Things you need to keep in mind while investing in US stocks

• Apart from asset diversification, geographical diversification is also an important aspect of modern investing.
• You can benefit from the US stock market’s rally by investing in US stocks from India.
• But before you do, here’s everything you need to know about investing in US stocks, including taxes, charges and more.

One of the things often talked about when it comes to investing is diversification. While usually it refers to allocating your capital across various asset classes, geographical diversification is also an aspect that is worth considering.

This is where investing in US stocks comes into the picture. While there are mutual fund schemes specifically oriented towards US stocks, you can also invest in equities of these US companies directly.

Over the past few years, investing in US stocks has grown in popularity among Indians. Now with the NSE IFSC allowing access to some of the best US-based companies like Apple, Google, Tesla and others, it is important to understand the things you need to keep in your mind before investing in US stocks.

Everything you need to know about investing in US stocks

Liberalised Remittance Scheme

The Reserve Bank of India’s Liberalised Remittance Scheme (LRS) allows Indian residents to remit up to $2,50,000 (approx. ₹1.9 crore) every year. This includes any payments made in foreign currency, so you can buy stocks as well in foreign markets up to this limit.

Note that this limit is on an annual basis, and also applies to even minors separately.

USD-₹ exchange rate fluctuations

While foreign currency exchange rates are not as big a deal for those who want to invest in US stocks for a considerable amount of time, the costs and fluctuations can add up to a significant amount for traders.

Apart from this, the foreign currency exchange fluctuation will have to be accounted for at the end of every financial year, so that risk is still going to be there whether you are an investor or a trader.

Apart from this, you will also have to consider the forex markup fee that banks charge to remit foreign currency. This can be anywhere from 0-3%, based on your bank.

If you haven't looked at international investing yet. Here are a few reasons you might want to - 1. Lowering your risk - Being fully invested in one country and one currency exposes you to country-specific risks and currency risk. Diversification helps avoid that. 2. More opportunities - When looking to deploy incremental capital, you will have access to more opportunities within your circle of competence. 3. Increased portfolio stability - Investing in two or more geographies with relatively lower correlation allows your portfolio to stay a lot more stable over longer periods of time. 4. Access to unique opportunities - There might be many sectors or themes that might not be available to play within the country you currently are investing in. An example of this is the genetics theme in India.

— (@krishnabahirwani) April 04, 2022

What about taxes?

The US and India have a double taxation avoidance agreement (DTAA), so that is one less thing to worry about.

But when it comes to taxation, there are two aspects to consider here – capital gains and dividend tax.

Dividend Tax

The US does not have capital gains tax on stocks, so you don’t have to worry about it. It does have a dividend tax, though, with a tax rate of flat 30% for foreigners.

Don’t worry, though, since you can offset this tax paid in the US against your tax liability in India.

Capital Gains

As far as capital gains are concerned, here’s how it works in India:

Any gains made on holdings of less than two years will be considered as short-term capital gains and be taxed according to the tax slabs applicable to the individual.

For holdings of more than two years, provisions of long-term capital gains will be applicable and the tax rate will be 20%, with the benefit of indexation.

Indexation is the process of adjusting your investment for inflation. It is applicable on long-term investments.

Transaction charges

To be able to buy and sell US stocks, you will have to create an account with a brokerage that has this facility.

Depending on the broker you choose, you will have to consider the annual maintenance charges, transaction charges and other costs associated with the service.

It may or may not be a significant part of your costs depending on the capital you set aside for investing in US stocks.

Which brokers let you buy and sell US stocks?

Apart from NSE’s newly-announced service of buying US stocks in the form of NSE IFSC receipts, several brokerages already offer the ability to directly invest in US stocks. Some of these include Groww, INDmoney, Vested, among others.

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