Recently NSE-owned IFSC has been permitted to offer trading in securities in any currency other than the Indian rupee. Hence, it will give an exposure to the individual to foreign securities which was not available earlier. So, let’s discuss what is this new investment avenue and how will the same will be taxed.
Investing Avenues in Foreign (US) Stocks:
1) Mutual Funds:
- An investor can choose a foreign mutual fund or an Indian Mutual Fund which invests in foreign stocks
2) Investment via Liberalized Remittance Scheme (LRS) Limit & Direct Investment:
- An Individual can open an Overseas Trading Account with Indian Broker or by directly Approaching a Foreign Broker.
- Portfolio Investment in overseas stock up to $2,50,000 per financial year is allowed where TCS Applicable @ 5% when the amount exceeds Rs 7 Lakhs in a year.
3) New Age Apps:
- Many fintech startups have launched mobile applications, which simplify the investment procedure and assist Indian investors to invest in stocks listed in foreign stocks.
4) Investing in Foreign Stocks listed on GIFT City IFSC:
- NSE IFSC & INX will provide an international trading platform for Indian investors to invest in the international stocks
- NSE-IFSC is India’s first International Financial Service Centre which is located in Gujarat’s Gift City.
Investing Through IFSC Gift City:
- The National Stock Exchange's (NSE) International Financial Services Centre (IFSC) platform in Gujarat's GIFT City has started trading in eight US stocks from March 3.
- NSE IFSC has received approval to trade receipts of 50 US-based stocks Initially, the exchange will start trading in Alphabet Inc, Amazon Inc, Tesla Inc, Meta, Microsoft, Netflix, Apple, and Walmart and eventually, the 50 largest US companies will be listed.
- This does not mean the US stocks will list in India. Market makers will rather buy scrip in the US and issue the unsponsored depositary receipts against them called NSE IFSC Receipt, NSE circular said. GIFT City, the IFSC Authority will be the sole regulator for this.
- NSE IFSC Receipt is a negotiable financial instrument like an unsponsored ‘depository receipt’, which means it is a derivative product. Investors are also provided with an option to trade in fractional quantities here.
- A person resident outside India, Non-resident Indians, and Individual residents in India who are eligible to invest to funds offshore under FEMA to the extent of liberalized Remittance Scheme are allowed to invest under this route. However, US & Canadian citizens are not allowed.LRS is not available to corporates, partnership firms, HUF
- For buying in these stocks retail investors can transact on the IFSC platform under the liberalized remittance scheme (LRS) limits prescribed by the Reserve Bank of India (RBI), which currently stands at $2,50,000 (~Rs. 1.3-1.4 Cr.) each financial year.
- HDFC Bank's IFSC Banking Unit in the GIFT City (HDFC Bank-IBU) in its role of NSE IFSC Receipts Custodian to this newly launched UDR programme will issue the NSE IFSC Receipts. The bank will undertake related activities besides opening the depositary accounts of investors as a depository participants registered with IFSCA registered depositaries.
- The trading will start at 8:30 PM on day one to 2:30 PM the next day. Trading in US stock receipts will be conducted over beginning 20:00 PM on day one and extending up to 2.30 pm the next day. Such a trading cycle will be considered one single business day
- Unlike the domestic market, where individuals’ money gets fully invested straightaway, various charges get deducted in the case of international investing. The charges will be deducted under various heads such as broking, remittance and forex charges. These charges vary from broker to broker.
- An individual will also be charged at the time of withdrawing money from your account, which could be as high as $10-$20. Then there are also forex inward charges at the time of withdrawal.
Steps For Registering a Demat Account with NSE IFSC:
Step 1: To invest in the international stock market, you must first open a trading account with a brokerage firm that offers abroad trading services. There are only a few well-known brokerage firms that offer foreign trading services. Investors already having a Demat account with these registered brokers have to perform the succeeding steps.
Step 2: Once you have the Demat account, you will need to fulfil all Indian KYC (know your customer) norms and compulsorily submit a declaration in the US W-8BEN/ W-8BENE form with NSE IFSC. This form is called the Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting.
