Sharekhan.
Tax Collected at Sources: A 5% TCS (Tax Collected at Source) is levied on all remittances above Rs 7 lakh under the RBI’s Liberalized Remittance Scheme (LRS). This is applicable to the amount above Rs 7 lakh and not the total amount.
The TCS can be claimed as a refund when the taxpayer files an income tax return.
Capital Gains and Dividend Tax: In the US, dividends are taxed at a rate of 25% for Indian citizens. Owing to the Double Tax Avoidance Agreement (DTAA), the investor can claim credit for taxes paid abroad so that he/she doesn’t have to pay tax on the same income twice.
There is no capital gains tax on your investments in the US. But you are liable to pay tax on the capital gains in India.
Bank charges: Most banks charge foreign exchange conversion fees and transfer fees. There may also be a one-time account setup charge.
Brokerage Fees: Brokerages charge a fee on the buying and selling of shares.
Foreign Exchange Rate: The foreign exchange rate at the time of purchase or withdrawal can impact the costs and the number of units allotted.
To invest in shares outside India, you need to open a trading account with an international broker or one that offers global market access, fund the account in foreign currency, and follow the tax and regulatory requirements. It’s also recommended to stay updated on the tax implications of international investments and keep track of your overseas earnings.
DISCLAIMER: The information provided in this article is intended for general informational purposes only and is based on the latest guidelines and regulations. While we strive to ensure the accuracy and completeness of the information, it may not reflect the most current legal or regulatory changes. Taxpayers are advised to consult with a qualified tax professional or you may contact to our tax advisor team through call +91-9871990777 or info@semantictaxgen.in