Thinking of investing in US stocks such as Amazon, Tesla, Google from India?
Investing in US stocks is lucrative. Having some investments in international stocks can help diversify your portfolio. Dividends and profits are better and bigger.
But before making a move, investors need to have awareness of tax implications, investment process, remedies available against fraud, and some of the common challenges faced by Indian investors.
Who can invest in US stocks from India?
Anyone in India, with proper ID proof (Aadhaar/Passport, etc) and a PAN card can invest in the US stock market.
Is investing in US stocks from India legal and how much money can be invested?
Yes, it is completely legal as per the Liberalised Remittance Scheme (LRS) scheme of RBI (https://m.rbi.org.in/Scripts/FAQView.aspx?Id=115).
Under the Liberalised Remittance Scheme (LRS), the Reserve Bank of India (RBI) allows an Indian resident to invest up to USD $250,000 per year in overseas stock markets.
Under this scheme, the Reserve Bank of India (RBI) allows an Indian resident to invest up to USD $250,000 per year in overseas stock markets.
Can NRIs invest in US stocks?
Yes, any non-US resident NRI can invest in US stocks. He needs to have proper KYC documents like ID proof and tax documents from the country of the residence.
How to start investing in US stocks from India?
There are 4 key steps to invest in American Stocks:
1. Onboarding: The investor undergoes a KYC process to open a US brokerage account. Verification usually requires his or her PAN number, PAN card scan, and a proof of address.
2. Remit USD: Once the account is opened, the investor needs to fund his or her account with USD in order to invest. This process involves following the RBI’s Liberalised Remittance Scheme (https://m.rbi.org.in/Scripts/FAQView.aspx?Id=115) guidelines and remitting USD via their bank account.
3. Buy/sell shares: Once the account is funded, the investor can start investing in US-listed stocks and ETFs.
4. Withdraw to INR: Investors can choose to hold cash in their account or if they want to bring the funds back to India, they can choose to withdraw into their India bank account.
What are the alternatives?
Alternative 1 – Through foreign brokerages having a direct presence in India
Some foreign brokerages have a direct presence in India, including Interactive Brokers LLC, a US-based brokerage. Similarly, a US Securities and Exchange Commission (SEC) registered investment advisor, Vested Finance, offers stocks, exchange-traded funds (ETFs), and custom-made portfolios (called “vests”) to Indian investors. It has a tie-up with US SEC-registered broker Drivewealth.
Vested Finance: Vested Finance a commission-free US stock investing platform for Indians. It is an SEC-registered investment advisor. They have lowered barriers for Indian investors to invest in the US stock market by offering – paperless KYC, fractional shares, commission-free trades, and pre-built portfolios called Vests.
Brokerage: Vested lists zero commissions for trades, but it does charge a $3 upfront fee and 0.00417% for amounts invested in “vests”.
Similarly, a number of large Indian brokerages have tie-ups with foreign brokers to facilitate investment in foreign stocks. An account for foreign stocks can be opened through them.
For example, HDFC Securities Ltd has a tie-up with Stockal, a New-York headquartered global investment platform.
Stockal: They have different brokerage structures. They either charge $5.99 per trade and no subscription fees or a much lower amount per trade and annual subscription fees.
Interactive Brokers LLC: It charges 0.005% per share for US stocks and ETFs. It charges a minimum of $1 per trade and a maximum of 1% of the trade value. It does not charge anything for specific ETFs, as per its website.
Alternative 2 – Through Mutual Funds
If you don’t want to invest in another third party app and still want to invest in US stocks, you can do so through mutual funds. If you’re an Indian resident and already have invested in mutual funds, then buying those stocks that have US stocks is a good idea.
Some of the popular American equity mutual funds are (as of 2020 April):
- Reliance US Equity Opportunities Fund
- ICICI Prudential US Bluechip
- Parag Parikh Long Term Equity Fund and many more…
Alternative 3 – Through Indian Banks
Indian investors can invest in US stocks through Indian banks too.
