Understanding Regulations to Invest in US/Foreign stocks for Indians: Owning foreign shares like Tesla, Apple, Amazon, etc has been made so simple that Indian investors can now do it with the click of a mouse. All one has to do now is find a good international broker to create an account by providing details such as name, email, and mobile number to start.
This is followed by providing documentation like PAN card and address proof. The brokers take care of paper-work, authorizations from banks, getting the RBI clearances being, and opening an account. Almost seems like investing in Indian markets!
With the process now being seamless, it is easy for investors to get carried away. At times lose track of the guidelines set for investing abroad. So let us find out and understand better the guidelines that govern investing abroad. Here, we’ll look into the Regulations to Invest in the US or foreign stocks for Indians. Let’s get started.
Regulations to Invest in US or Foreign stocks
Transferring money abroad used to be complex with a lot of approvals required. The advent of globalization simplified the process with the introduction of the Liberalised Remittance Scheme (“LRS”) in 2004.
RBI’s Liberalised Remittance Scheme (LRS) allows Resident Individuals in India to acquire foreign securities without prior approval. They can freely remit money out of India, up to the given threshold, with the help of authorized dealers and Indian banks. The threshold is currently set at $250,000 for one financial year (April to March). At the current rate (73.59) this amounts to Rs. 1.83 crore. Individuals here have to watch out for forex changes.
Current and Capital Account Transaction
It is important to understand all transactions involved in LRS other than stock market investments. This is because they too affect the remittance ability of an individual. This $250,000 is permissible for current or capital account transaction or a combination of both. The current account transaction can include gifts, donations, emigration, medical treatment, business travel, private visits to any country (except Bhutan and Nepal). The Capital account transaction include the following:-
- Making investments abroad ( Debt instruments, shares, etc.)
- Purchasing property abroad.
- Buying objects of art.
- Extending loans including loans in INR to NRI/PIO close relatives.
- Setting up of wholly-owned subsidiaries and joint ventures outside India for bonafide business.
- Repayment of loan acquired when you were a non-resident etc.
The LRS restricts buying and selling of foreign exchange abroad, or purchase of lottery tickets or sweepstakes, proscribed magazines, etc. An individual is also restricted from investing in a country that has been identified by the Financial Action Task Force as “non-co-operative countries and territories”.
Once a remittance is made for an amount up to USD 2,50,000 during the financial year, a resident individual would not be eligible to make any further remittances under this scheme. This is even if the proceeds have been brought back into the country. The individual however can send money as many occasions as he wants. This is as long as the $250,000 cap is maintained. It is not necessary that the remittances have to be made only in US dollars, they can be made in any freely convertible currency.
In the case of investment in shares, debt instruments, and mutual funds it is not necessary that the interest or dividend earned have to be remitted back. They can be reinvested or retained or used to meet any expenses abroad. The investment and their profits too can be reinvested without being brought back to India.
Which individuals are considered as resident individuals?
Any individual that satisfies one of the following 2 conditions would qualify as a resident of India:
- Stayed in India 182 days or more in a year or
- Stayed in India for 365 days or more for the immediate 4 preceding years and 60 days or more in the relevant financial year.
How are taxes affected in India for income earned abroad?
According to income tax rules, the income earned anywhere in the world is taxable in India for you. However, if taxes have already been deducted at source abroad. Then the individual can make use of the Double Taxation Avoidance Agreement (DTAA) where the income was earned. According to this if the taxes have already paid in the country abroad, as long as that country has a DTAA with India the individual will not be required to pay tax on the income once again.
What are the exceptions to the LRS cap?
If the $250,000 cap is reached one may still remit more funds if it takes prior approval from the Reserve Bank. The exception also includes medical treatment where one can still remit more than USD 250,000 without approval from RBI.
This is if one can produce certain documents. In the case of education undertaken abroad too may be allowed without prior approval from the Reserve Bank. This is because students are considered NRIs from day one (of moving abroad for studies).
|Date||Feb 4, 2004||Dec 20, 2006||May 8, 2007||Sep 26, 2007||Aug 14, 2013||Jun 3, 2014||May 26, 2015
|LRS limit (USD)||25,000||50,000||1,00,000||2,00,000||75,000||1,25,000||2,50,000
Despite liberalizing the economy it is important for a country like India to practice control on foreign exchange movements in and out of the country. India already spends much more on foreign exchange than we earn. The RBI keeps an eye and adjusts the cap accordingly.
The table above shows the limits adjusted by the RBI throughout the years, A situation where unlimited remittances are allowed would ruin the exchange rates of the country. This makes LRS all the more important to be implemented.
That’s all for today’s article on regulations to Invest in US or abroad. Hope it was useful to you. Please comment below what you think of these regulations to Invest in US and other foreign stocks. Happy Investing!
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
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Hey Kritesh, how can i invest in “ARK Innovation ETF (NYSE: ARKK)”. Is there any international mutual fund is available? I did my research, i didn’t find any.
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