How to Invest in US Stocks from India
Any individual resident in India can legally and easily invest in the American stock market using the Liberalized Remittance Scheme (LRS). If you are wondering how to open US stock trading account from India, it is done through a trading account or application that provides services to the U.S. stock market. The procedure is relatively simple and only requires knowledge of the peculiarities of investing in stocks in another country.
Key points to consider before investing in American stocks from India.
Why to Invest in Stocks in the US Market?
Can residents of India invest in the U.S. stock market?
What is the procedure for investing in the US stock market from India?
- Brokers or financial apps. Indian financial organizations that provide services for buying and selling American stocks.
- International Brokers. Another option is to directly open an account with international stock market brokers.
- Identification: provide PAN, address, and photo.
- Bank account connection: connect the bank account and sign the declaration forms for outward remittance under the LRS.
- Replenish the account: transfer money to the account in rupees, which will be converted to dollars.
- Start investing: purchase desired stocks or idiosyncratic investment funds.
When choosing a particular platform, it is necessary to pay attention to the fees for remittance, conversion, brokerage, and withdrawal of funds. Taxation of the investment: tax on US stock investment for Indian residents on long-term and short-term capital gains and dividends.
The main nuance of investing in the U.S. stock market from India is the question of taxes. For resident Indians, income from foreign sources is subject to tax on US stock investment for Indian residents. Consequently, profits from the sale of stocks, as well as dividends, are subject to taxation.
- Dividends: the US withholds 25% as tax, which is returned to the investor at the time of payment if the DTAA form (W-8BEN) is filled out with the broker. The withheld tax applies to the investor’s income tax return in India as a foreign tax credit (Form 67), which reduces the tax liability. If an investor receives a dividend, this income should be indicated in the “other income” section.
- Capital gain: In India, long-term capital gains are taxed at 20%, and short-term gains are taxed at the income tax rate of the dividend recipient. At the same time, the U.S. does not impose any tax on capital gains for non-resident Indians. Therefore, the profits are subject to tax only in India. If the shares are held for more than 24 months, long-term capital gains tax applies; otherwise, short-term tax applies. It should be noted that the rates and terms of the long-short taxation of capital gains may change in the Union Budget presented by the government of India.
- It is necessary to indicate foreign assets in the investor’s income tax return in India, even if the investment transaction was not profitable. The failure to do this may lead to restrictions on account operations and even to sanctions under the Black Money Act.
- It is also important to note that the LRS limit for investing in US stock does not apply to NRIs. Accordingly, the entire procedure described above does not apply to them; the investment process is completely different.
Important note for NRI investors:
If you hold shares in the US market, remember that NRIs do not have an obligation to report these assets in their income tax return in India, which is a significant difference between them and residents.
What does the portfolio of a prudent investor in US stocks in India miss?
While diversifying the portfolio by investing in the foreign market, prudent investors often fail to take into account the correlation between the Indian stock market and the U.S. market. When the stock market falls, the prices of both domestic and foreign stocks are affected simultaneously. In other words, the Indian stock market and the U.S. market are correlated, so diversifying the portfolio within the framework of only these two markets will not eliminate market risk.
An alternative to equity investment that removes market risk entirely is the LenDenClub P2P lending platform, which has been operating since 2015 and is registered with the Reserve Bank of India. LenDenClub is an NBFC-P2P registered with the Reserve Bank of India. Lenders earn interest on the money lent to borrowers through this platform. The main advantage of LenDenClub is that its returns are not correlated with equity market movements. Therefore, prudent investors can use the diversification strategy when investing in the U.S. stock market from India. However, it is important to remember that LenDenClub and, in general, any P2P lending platforms are a risky but potentially profitable type of alternative investment.
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Team LenDenClub
LenDenClub is India’s largest peer to peer lending platform which started operations in India in 2015. We have been helping lenders diversify their portfolio beyond traditional investment instruments ever since.