20% tax on foreign remittances make foreign investments unviable for retail investors
Budgetannouncement of 20% tax on foreign investments to make investments in the US markets less appealing.
- Direct investments in the US markets remain viable only for a tiny minority of high and ultra high-networth individuals (HNI/UHNIs).
- Retail investors should consider exposure to the US markets through Indian mutual funds that invest in US
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However, a budget proposal to impose a 20% tax collected at source (TCS) on foreign remittances under LRS without any threshold limit has made investing directly in foreign stocks, especially in US stocks, less attractive for investors. Earlier, a 5%
20% tax on foreign investments to hit retail investors hard
Manish Chowdhury, head of research at Stoxbox, a subscription-based value broker, says “The budget proposal would prove to be a deterrent for small-time investors, as it would mean a large upfront cash outflow. Moreover, we believe that the change in TCS will adversely affect investing platforms, especially aimed at retail investors, who are more glued to direct investing in international stocks.” Currently IndMoney and Vested Finance are two such platforms that help Indian investors invest in US stocks and exchange-traded funds (ETFs).
Pratik Oswal, head, ETFs and Index Funds, Motilal Oswal Financial AMC says that since this means that 20% of the sum invested abroad will be used for tax purposes and locked away at zero-percent interest till you file your taxes, it will mean an additional cost to the investor.
It is to be noted that the tax paid can be claimed as credit. “While the TCS of 20% is a sentiment damper for Indians who would like to create a corpus outside of India and invest to meet future dollar commitments, it should not be confused as a sunk cost or additional cost. The TCS will be reflected as tax credit in your Form 26AS. So, the amount of TCS can be claimed as credit against tax payable while filing income tax returns,” says Sumita Pillai, chief executive officer of Torus Private Wealth. In case the TCS is higher than your tax payable, you will get a refund.
Direct investments in the US markets to get costlier
In another development, in January 2023, RBI asked SBM Bank to stop LRS transactions till further notice. Both IndMoney and Vested Finance have tie-ups with SBM Bank to make the process of investing faster and cheaper. “Vested Direct, our unique, low-cost digital fund transfer solution is supported by SBM India. With the help of Vested Direct, we were able to lower the overall cost of depositing funds to investors,” says Viram Shah, founder and CEO, Vested Finance.
However, after the RBI directive, that is no longer possible. Shah clarifies that the introduction of this ruling means they will not be processing any new deposits using Vested Direct in the interim. This means that investing abroad through the LRS route is now more cumbersome and costly, the way it was a few years ago. This is definitely a dampener when it comes to Indians investing abroad.
Alternative option for investing in the US markets
The above platforms provide investors an option to directly invest in US stocks. However, Indian investors can also get exposure to the US markets indirectly through international mutual funds that invest in the US stock markets. Says Chowdhury, “With the policy change, investing in equities globally through a direct route has definitely become more expensive. However, investors can continue to take exposure in global equities through mutual funds and ETFs because they are still exempt from LRS. We continue to advise small investors to invest in global equities through the indirect route as it saves them from the hassles of setting up the infrastructure for direct investing and also does not involve upfront costs.”
Agrees Oswal, “Investors looking at global options should look at mutual funds because they are a lot cheaper right now.”
However, a lot of these mutual funds in India cannot accept fresh investments because they have either already exhausted or are about to exhaust the limit of $7 billion to invest in overseas securities and funds. The entire industry is hoping for higher limits to be put in place. “When these mutual funds stop accepting fresh investments, direct investments outside of India via LRS will be the only route available to invest outside of India. That route will make sense for only a very tiny minority of HNIs ( high-networth individuals) and UHNIs (ultra high-networth individuals),” says Avinash Luthria, a financial planner & SEBI registered
Investors who want to invest in the US market through mutual funds should reach out to the asset management company (AMC) and find out which funds are still accepting fresh investments.
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