For example, ICICI bank has a tie-up with US bank Saxo and through their trading platform, Indian residents can invest in non-Indian stocks.
It’s not a very popular method though, possibly inefficient with high rates. There is an account opening fee of ₹1500. The brokerage charges turn out to be $.02/per share or $15 whichever is minimum. Moreover, the minimum transaction value has to be $50.
Alternative 4 – Through American Depository Receipts (ADRs)
American Depository Receipt is a receipt issued by a bank located in the United States of America.
ADRs are traded just like stocks so they can be purchased over the stock exchange. This receipt has a certain number of underlying shares. These shares are issued by public companies in India that trade on the stock exchanges in India.
The company deposits a fixed number of shares with the Bank and the Bank acts as a depository for these shares. The Bank issues receipts against these shares and these receipts are traded on the stock exchanges in the US.
Investors can buy these receipts if they are interested in buying shares of that company.
What is the holding method of these shares?
The holding method of US brokerages may be different from the practice in India. In India, the stocks you invest in are held in your own name in a Demat account. In the US, on the other hand, they are held by a third-party custodian in the name of the broker.
What are the Tax Implications?
Indians investors investing in US stocks can face two types of taxation events:
1. Taxes on investment gains:
Indian investors will be taxed in India for this gain. They will not be taxed in the US. The tax amount they have to pay in India depends on how long they have held the investment.
24 months is the long-term capital gain threshold and the tax rate is 20% with indexation benefit. If it’s less than 24 months, it’s short-term capital gain and is taxed according to the income tax slab.
According to the new tax reform, all the capital gains that are more than Rs.1 lakh in the amount will be charged at 10% tax rate without any inflation indexation benefit. However, the gains made on and before 31st January 2018 will be exempted from this new rule.
2. Taxes on Dividends:
Unlike investment gains, dividends are taxed in the US at a flat rate of 25%. Fortunately, the US and India have a Double Taxation Avoidance Agreement (DTAA), which allows taxpayers to offset income tax already paid in the US. The 25% tax paid in the US is made available as Foreign Tax Credit and can be used to offset income tax payable in India.
Moreover, remember to disclose the value of your foreign assets and income each year in Schedule FA of your income tax return.
What kind of Indian investors should invest in US stocks?
- Investors with a long-term mindset are best suited to invest in the US stock market
- Investors who are looking for additional asset class and diversification for their portfolio
- Investors who are looking to hedge INR against USD
- Investors who are looking to invest in disruptive new-age technology companies:
What are the risks involved for Indian investors who are planning to invest in US-listed stocks?
Apart from general market-related risks, the key additional risk that Indian investors are exposed to is currency risk.
Since the investments are in USD, this requires converting funds from INR to USD and back to INR when bringing them back.
Additionally, since this is a new market for most investors, there is the possibility of an investor taking an additional risk than they should be taking given their age, income, portfolio size, etc.
There is a wide range of investment products available in the US market and investors should only invest in the products that are suited to their risk capacity. Further, under FEMA laws leverage and investing in speculative products (derivatives) are not allowed, so one should refrain from that.
- Investors should make sure to invest through regulated entities only.
- Investors should make sure whether the broker is registered with the SIPC or the Securities Investor Protection Corporation. This organization ensures investor’s brokerage accounts up to $500,000. So, in case anything happens to the broker, the funds are protected.
Remedies available to Indian Investors
Some of the remedies that are available to Indian investors in case they face some fraud while investing in the US-listed stocks are:
- An investor should ensure that the platforms or companies they are investing through are regulated by the SEC (US version of SEBI). The platforms could have a license as an Investment Advisor or as a Broker. For example, Vested Finance is an SEC-registered Investment Advisor and in turn, works with a broker called Drivewealth.
- Each brokerage account in the US is usually insured up to $500,000 by the Securities Investor Protection Corporation.
- The Securities Investor Protection Corporation in the US has outlined multiple things one (even international investors) can do to protect from fraud which can be accessed from their official website.
Cover Image: TradeBrains