Investing in the US stock market is one of the best ways to diversify your portfolio and minimise risk. Additionally, you also get the chance to invest in some of the best technology companies in the world like Apple, Amazon, Microsoft, Meta and Alphabet, among others.
Although the US stock market shares a lot of similarities with its Indian counterpart, there are several things that you need to know before investing in it. In this article, we’re going to take a look at a few of the crucial things that you need to keep in mind. Let’s begin.
Things to Know Before Investing in US Stocks
There are a few rules and regulations such as the Reserve Bank of India’s Liberalised Remittance Scheme (LRS), foreign exchange and taxation that you need to know before you invest in US stocks. Here’s a detailed overview of each of these concepts.
- Liberalised Remittance Scheme (LRS)
The Foreign Exchange Management Act, also known as FEMA, was enacted in 1999 to regulate foreign exchange payments. The Liberalised Remittance Scheme (LRS) is a part of this act.
The LRS lays down guidelines that resident Indians are required to adhere to in case of remittance of funds from India to other countries in foreign exchange. According to this scheme, all resident Indians are only allowed to remit a maximum of $250,000 outside India each financial year without the approval of the Reserve Bank of India. However, individuals desirous of remitting more funds abroad in a financial year may continue to do so, but only with the express approval from the RBI.
The maximum remittance limit under the LRS includes foreign stock market investments, real estate investments, bank deposits and even expenses you incur abroad such as travel and education expenses.
Therefore, if you’re planning on investing in the US stock market, the maximum that you can freely invest during a financial year is restricted to $250,000 (or roughly ₹2.07 crores).
- Foreign Exchange
Investing in the US stock market involves the conversion of your investment capital, which is likely to be in Indian Rupees, to US Dollars. This makes the USD-INR foreign exchange rate one of the most important factors you need to consider.
Of late, the Indian Rupee has been depreciating, leading to a high USD-INR conversion rate. This can be disadvantageous to you as an investor since the foreign exchange conversion would result in a lower USD value. On the other hand, an appreciating Indian Rupee vis-a-vis the US Dollar is favourable since it can boost your portfolio value and enhance the returns that you get from your investment.
Therefore, when you remit funds to your US brokerage account, it is advisable to keep an eye on the USD-INR exchange rate. Consider remitting funds when the conversion rate is favourable.
Additionally, banks usually charge a forex conversion fee when remitting funds from an Indian bank account to a US account. This fee typically ranges between 0.5% to 3% of the total transaction value depending on the bank. This is another very important factor you need to take into account when investing in US Stocks.
Since you would be investing in the US stock market, you need to be aware of the tax implications of your investments. Fortunately, the US and India have a Double Taxation Avoidance Agreement (DTAA) that prevents any gains from being taxed twice. This effectively means that if you’ve paid any tax on gains that arise in the US, you won’t have to pay tax once again to the Indian authorities. You can simply claim the tax paid in the US when filing your Indian income tax return (ITR).
As far as investments are concerned, there are three kinds of tax that you need to be aware of – tax on dividends, tax on capital gains and tax collected at source.
- Tax on Dividends
The US taxes dividends are distributed to foreign investors at the rate of 30%. However, for Indian investors, the tax rate on dividends is 25% due to the DTAA signed by the two countries. The tax that you pay on dividends received from US companies can be claimed as a foreign tax credit at the time of filing your Indian income tax return.
- Tax on Capital Gains
The US does not levy any tax on capital gains arising from stock market investments. However, being an Indian resident, you will have to pay capital gains tax in India. Capital gains tax can be categorised into two – long-term capital gains (LTCG) tax and short-term capital gains (STCG) tax.
- Long-Term Capital Gains Tax
If you hold your US stock market investments for over 24 months before selling them, any gains arising from such a sale will be termed long-term capital gains. These gains are taxed at the rate of 20% plus surcharges. However, you get the benefit of indexation, which you can use to lower your tax liability.
- Short-Term Capital Gains Tax
If you hold your investments for less than 24 months before selling them, the gains arising from such a sale will be classified as short-term capital gains. These gains are added to your total income and are taxed according to the income tax slab rate you fall under.
- Tax Collected at Source (TCS)
If you remit more than ₹7 Lakhs to a foreign account during a financial year, you will be liable to pay TCS at the rate of 5%. However, TCS will only be applicable on the amount exceeding the limit of ₹7 Lakhs. Also, you get to claim the TCS paid by you at the time of filing your income tax return.
You will need to open a separate US brokerage account to invest in the US stock market. Depending on the brokerage account you opt for, you may have to contend with various one-time and recurring fees. This includes account opening fees, annual maintenance charges (AMC) and brokerage among others.
The brokerage charges can be anywhere from zero brokerage to $7 per trade. It is important to make yourself aware of the various fees that you’re liable to pay before opening a brokerage account. If you’re planning on trading frequently, it is advisable to opt for a stockbroker who charges the least amount of fees. This will allow you to keep your costs low and not eat into the profits.
So there you have it. These are the four crucial things you need to know before you begin investing in US stocks from India. There are many advantages that you get to enjoy by investing in stocks listed in the US. The market, as a whole, is very stable and far less volatile and you get access to emerging thematic investments, many of which are unavailable in India as of now.
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