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Investing In The US From India Under RBI’s LRS Limit

Updated on April 05, 2021 10:10 am

Indian residents can freely remit money across international borders without seeking approval from the Reserve Bank of India (RBI). Under RBI's Liberalized Remittance Scheme (LRS), any Indian resident (including a minor, countersigned by a guardian) can send up to USD 250,000 abroad in a financial year through authorized dealers. For the current financial year, the deadline was March 31, 2021, to reach this maximum remittance limit.

The LRS has made it easier for Indians to study abroad, send gifts and donations, go for medical treatment, travel, buy property, make investments in foreign countries.

What Is Permissible Under RBI's LRS?

Indians are permissible for the following activities under RBI's LRS

  • Purchase of foreign property
  • You can open, maintain and hold foreign currency accounts with overseas bank
  • Purchase and holding of shares of listed or unlisted companies abroad or debt instruments
  • Investments in mutual funds, ETFs, debt securities, venture capital funds, promissory notes
  • Acquisition of Employee Stock Ownership Plan (ESOPs)
  • Set up wholly-owned or joint ventures
  • Provide loans to NRI relatives as defined in Companies Act 1956
  • Avail foreign exchange up to the maximum amount for business trips, emigration, overseas employment, overseas education, medical treatment, maintenance of close relative abroad, gifts, and donation abroad

Documents Required by Remitter

RBI requires individuals to fill and submit a Form A2 as an annexure for the purchase of foreign exchange under the scheme. In the case of a minor remitting the funds, Form A2 needs to be countersigned by the minor's guardian.

The form will have the remittance amount, the reason for remittance, the individual's PAN number, and other necessary details. Once the form is submitted, the Authorized Dealer verifies the information, and the transaction is processed.

An authorized dealer is an entity authorized by RBI under the Foreign Exchange Management Act, 1999 (FEMA) to deal with foreign exchange or foreign securities transactions.

What Is Not Permissible Under RBI's LRS?

  • You cannot remit money that comes from lottery winnings, income from gambling, racing, purchase of prescribed magazines, sweepstakes
  • Remittance not allowed for illegal activities like margin trading
  • Remittance prohibited to some countries or organizations identifies by the Financial Action Task Force (FATF) as "non-co-operative countries and territories"
  • You will need to get special permission from RBI if you exceed the maximum remittance limit

Note that remittance under the scheme can be combined for family members as long as the individual family members comply with the terms and conditions of the scheme. For remittance made for investments or property purchase or opening of a bank account, the individual family members must be co-owners or co-partners.

What Do You Need to Know About Tax on Remittance Under LRS?

As per the Union Budget 2020, 5% Tax Collected at Source (TCS) is applicable on remittance made under LRS for the amount exceeding INR 7 lakh since October 1st, 2020 in a financial year.

TCS will apply to all remittances under the scheme including foreign equity investments.

Here is how the rates are given based on the purpose of remittance.

Educational spending financed by a loan will incur 0.5% TCS on the amount above INR 7 lakh. If not financed by a loan, a TCS of 5% on the excess amount will be applicable.

Overseas Travel package will have a 5% TCS on the entire remitted amount. The threshold amount of INR 7 lakh is not given.

Read more on the tax rules on foreign remittances.

Investing in the US From India Under RBI's LRS

If you are interested in diversifying your stock portfolio beyond Indian stocks, you can legally invest in foreign stocks under LRS as discussed above.

You can remit USD from India to the US to invest in the US stock market. The US is home to some of the best stocks in the world such as Facebook, Amazon, Apple, Google, Netflix.

For beginner investors, ETFs are low-cost investments and a smart way to gain exposure to several stocks in a single investment. For example, SPY ETF tracks the S&P 500 index, and Invesco QQQ, another ETF gives access to Nasdaq's 100 companies.

From large-cap to small-cap stocks, the US stock market offers a plethora of options for investors.

Under the LRS, investors are allowed to retain, reinvest the income earned on the investments made through the remitted funds. They need not repatriate the funds or income earned from the investments made under the scheme. At an exchange rate of INR 72.76 to 1 USD, the LRS limit is around INR 1.82 crore.

According to the RBI, resident Indians remitted $431 billion (INR 3,258 crore) for investments in foreign equity and bonds in 2020.

 If you are looking to invest in Indian stocks from the US, here is how you do it.

Open a US Brokerage Account to Start Investing in the US Stock Market

To start investing in the US stock market, you need to open an overseas brokerage account with an international online broker like Interactive Brokers, TD Ameritrade, Fidelity Investments, Vested, etc, or any domestic brokers. Most of the platforms offer zero commission, no minimum balance, lower fees, and a paperless account opening facility.

You need to provide KYC documents like your PAN card, ID card, proof of address for verification purposes.

The brokerage firms help you with meeting the LRS formalities, funding your foreign account from your Indian bank account so that you can start buying US stocks directly.

You need to wire the funds in USD to your brokerage account since you will be buying the stocks in USD. As a resident Indian, you are allowed to wire up to $250,000 per financial year via authorized dealers.

Learn more about the best stock trading apps.

What Are the Brokerage Fees?

The fees will vary depending on the brokers. It can either be a fixed fee per trade or a percentage of total trade. There can be additional charges like maintenance fees, annual fees, inactivity fees, fees for data research, and so on. Some brokers like discount brokers are cheaper and offer zero commission, unlimited trading.

In addition to brokerage fees, you need to pay fees for international wire transfers to your bank. Most importantly, as you will be converting the Indian rupee to USD, there are foreign exchange conversion fees that your bank charges.

Send money online to the US at the best exchange rates on CompareRemit.

Tax on Foreign Investments

There are taxes applicable on investment gains and dividends.

For investment gains, the amount of taxes varies on the duration of holding the investments. The threshold for long-term capital gain is 2 years with a rate of 20% with indexation benefit. If your holding period is less than 2 years, it is considered a short-term capital gain and is taxed based on your income tax slab. 

For dividends, a rate of 25% will be taxed in the US. You need not pay this tax in India thanks to the Double Taxation Avoidance Agreement (DTAA) between India and the US.

The US stock market is the world's largest stock market. From IT to pharmaceutical companies, the investment sectors are wide-ranging. Investing in the US can be the easiest way to get into other international markets.

As we have established that you can legally invest in foreign stocks under the RBI's LRS and can invest up to INR 1.82 crore in a financial year, why not diversify your investment portfolio by buying some of the top US stocks and build wealth over the long term.

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