For many investors, the US stock market has emerged as a preferred destination. The reasons are multifold. The US has the world’s strongest capital market, with a market capitalization of over US$48 trillion and more than 6,000 listed companies.
Most of the global leading companies by market cap are listed on US stock exchanges. Since it is one of the world’s oldest stock markets, it is more mature, less volatile, and generates higher returns on a currency-adjusted basis.
Here’s how Indians can invest in US stock markets:
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At the outset, RBI’s Liberalised Remittance Scheme limits outward remittances (including investments in US stock markets) by Indian residents to US$ 250,000 per financial year. It is important to note that this limit is not exclusive to stock market investment but includes remittance abroad for all purposes such as travel, education, business, etc.
Broadly speaking, there are three ways in which Indian residents can invest in the US stock market.
First, they can make direct investments by opening an overseas trading account with a domestic or foreign broker.
Second, indirect investments can be done through mutual funds and exchange-traded funds (ETFs) listed on the US stock exchanges.
Third, US stocks can be bought through the International Financial Services Centre (IFSC) via the platform of the NSE International Exchange (NSE IFSC), a wholly-owned subsidiary of the National Stock Exchange of India (NSE). The India International Exchange (IFSC) Limited (India INX), BSE’s international arm, also allows the purchase of US stocks through its wholly-owned subsidiary, India INX Global Access IFSC Limited.
Before Indian residents can invest in the US stock market, they must possess some important credentials including proof of identification, proof of address, PAN and investor profile information such as income, net worth, and risk tolerance.
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To invest in US stocks, they must remit money to a regulated US broker overseas via an RBI-regulated bank. To open an account, the RBI-regulated bank conducts an online KYC and does due diligence (through documents like ITR and bank statements). Form A2 (LRS declaration) must also be submitted. On the basis of due diligence and anti-money laundering checks, the bank then approves the remittance. For opening a US brokerage account, the US broker conducts KYC, risk profile assessment and background checks on affiliations. It also requires the W-8BEN declaration (for non-resident alien (NRA) taxpayers).
For the latest updates on the US stock market, click here.
Lastly, but most importantly, investors must be mindful of the tax implications. Tax Collected on Source (TCS) is levied at 5% above the threshold of Rs 700,000. But the TCS deducted can be claimed as a refund at the time of filing ITR under form 26 AS.
Second, if a profit is made on the investment, it is taxed in India based on how long the stocks were held. If stocks are held for over 24 months or ETFs are held for over 36 months, a long term capital gains tax of 20% is imposed.
Otherwise, the profits are treated as normal income and taxed as per the applicable tax slabs.
Third, dividends on US stocks are taxed at source at 25%. A Double Taxation Avoidance Agreement (DTAA) between US and India allows taxpayers to offset income tax already paid in the US. The 25% tax already paid in the US is made available as Foreign Tax Credit and can be used to offset the income tax payable in India.
