When talking about stock market investment, our focus usually stays within the country’s leading stock exchanges—the NSE and the BSE—to invest in Indian companies’ stocks. However, you can broaden your investment diversification beyond the country’s boundaries to foreign markets like the US stock exchanges. How do you invest in those markets from India? What is the procedure? Let’s understand.
How to Invest in Share Market of Other Countries from India?
You can invest in foreign company stocks in two ways: indirectly and directly.
A] Direct Investment Route:
When it comes to direct investment, you have two options:
Global Trading Account with a Domestic Agent:
Many local brokers partner with foreign stockbrokers to help you with international trades. You can open an international trading account through one of these brokers, but you’ll likely need to provide some documents to get started. Depending on the broker, there may be limits on the types of investments you can make or how many trades you can do.
Overseas Trading Account with a Foreign Broker:
Another option is to open a trading account directly with an international broker like Charles Schwab or Interactive Brokers, which has a presence in India. Before opening the account, it’s important to understand the costs and terms involved. But remember that direct investment costs can be high due to brokerage fees and exchange rate charges. So, it’s essential to be aware of all the expenses before opening an account.
Open a Demat Account with IFSCA-licensed broker:
This third option is only valid if you want to invest in the US stock market. You can trade US stocks through the NSE IFSC, a National Stock Exchange (NSE) subsidiary. To begin, you’ll need to open a new demat account with an IFSCA-licensed broker. Right now, you can invest in 8 US stocks, including Meta Platforms (Facebook), Amazon, Alphabet (Google), Netflix, Apple, Tesla, Walmart, and Microsoft, through IFSC. The good news is that this list is expected to expand to 50 stocks soon.
Once you have your foreign trading account, you can shortlist your shares and send money to the broker directly through your Indian bank account. This remittance will be subject to applicable taxes and forex charges. And though the money is instantly debited, the transaction will take 3-5 business days to reflect in your account.
B] Indirect Investment Route:
If you wish to eliminate the broker from the picture when investing in foreign stocks, you can opt for the indirect route. This involves three options-
Through Mutual Funds:
International mutual funds offer opportunities for overseas investments. These funds often track indices from various countries in Asia or South America, but most commonly, they track the US market.
Through Exchange-Traded Funds (ETFs):
Unlike mutual funds, ETFs are traded on the stock market during trading hours. This means you can trade ETF units on the exchange just like you would with stocks. If you have a Demat account with any brokerage, you can trade ETFs. Many ETFs give you access to NASDAQ and other major international indices. You can purchase an ETF with international exposure through domestic or international brokers or go for an Indian ETF benchmarked against a global index.
Through Investment Apps:
Several start-ups have launched apps that help Indian investors access foreign stock markets. However, some of these apps may not allow intraday trading in markets outside India due to regulatory restrictions. So research the best apps available and choose the one that suits your investment needs to proceed with foreign investments.
So, you have multiple options for investing in foreign markets, but is there a limit on your investments?
How much can you invest in foreign markets?
When talking about remittance and investing in foreign markets, you need to be mindful of the LRS, Liberalized Remittance Scheme, set up by the RBI. According to this scheme, as an Indian resident, you can use up to $250,000 (approximately Rs.2.09 crore) per financial year (April to March) for permissible investments through the Overseas Portfolio Investment (OPI) and Overseas Direct Investment (ODI) routes. Other uses include private visits abroad, gifting, donations, supporting relatives, medical treatments, and education outside India.
Here, ODI refers to equity investments in unlisted foreign companies or in listed foreign companies where you hold 10% or more of the paid-up capital. On the other hand, OPI involves investments in foreign securities that are not considered ODI, meaning having less than 10% of the equity capital in a listed foreign company.
Taxes and Charges Involved in Overseas Investment:
Regarding the taxes and charges involved, the income from trading of foreign investment, when sold before and after one year, is taxed under short-term and long-term capital gains similar to other Indian investments. But the dividends are taxed differently.
When calculating the tax on US stocks in India, dividends earned are taxed at a flat rate of 25%. For example, if a company declares a $100 dividend, you’ll receive $75 after tax. This rate is lower due to the tax treaty between India and the USA.
In India, dividends, whether received as cash or reinvested, are added to your income and taxed according to your income tax slab. However, the DTAA (Double Taxation Avoidance Agreement) between India and the USA allows you to offset the tax withheld in the US against your Indian tax liability.
This principle applies not just to US stocks but also to investments in over 90 other countries with which India has a similar arrangement, including the UK, Canada, Australia, and the UAE. These agreements generally provide similar tax credits, ensuring you don’t pay tax twice on the same income. So, if you invest in stocks from other foreign markets, DTAA provisions allow you to offset the foreign tax paid against your Indian tax liability.
Summing Up:
Investing in foreign stocks gives your portfolio geographical diversification, thereby helping manage the risks of a concentrated portfolio. However, when investing in foreign stocks from India, it’s important to do your homework. Keep up with market trends and global events that might affect your investments, and be mindful of currency exchange rates, as they can influence the value of your returns when converting back to Indian Rupees. Lastly, stay disciplined. Avoid making decisions based on short-term market swings. Stick to your investment plan for long-term success and consult a registered financial advisor for a deeper understanding of concepts like overseas investment or ‘What is IPO?’.
FAQs:
- What documents do you need to open a trading account for overseas investing?
To open a trading account for foreign investments, you’ll need a government-issued ID, a local tax ID, and proof of address. For Indian investors, this means you’ll need your PAN and Aadhaar.
What do you mean by foreign stocks?
Foreign stocks refer to companies listed on stock exchanges outside your home country. For example, as an Indian investor, companies listed on exchanges outside India are considered foreign stocks. Similarly, if you’re in the US and looking at companies listed on the Bombay Stock Exchange or NSE, those are foreign stocks for you.