Want to invest in US equities? Here’s how you can use the Liberalised Remittance Scheme

With S&P 500 in the US falling by 2.14 percent and Nasdaq falling 3.42 percent in the past week, this might not appear to be the best time to invest in US equities. But consider this: If you had invested Rs 1 lakh in Nvidia stock five years ago, you’d be sitting on a fat pile of more than Rs 40 lakh today with currency appreciation. That’s right: Nvidia’s share price has grown over 3,000 percent in the last five years. Nasdaq went up by 100 percent over the past 5-year period. Dow Jones went up by 50 percent in the same period. As a long-term investor with a long term horizon, this is as good a time as any to enter equities, especially US equities.

Here’s the kicker: investing in US stocks isn’t nearly as complicated as it might sound. Indian investors can easily invest in Nvidia, Tesla, and other US stocks quite easily, thanks to the Liberalised Remittance Scheme (LRS).

What is LRS?

In order to invest a certain sum of money in the US stock market, you first need to transfer that sum to the US using LRS. Prior to 2004, overseas money transfers were regulated by the Foreign Exchange Management Act (FEMA) of 1999, whose terms were relatively restrictive.

These restrictions were reduced in 2004 with the introduction of the LRS by the Reserve Bank of India. Initially, the LRS permitted each resident to freely remit up to $25,000 abroad every year for various purposes, such as tourism, education, and investing. Currently, that annual limit has been revised and stands at $250,000 per resident.

To remit funds under the LRS for any purpose, you must be an individual residing in India, with an active Indian bank account and a valid Permanent Account Number (PAN).

Also see: MC Explains I How RBI's easing of LRS norms opens new avenues for investors via GIFT City

Should you invest in US stocks?

While the Indian market is doing phenomenally well, we believe that it makes sense to diversify globally as this is a very sound idea from a financial perspective.

The US has some of the fastest growing, innovative companies in the world, which means that investors in such companies can potentially see impressive gains whenever they push the envelope.

By investing in the US, your portfolio benefits from geographical diversification, and can better withstand unexpected shocks in the Indian market.

You can also benefit from USD appreciation which has been in the range of 3-5 percent annually.

In the light of all these benefits, let’s understand how you can leverage LRS to invest in US stocks.

How can Indians use the LRS to invest in the US stock market?

There are a few ways to invest in the US market while taking advantage of the benefits the LRS offers.

One way is to open an overseas trading account with a foreign broker that has a presence in India, or with a domestic broker that has a tie-up with an American brokerage firm.

In both these cases, you will typically need to pay additional charges, including brokerage fees, currency conversion charges, and remittance costs. You may also typically come across account opening fees or minimum investment amounts. These additional charges can add up, so you’ll need to be mindful of them. You should also vet each broker you intend to use thoroughly.

Alternatively, you can also invest in US stocks through new age fintech apps. Some of these apps can provide benefits such as low-cost investing, highly competitive currency exchange rates, and easy remittances. Moreover, after you’ve completed the initial formalities, such platforms handle any LRS-related complexities with minimal intervention and effort needed on your part.

To be sure, when you invest in domestic mutual funds, like Exchange-Traded Funds and Fund of Funds, then this doesn’t count as the LRS limit. That’s because you invest in Indian Rupees. But not all such funds are accepting money from you these days. In 2022, the Securities and Exchange Board of India (SEBI) asked mutual fund houses to stop accepting fresh investments in schemes dedicated to overseas stocks. This was because the industry as a whole was close to breaching the $7-billion limit available to them for investing in overseas securities.

Also read: Mutual funds call for easing RBI's limit on overseas investments amid growing opportunities

Fund houses can now accept new investments over the regulatory threshold, if there is a fall in the total value of their portfolio or if there is a spike in redemptions. This way, there will be headroom for more funds. But this is unlikely to result in significant additional headroom for new investors to invest.

Tax aspects to keep in mind

If you plan to use the LRS to invest in US stocks, there are two key tax-related points you should be aware of.

First, if you remit more than Rs 7 lakhs under LRS in a financial year, the amount exceeding Rs 7,00,000 shall be subject to a Tax Collected at Source (TCS), 20 percent of which can be claimed later. There is no TCS for amounts under Rs 7 lakhs.

Second, any profits you might make through your overseas investments will be taxable only in India. The India-US DTAA prevents taxpayers from being subjected to double taxation. However, if your investments get taxed in the US, then you can offset your tax liabilities here against the taxes that you’ve already paid in the US.

Further, gains from investments in US stocks and ETFs will now be taxed at 12.5 percent as opposed to the 20 percent that was applicable earlier. The new relaxed Long-Term Capital Gains (LTCG) tax rates will be applicable, when you hold US securities for a period of over 24 months.

The bottom line

The LRS provides a relatively simple means for Indian investors to diversify their portfolios, benefit from global innovation, and potentially improve their overall portfolio returns. Moreover, various technological developments have made it quicker and more convenient to start investing in the US stock market. Thus, for investors who have done their due diligence and are aware of the risks, there has never been a better time to go global!!