As the hoopla around US stock investment is growing, traditional and discount brokerages alike have started offering international stock investment options. Domestic brokerages are tying up with US-based broking firms such as Vested Finance, Stockal and Interactive Brokers to facilitate investment in US stocks. But, before you go ahead, taking note of all charges and taxes becomes imperative. Factoring in bank charges, conversion rate and taxes, the real rate of return on your overall investments may not be as attractive as it appears on the paper.
"Currently, global investment doesn't make much sense for smaller investors who want to invest around Rs 50,000. You pay remittance charges of Rs 700 to Rs 1500 (on each side - deposits and withdrawal), and a forex conversion mark-up of about 2-3 per cent on both sides. It means, even before you make an investment, you will have incurred an expense of Rs 6-8 per cent. This only makes sense for HNIs who tend to have higher ticket sizes," says Somnath Mukherjee, AVP - Business, Zerodha.
Here's a lowdown on all charges that get applicable when you invest in US equities:
Once you open a demat account with a broker, they create a trading account with the brokerage in the US. Now you are asked to transfer some funds from your bank account in India to the US trading account. "You end up paying 4-5 per cent of your investment amount in bank charges (spread + commission + GST) for foreign exchange conversion and transfer fees," says Archit Gupta, founder & CEO, Cleartax.
Gupta explains it with an example: If you are converting Rs 1 lakh to its equivalent amount in the US dollars, the bank may charge a spread of 4 per cent which translates to Rs 4,000. Let's assume the bank charges a commission of Rs 500 for transferring Rs 1 lakh, you would also incur GST on the commission. It comes to around Rs 590.
You then have to pay GST on currency conversion. This will be levied on the taxable value of the transfer. You have a taxable value of 1 per cent on transfers up to a maximum of Rs 1 lakh. It is 0.5 per cent plus Rs 1,000 on transfers ranging from Rs 1 lakh to Rs 10 lakh and 0.1 per cent plus Rs 5,500 on transfers above Rs 10 lakh, capped at Rs 60,000. For example, if you are transferring Rs 1 lakh, the taxable value will come to 1 per cent of Rs 1,00,000 or Rs 1,000. You then have a GST of 18 per cent levied on Rs 1,000 which comes to Rs 180. It translates to a total amount of Rs 1,180.
If you add up the spread, commission and GST, you would incur Rs 4,000 + Rs 590 + 1,180 = Rs 5,770 on a transfer of Rs 1 lakh.
Various brokerages charge the brokerage fee on per trade or trade volume basis. "The brokerage charge in case of US equity is high and a broker typically charges you either a flat rate on per trade basis or a percentage on the total value traded," says Vineet Patawari, Co-founder & CEO of Elearnmarkets & StockEdge. Some of brokerages like ICICI Securities and HDFC Securities have started offering subscription-based models that have variable brokerage fee based on the plan opted.
Exchange rate becomes a key parameter when investing abroad because all investments are in dollars. "One has to pay special attention to the forex rate as it can directly impact the cost of acquisition and the return on such investment," says Patawari.
You could lose on your investment if the rupee gains against the US dollar over a time period, even if you make a profit on the trade. However, you may get a higher profit if the rupee depreciates against the US dollar over some time.
Tax collected at source
When it comes to foreign remittances, Indians are allowed to send $2,50,000 each year under the RBI's Liberalised Remittance Scheme (LRS). Your investments in US equities fall under LRS. Effective from October 1, 2020, a 5 per cent TCS (Tax Collected at Source) is levied on all remittances above Rs 7 lakh under LRS. "It would apply to an amount over Rs 7 lakh in a financial year and not the total amount. For example, if you remit Rs 9 lakh in a financial year, TCS is applicable only on Rs 2 lakh," says Gupta of Cleartax.
This tax will be withheld by the bank before the rest of the money moves overseas. If your tax liability is less than the TCS deducted, you can file Income Tax Return and claim a refund.
"Although you will get the refund, the government will give it at an interest rate of say 6 per cent. In terms of opportunity cost it is a clear-cut first loss if you are investing money abroad. You are losing out on 10-15 per cent return that you may otherwise earn on the reserved money," says Ghanisht Nagpal, convener, Delhi Investor's Association.
Capital gains and dividend tax
The capital gains that you earn on US stocks are only taxed in India. If you sell US shares within a holding period of two years, you may realise short-term capital gains. These gains are added to your overall income and taxed as per your income tax bracket. If you sell US shares after holding them for two years or longer, your gains are long-term capital gains. They are taxed at 20 per cent (plus applicable cess and surcharge).
The trouble comes with the dividends you earn on your investments. The dividend income is taxed in the US and India both. In the US, it is taxed at a flat rate of 25 per cent. This tax is withheld before you receive your dividends.
You also have to pay tax on these dividends in India, which is added to your taxable income and taxed as per your income tax slab in the financial year. "India and the US have a Double Taxation Avoidance Agreement (DTAA). You can offset the tax withheld in the US, against your tax liability in India. For example, the 25 per cent tax you have paid on dividends in the US can be offset against income tax payable in India," says Gupta of Cleartax.
Direct stock investment in the US stocks is no easy ball game. Factor in all the charges before you estimate expected returns on your investment. Alternatively, you can go for international mutual funds that don't require you to open a demat account or transfer money via banks. "For smaller investors, direct plans of international mutual funds are a cost effective and tax efficient way to get global exposure," says Mukherjee of Zerodha.
If indeed you have to go for direct stock investment, choose a broker that charges zero or flat brokerage fee. "A flat fee will ensure your charges do not increase exponentially depending on the trade size. Secondly, the investor should look for brokers/banks that offer a favorable exchange rate for currency conversion both at time of investment and withdrawals," says Patawari of StockEdge.
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