Finding Us Investors: India's Investment Opportunities

India and the United States have a strong economic partnership, with the US being the 3rd largest Foreign Direct Investment (FDI) contributor to India. Bilateral trade exceeded $190 billion in 2023, and the two countries have an ambitious target of achieving bilateral trade worth $500 billion by 2025. The US stock market is home to some of the world's most successful companies, such as Facebook, Google, and Apple. Indians can invest in the US stock market through mutual funds, ETFs, and direct or indirect methods. There are options like global trading accounts with domestic agents or overseas trading accounts with foreign brokers. NSE IFSC Exchange now offers US stock trading. Traders need to open a special Demat account registered with the IFSC to trade US stocks.

Direct investment options: open a global trading account with a domestic agent or an overseas trading account with a foreign broker

Indians can invest in the US stock market, and there are two direct ways to do so: by opening a global trading account with a domestic agent or an overseas trading account with a foreign broker.

Global Trading Account with a Domestic Agent

Many domestic brokers in India work as intermediaries for trades by collaborating with US stockbrokers. You can open an international trading account with any of these brokers, but you may need to submit several documents to open this account. Depending on the brokerage firm, there may be restrictions on the kinds of investments you can make or the number of trades you can conduct. The cost of investing can be high, considering brokerage and currency conversion charges, so it is important to understand all the costs before opening an account.

Overseas Trading Account with a Foreign Broker

You can also set up an overseas trading account with an international broker that has a presence in India. Some brokerages that offer this service include Charles Schwab, Ameritrade, and Interactive Brokers. Be sure to research the costs and terms before opening the account.

Direct investment options may have high costs due to brokerage and exchange rate charges, so it is important to understand all expenses before proceeding.

Indirect investment options: invest in mutual funds, exchange-traded funds (ETFs), or online apps

There are two ways to invest in the US stock market from India: direct and indirect. Here is a detailed overview of the indirect investment options:

Mutual Funds

Mutual funds are an indirect way to invest in the US stock market. These funds track various indices for different countries, with most funds tracking the US market. Mutual funds allow you to take an indirect position in US stocks without investing in them directly. You can invest in mutual funds that invest in US stocks and/or other mutual funds. This option does not require you to open an overseas trading account or maintain a minimum deposit.

Exchange-Traded Funds (ETFs)

ETFs are another indirect investment option for the US stock market. Unlike mutual funds, ETF units are traded on the stock market during trading hours, similar to stocks. You can buy and sell ETF units on the exchanges during market hours. To trade ETFs, you need a Demat account with any brokerage house. Many ETFs provide access to NASDAQ and other important international indices.

There are direct and indirect routes for investing in ETFs. You can purchase US ETFs directly through a domestic or international broker, or you can buy an Indian ETF of international indices.

Online Apps

The evolution of mobile apps has led to the launch of several apps by startups to assist Indian investors in investing in the US stock market. These apps provide a platform for Indians to invest in US stocks, although some may not allow intraday trading in the US market due to regulatory requirements. It is important to research and choose the best app that suits your investment needs and goals.

Currency exchange: be mindful of currency conversion rates and fees

Currency exchange rates and fees can be a complex and costly issue, so it is important to be mindful of them when investing. Here are some key points to consider:

• Currency conversion rates differ between companies as each company manipulates the interbank rate to make a profit. The higher the volume of currency exchanged, the closer you will get to the interbank rate.
• Be cautious of companies that advertise "no-fee" exchanges, as they often build in a high profit by offering an unfavourable exchange rate.
• Credit cards generally offer some of the lowest currency exchange rates, as card companies base their rates on wholesale prices offered to larger institutions. However, foreign transaction fees may apply.
• Debit cards can also be a cost-effective way to exchange currency when travelling, as fees are often lower than those for credit cards. Using ATMs to withdraw cash can be convenient and provide good exchange rates.
• Prepaid cards for foreign currency are becoming more common and can be a safe and convenient option, but be sure to read the fine print, as some come with substantial fees and may not be accepted everywhere.
• Airport and hotel currency exchange desks should generally be avoided due to high exchange rates and hidden fees.
• Dynamic currency conversion, where your credit card purchase is charged in your home currency, should also be avoided, as it often results in unfavourable exchange rates and additional fees.
• When investing in US stocks from India, be aware that direct investment options, such as global trading accounts with domestic agents or overseas trading accounts with foreign brokers, may incur higher costs due to brokerage and exchange rate charges.
• Indirect investment options, such as international mutual funds and exchange-traded funds (ETFs), can provide access to the US market without the need for a trading account.
• If you plan to trade US stocks on the NSE IFSC Exchange, you will need to open a special Demat account registered with the IFSC and be mindful of currency conversion requirements, as transactions on the exchange are made in US dollars.

