US stock

In this article, Abhijeet Singh discusses how can Indians invest in US Stocks and Securities.

Can Indian Individuals invest in US Stocks and Securities?

Yes. Let’s find out how…

In 2004, the Reserve Bank of India introduced the Liberalised Remittance Scheme (LRS) to facilitate current and capital account transactions for individuals. Capital account transaction includes transferring or issuing of any foreign security by a person resident in India(section 6(3), Foreign Exchange Management Act, 1999). The current limit per resident individual per financial year is capped at $2,50,000 which subsumes private visits, gifts and education expenses. Although, exceptions are provided in cases of medical treatment. The permissible capital transactions includes a provision of making investments abroad vide section 6(iii) of the LRS. Acquisition and holding of both listed and unlisted shares, mutual funds, qualification shares, unrated debt securities, shares issued as remuneration for services rendered are all permitted under this scheme. Infact, reinvestment of the income earned on investment is allowed for (section 16, LRS).

Indian individuals can take these 2 routes to invest in the US Stock and Securities

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). Incase you do not have a demat account you can approach an Asset Management Company (AMC) to directly purchase a mutual fund of your choice, on paper without the need of a demat account.

OR   

Open a demat A/C with any Indian brokerage house which has a tie-up 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)

If you simply wish to invest in a Global Mutual Fund or an ETF you need not bother yourself with the LRS or FEMA. These regulations will not apply to you in this case, if you are taking the first option. However, if you want your own portfolio 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 (read more on this here), then considering the second option will be worth you time and money.    

(Note: I personally recommend using ICICI Securities as a broker as it is one of the leading brokerage houses in India. It also has a tie up with a US brokerage firm which enables its customers to trade in foreign equities. It also seamlessly integrates its banking facilities with its demat services and it is an Authorized Dealer Category I bank which makes the whole process a lot more easier. There are other players in the market offering similar facilities, feel free to choose and see which one suits your needs the best.)

Steps to follow for creating your own foreign equity portfolio

  1. Open a demat account with your broker in India (who has a tie-up with a US brokerage house) or with a broker in the United States.
  2. 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.
  3. Voilà! Get ready to be the wolf of wall street…

Now before you go on to take your quaaludes*, keep in mind the following tax liabilities and rules for trading in foreign security.

https://lawsikho.com/course/diploma-entrepreneurship-administration-business-laws

Taxes

Income from sale of foreign securities is taxable in India.

Sale of shares by an Indian Individual, amounts to “[t]ransfer” 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.”

EXCEPTION

Holding domestic equities for over a year falls under long term capital gains and for domestic equities there is no tax levied on it while short term capital gains attract tax. However, holding foreign equity for long term will not entitle you to such benefits. It is liable to be taxed.

Taxes on dividends

Section 5 of the IT Act, 1961 provides a “[s]cope 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.”

Thus, dividends are liable to be taxed whether foreign or domestic. The earlier position under the IT Act, exempted profits earned from dividend pay-outs from any kind of taxes(section 10(34), IT Act). Now this section has been amended and dividends exceeding 10 lakhs will be be taxed at a rate of 10 percent u/s section 10(34) and 115BBDA of the IT Act.

EXCEPTION

The aforementioned exception provided for dividend pay-outs from domestic securities is not extended to the foreign securities. Therefore, 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?

No, thanks to the Double Taxation Avoidance Treaty between the two countries. The US-INDIA GTAA allows the tax on dividend to be deducted at source. In your case, if you’re investing in a US Security, you will have to pay between 15 to 25 percent tax at the source, i.e., in the United States of America.

Should you worry?

No. You are eligible for Tax Credits in India. Consult your Chartered Accountant for the same before filing your taxes. (For more information click here.)

Short selling US securities

Brokerage houses need what is called a margin account to be setup for an investor to enable short selling of stocks. 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 to set up margin calls. Thereby preventing short selling of foreign equity.  

Seems you can’t short Steve Madden like Wolfie after all!

[*DISCLAIMER: quaaludes” is given as one of the references to the movie, ‘The Wolf of Wall Street’ throughout this article, the author does not, in any manner whatsoever, intend to promote, support or encourage the use of any narcotic substances or scheduled drugs banned by the Ministry of Health and Family Welfare in India under the Narcotic Drugs and Psychotropic Substances Act, 1985.]  

 

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3 COMMENTS

  1. Remember margin trading and short selling will not be allowed with a foreign broker. You can buy shares if you have sufficient funds. You will receive contract notes for executed trade in your inbox. Thanks for sharing a great article.

  2. This is all good but isn’t ICICI costs more in Brokerage Fees?
    I want to inquire a possible TRADING PLATFORM that doesn’t charges so much. Please requesting for specifics and details.
    Plus you haven’t mentioned the cost details for opening in ICICI or why you should considering the company going through a bad reputation for SCAMS how are you safe in opening your account there?
    Once more, please be honest and try not to promote one service over the other.

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