How to invest in US stocks from India?

One certainly must have heard about the companies listed in America and thought about investing in them to be a part of their growth story. Looking at how Apple, Google, Microsoft, Amazon, and multiple other companies have turned out to be multi-baggers makes people want to take chances on companies which may follow a similar trajectory in the future. Some Indian citizens also look out to diversify their portfolios internationally, and in this article, we will talk about how to invest in US stocks from India.

There exist two different ways for an Indian citizen to invest in the US markets, one is through direct investments in the form of stocks using a stock trading app, and the other is through indirect investments like mutual funds and ETFs. Let’s take a detailed look at these two methods.

Direct investments in the US markets

Under the category of direct investments, one can open an overseas trading account with a domestic broker which has a tie-up with stockbrokers in the US, or an overseas trading account with a foreign broker which has a presence in India. In the former, the domestic brokers have tie-ups with brokers in the US and act as intermediaries in executing one’s trades. One should keep in mind that on the basis of brokerage firms, one may face restrictions when it comes to the number of trades which can be made or restrictions in investing in certain investment vehicles.

As you know, the price of a few stocks becomes too much if you convert them in Indian rupee and many investors can’t afford even one share. To avoid this problem, one can also buy a fractional share in the US market. A fractional share is a slice of a whole stock and can be traded like a full stock.

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Indirect investments in the US markets

Firstly, let’s understand about the mutual fund route. There exist two kinds of mutual funds who make investments in overseas markets. One being fund of funds, which are local mutual funds which make investments in international mutual funds, and the other being local mutual funds which make investments in international stocks. The expense ratio of mutual funds that invest in international funds also tends to be higher. For fund of funds, apart from the management fee for the Indian fund, there is also a management fee for the underlying international fund.

Let’s now come to ETFs. ETFs, which stand for Exchange Traded Funds, are similar to mutual funds, as they essentially are a collection of multiple stocks which are traded under one fund, but unlike a mutual fund, ETFs are traded on exchanges with real-time pricing, similar to how stocks are traded. ETFs can also let one get some exposure on certain sectors by investing in an ETF which tracks a particular sector, like healthcare or energy.

One should keep in mind that there would be some regulatory hurdles through a mutual fund route. According to the mandate given by the Reserve Bank of India, all Indian mutual funds registered with the Securities and Exchange Board of India (SEBI) are permitted to invest in international markets up to a limit of $7 billion, and investments in international ETFs have a limit of $1 billion. In Jan, 2022, the investments made internationally by these entities has almost reached the $7 billion mark, so any fresh investments in international stocks have been paused.

One also needs to keep in mind the guidelines released by the RBI under the Liberalised Remittance Scheme (LRS) which permits an Indian resident to invest up to $250,000 per year without any special permissions.

Tax and charges on investment in US stocks

Let us now talk about the different kinds of charges which one will encounter while investing in US stocks.

Starting with Tax Collected at Source, or TCS, a 5% TCS is levied on the aggregate remittances above Rs. 7 lakhs in a year under the Liberalised Remittance Scheme about which we talked a while before.

Then there is brokerage fee which is charged on the buying and selling of shares, bank charges which include foreign currency conversion fees, transfer fees and maybe even a one time account set-up charge. The foreign exchange rate at the time of purchase or withdrawal may also impact costs.

Other than these, there also exist capital gains and dividend tax. In the US, dividends are taxed at a rate of 25% for Indian citizens. Also, due to the Double Tax Avoidance Agreement (DTAA), investors get to claim credit for taxes paid abroad so that they don’t have to pay taxes on the same income twice. There exists no capital gains tax in the US, but one is liable to pay taxes on the capital gains in India. If you hold the stocks for more than 2 years, it will be qualified for long term capital gains and taxed at 20% with indexation. If it is sold before two years, it will be treated as short term capital gain and will be added to the individual’s income and taxed as per the slab. The exemption of Rs. 1 lakh per year available for long term capital gain on stocks is not applicable for foreign stocks.

Recent developments

Let’s now come to a recent and a rather interesting occurrence pertaining to international investments. Indian retail investors can now trade select US stocks through NSE IFSC, which stands for NSE International Financial Services Centre. It is a wholly-owned subsidiary of the National Stock Exchange, NSE. The international exchange operates in the Gujarat International Finance Tech City, or the GIFT city. Presently, investors will be able to trade in 50 US stocks. Investors will be able to trade these stocks in the form of Unsponsored Depository Receipts.

It also allows investors to trade in fractional quantities while being entitled to receive corporate action benefits pertaining to the underlying stocks.

The settlement cycle of T + 3 days will be followed, meaning that the stocks or depository receipts bought will be credited after 3 days into the demat account and the funds from the stocks sold will be credited after 3 days.

Conclusion

To conclude, we can say that various method of investing in the US stock market holds the potential to open up international diversification opportunities for Indian retail investors.

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