Invest in Foreign Stocks from India

 How to Invest in Foreign Stocks from India: Exploring Methods, Benefits, and Drawbacks

Investing overseas for Indian residents is governed by India's exchange control regulations. As of August 22, 2022, the Indian Government and the Reserve Bank of India (RBI) introduced a new framework enhancing clarity, expanding coverage of economic activities, and updating reporting requirements.

 Overseas investments by Indian residents can be categorized into Overseas Direct Investment (ODI) and Overseas Portfolio Investments (OPI). This guide covers the advantages, limitations, exchange control regulations, and tax reporting for OPI for Indian residents.

 Methods of Overseas Investment for Indian Residents under OPI:

 Limits under the Liberalized Remittance Scheme (LRS): Indian residents are allowed to invest up to $250,000 per financial year (April-March) under LRS. This includes OPI, ODI, and other expenditures like travel, gifts, medical treatment, and education.

 Definition of OPI: The new framework clearly defines OPI, a change from previous regulations. Investments must stay within the LRS limit.

 Investment in Foreign Listed Shares: Residents can invest in shares of overseas companies listed on stock exchanges. The investment should be less than 10% of the entity's stake without controlling interest. Investments fall under the LRS limit with no half-yearly reporting (Form OPI) needed.

 Opening an Overseas Trading Account: Residents can open accounts with Indian brokers linked to international brokers or directly with foreign brokers present in India.

 Investing in International Mutual Funds and ETFs: This option is available for those preferring not to invest directly in foreign shares, allowing access to global markets and stocks.

Investment in Listed Debt Instruments: Investments in foreign government and corporate bonds are included under the LRS limit without half-yearly reporting requirements.

Inheritance and Gift of Foreign Securities: Acquiring foreign securities through inheritance or as gifts does not count towards the LRS limit and requires no reporting.

Investments in IFSC (GIFT City in Gujarat): Investments in entities in the International Financial Services Centre, like GIFT City, are considered overseas investments and are within the LRS limit.

Acquisition of Sweat Equity Shares and ESOPs: Residents can acquire up to 10% of sweat equity shares or interest under ESOPs from foreign entities, counted towards the LRS limit.

Acquisition of Minimum Qualification Shares: Investment in minimum qualification shares for management roles in foreign entities is capped at 10% of the paid-up capital and falls under the LRS limit.

Reporting Requirements for International Investments:

 Under Foreign Exchange Regulations: Indian residents must submit specific documents for LRS compliance when remitting funds for foreign investments. Except for sweat equity shares or ESOPs, no additional compliance is required.

 Under the Income Tax Act: Investments in foreign assets must be disclosed in the Income Tax Return under “Schedule FA”. Non-disclosure may attract penalties under the Income Tax Act and the Black Money Act.

Tax Collected at Source (TCS) under LRS: For remittances exceeding INR 7 lakh, TCS at 5% (10% without PAN or Aadhar) applies to the amount above INR 7 lakh.

 Merits and Demerits of Overseas Investment:

     Merits: Diversification, investment in global companies, reduced country and currency risk.

    Demerits: Requires deeper market understanding, increased compliance and reporting, higher capital gains tax compared to Indian shares.

Conclusion:

 The surge in overseas portfolio investments by Indian residents brings significant implications, requiring careful consideration of the updated regulations, tax implications, and investment strategies