Tax implications: understand the tax laws and double taxation agreements between India and the US

When considering investing in the US stock market, it is important for Indian residents to understand the tax implications to ensure that net returns are worth the effort. There are two types of taxes to consider: dividends and capital gains tax.

Dividends

Dividends from US stocks are taxed at a flat rate of 25% in the US according to the India-US Double Tax Avoidance Agreement (DTAA). This is lower than the standard tax rate for foreign investors in the US due to the tax treaty between the two countries. This means that if a company declares a dividend of $100, you will receive $75 after the tax deduction. This dividend income will also be taxable in India. While filing an ITR, the same income will be included in your total income and taxed at the normal slab rates. This may seem like double taxation, but the DTAA allows you to claim a foreign tax credit and offset the tax withheld in the US against your tax liability in India.

Capital Gains Tax

There is no capital gains tax in the US for non-resident aliens. However, capital gains are taxable in India and are categorised as either long-term or short-term. Long-Term Capital Gains (LTCG) apply if you hold US stocks for more than 24 months, and these gains are taxed at 20% plus a surcharge and cess. Short-Term Capital Gains (STCG) apply if you hold the stocks for less than 24 months, and they are taxed according to your income slab rate.

Practical Considerations

There are a few practical challenges to be aware of when claiming tax credits:

• Differences in exchange rates between the US and India can create complexities.
• The US follows a calendar year for reporting, while India follows the financial year (April to March), which can lead to accounting and reporting difficulties when claiming credits.
• The SBI TT buying rate is used to convert USD to INR, and the rate applied is based on the last day of the month immediately preceding the month in which the dividend is declared or paid.

Regulatory compliance: ensure your investment method complies with Indian and international regulations

Regulatory compliance is a crucial aspect of investing in India, and it is important to ensure that your investment method complies with both Indian and international regulations. Here are some key considerations for regulatory compliance:

• Company Registration: It is essential to register your business with the Ministry of Corporate Affairs (MCA) in India. Choose an appropriate legal structure, such as a Private or Public Limited Company, and obtain a Certificate of Incorporation.
• Foreign Investment Regulations: Comply with the Foreign Exchange Management Act (FEMA) and the regulations set by the Reserve Bank of India (RBI) for foreign direct investment (FDI). Obtain necessary approvals if investing in restricted sectors.
• Tax Compliance: Register for Goods and Services Tax (GST), Income Tax, and other relevant taxes. Ensure timely filing of tax returns and adhere to tax regulations, including transfer pricing and tax incentives.
• Employment Laws: Comply with Indian labour laws, including those related to employee welfare, minimum wages, provident fund contributions, and the Employees' State Insurance (ESI) Act.
• Intellectual Property: Protect your intellectual property by registering trademarks, patents, and copyrights with the Intellectual Property India office.
• Environmental Regulations: Adhere to Indian environmental laws and obtain the necessary permits for waste management, pollution control, and environmental impact assessments.
• Industry-Specific Regulations: Follow industry-specific regulations such as the Drug and Cosmetics Act for pharmaceuticals or the Bureau of Indian Standards (BIS) certification for manufacturing.
• Corporate Governance: Ensure compliance with the Companies Act, including maintaining statutory registers, conducting board meetings, and adhering to disclosure requirements.
• Due Diligence: Conduct thorough due diligence to understand the regulatory landscape in India and ensure your investment complies with all applicable laws and regulations.
• Reporting and Disclosure: Stay up to date with reporting requirements and disclose any relevant information to the appropriate authorities.
• Collaboration with Local Partners: Consider collaborating with local businesses or consultants in India to gain a better understanding of the regulatory environment and ensure compliance.
• Stay Informed: Stay informed about any changes or updates to Indian regulations and international investment regulations that may impact your investment.

By carefully considering these regulatory compliance factors, you can ensure that your investment method complies with Indian and international regulations, reducing legal risks and promoting a sustainable investment environment in India.

Frequently asked questions