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How to Invest in International Stock Market from India? | Tax Treatment

How to Invest in International Stock Market from India? | Tax Treatment

International Stock Market

In this article, we will how you can invest in the international stock-market from India. Many of us would be wondering and excited to know the different channels and procedures to invest in International Stock. Hence, we will try to cover this piece in a detailed way.

We are very well aware that the economy is global and interlinked with one another. As a result, if the sentiments of the investors are good around the globe,
it will have some positive/negative impact on the Indian stock market depending upon the relationship we are having with that country or vice-versa. Therefore, it’s crucial that portfolios should have exposure to the global economy to enhance portfolio diversification.

Around the globe, stock markets have indices to track the equities Global stock market indexes are weighted by market capitalization, and there is no room for emerging markets since they’re too small for inclusion.

Here is the list of the most popular global stock market in terms of market capitalization:

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Source: Statista.com

It’s very much clear from the above picture, United States accounts for 56% of the World Equity stock followed by Japan & China. As a result, NYSE and NASDAQ are some of the largest stock market operators worldwide. Stocks are considered the most attractive investment. Certainly the returns you get from the stock investment you cannot expect the same returns from any other financial instruments.

Is it a Good Idea to Invest in International Stock-Market or Not especially US?

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The answer to this question is definitely Yes! when it’s clear to us global economy is connected and the US itself accounts for more than 50% of the world equity market.
Whether we are aware of the US index’s performance as compared to Indian indices Sensex or Nifty.
However, we have heard that the Indian rupee is kneeling down against the USD by 44% in the last 10 years.
Hence, the effect of currency fluctuations between these two currencies has a significant negative impact on returns of Indian stocks which widens the performance gap. Therefore, the US market is consistently outperforming the Indian market in the last 10 years. Consequently, we can utilize this opportunity to make better returns.

We can reap the benefit of investing in the US Market as their financial system is more controlled and regulated leading to transparency, standardized government practices. Therefore, allowing investors to evaluate the opportunities understanding its integrity.

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How to Invest in International Stock-Market from India

Investing in US markets has become very easy now for savvy investors thanks to the liberal remittance scheme of RBI. Let’s discuss the way by which Indian investors can park their funds in the US market. Currently, there are two ways by which you can invest in US Stocks:

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Direct Investment

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As the name suggests, it’s similar to what you do in the Indian stock exchange. You can open a trading account with a domestic or foreign stockbroker. As per LRS, Indian residents are allowed to invest up to US $250,000 per year per person.
There are many players in the market with which you can open your trading account which facilitates you to invest in the global economy.
In case you wish to open a trading account with a domestic broker that has a tie-up with a foreign broker.
Merely, it acts as an intermediary between the investor and foreign stockbroker.
We have a few domestic brokers like HDFC Securities, Motilal Oswal, Stock, Vested, and Geojit that have opened doors to invest in the global economy for Indian investors.

The cost of investing via this medium will be on the higher-end as it will include brokerage plus currency exchange charges. Hence, before investing you evaluate their terms and condition to ensure you reap max profits by minimizing the investment cost. On the other hand, you can also open an account with foreign brokers directly having a presence in India. For instance, Ameritrade, Interactive brokers or Charles Schwab, etc,.

To open a trading account with a domestic or foreign broker ensure to conduct thorough research on account opening, brokerage, and conversion charges to execute your orders.

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Indirect Investment

This is the secondary way of investment in the global market by taking a route of Mutual funds and ETFs. In this medium, you don’t need to open a trading account with a brokerage. Instead, you can diversify your portfolio by investing in mutual fund schemes that focussed on international markets.
Generally, these funds will be usually funds of a fund or predominantly invest in equity or equity-related instruments of entities listed in the foreign markets.
Unlike direct investment, there is no limit on the investment amount for Indian residents as you’re investing in Indian currency only.
However, these AMC will charge higher expense ratios as general fund management fees plus investment fees in the international stock market.

Similar to investing in ETFs, you can directly invest in domestic ETFs that track international indices,
or invest indirectly in US ETFs via domestic or foreign brokers.

Also Read IPO vs Shares(Listed) – Difference between IPO and Listed Stocks in India

Tax Treatment for these Investment

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When you have made your mind to invest in the International stock market from India,
Please ensure you should aware of the tax treatment as well. Well, there are predominantly two ways you can consider:

Tax on Capital Gains: As per the Indian taxation system, tax on gains will be calculated on the basis of the holding period. If you hold the stocks for more than 2 years then it will be considered long-term capital gains. Accordingly, it will be taxed at 20% with indexation benefit.
On the other hand, if the holding period is less than 2 years then the gains will be considered short-term gains and will be added to your income. Consequently, it will be taxed as per your income tax slab.

Taxes on Dividends: Unlike capital gains, dividends get taxed in the US at a flat rate of 25% similar to another global market. Depending on their tax policy and foreign investment policy.
However, the tax you pay to the US will be considered as Foreign tax credit and you can use this to offset your tax liability in India.

Hope you like the article, in case you think we missed out on some important aspects do let us know.

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