Step 3: The underlying currency for all the 50 stocks, which are to be traded on the NSE IFSC, is the US dollar. So either you need to open a foreign currency bank account (FCA) with a bank that operates in the IFSC region, or you need to remit the money to your IFSC-based broker. If you choose the second option, then you also need to make sure that your bank is an Authorised Dealer-Category 1 bank and fill up the Liberalized Remittance Scheme (LRS) form as classified by the Reserve Bank of India (RBI). There are a total of 84 banks who are in the Authorised Dealer-Category 1.
Step 4: Under the Liberalised Remittance Scheme (LRS), the Indian government and the Reserve Bank of India (RBI) now require an LRS Declaration form (fully titled “A2 cum LRS Declaration”). Fill Form A2 (That is available with your broker) & Sign a declaration form under the Foreign Exchange Management Act (FEMA). Valid Identity Proof & Purpose Code is to be filled in form A2 along with other details.
Taxations of Indian Stock Market:
- Tax rates above are excluding the applicable surcharge and cess. The surcharge is levied on income tax at rates ranging from nil to 37% depending on the income slab. Cess is levied at 4% of the income tax and surcharge amount in all the cases.
- In the Indian stock market context, if the securities are held for more than 12 months then it is considered as Long Term Capital Gain (LTCG) and the tax rate applicable is 10% without indexation.
- Similarly, If the securities are held for less than 12 months then it is considered as Short Term Capital Gain (STCG) and the tax rate applicable is 15% without indexation.
- The dividend is taxable based on the slab rate.
Taxation of US Equity Shares:
- Tax rates above are excluding the applicable surcharge and cess. The surcharge is levied on income tax at rates ranging from nil to 37% depending on the income slab. Cess is levied at 4% of the income tax and surcharge amount in all the cases.
- In the case of US Stocks, the taxation is similar to Unlisted Indian Company Shares.
- If the securities are held for more than 24 months then it is considered as Long Term Capital Gain (LTCG) and the tax rate applicable is 20% with indexation.
- Similarly, if the securities are held for less than 24 months then it is considered as Short Term Capital Gain (STCG) and will be taxed on slab rate.
- The dividend is taxable based on the Slab Rate (Withholding Tax @25% applicable in US & credit of same is available in India. Depository Charges shall also be deducted before payment of dividend)
Taxation of Foreign Mutual Funds:
- Tax rates above are excluding the applicable surcharge and cess. The surcharge is levied on income tax at rates ranging from nil to 37% depending on the income slab. Cess is levied at 4% of the income tax and surcharge amount in all the cases.
- In the case of Foreign Mutual Funds, the taxation is similar to Indian Mutual Funds.
- If the securities are held for more than 36 months then it is considered as Long Term Capital Gain (LTCG) and the tax rate applicable is 20% with indexation.
- Similarly, if the securities are held for less than 36 months then it is considered as Short Term Capital Gain (STCG) and will be taxed on slab rate.
- The dividend is taxable based on the Slab Rate.
Disclosure of Foreign Assets in ITR:
- A Tax Resident in India is required to disclose all foreign assets & income in their income tax return.
- The tax resident in India has to compulsorily declare his assets in ITR irrespective of the fact that resident has earned income from that foreign asset or the resident is holding that asset as of 31st March of the Financial Year
- Also, note that filing of income tax return is mandatory for those who own foreign assets even if their total income from all sources is below the minimum exemption limit of Rs 2.5 lakh.
- These include assets that may have been held by a beneficial owner. Taxpayers who have foreign assets cannot file their returns using ITR-1. The details can only be reported in ITR-2 or ITR-3.
- Following “The Black Money (Undisclosed Foreign Income and Assets) And Imposition of Tax Act, 2015 (‘BMA’)”, if a foreign asset acquired is not disclosed in the Schedule FA in the past, such non-disclosure of the same in Indian tax return may trigger a penalty of Rs. 10 lakh.
What Should Investors Do?
Investing in foreign stocks is a great opportunity for Indian investors. But one needs to be cautious here as there are certain factors one need to be taken care of like high brokerage cost, etc. and should also evaluate the other options available for investing in foreign securities.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.
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