Bitten By The Nvidia Bug? How To Go About Buying Shares Directly Abroad

The frenzy across the global equity markets over Nvidia Corp. has once again shown the attraction that investors have towards taking exposure to equities, especially in the U.S., where there are a lot of success stories being scripted in the technology space.

Indian investors, too, can buy equity shares on the U.S. exchanges, but they need to follow the required procedure. This process will also give rise to several challenges, but here is how it can be handled.

Resident Indians who want to invest in listed equities on foreign stock exchanges have to go through the Liberalised Remittance Scheme route.

The impact of this situation is that there is a cap on the amount that can be used for both capital and current account purposes, and this limit is $250,000 per person per year. In effect, there is a maximum amount that can be invested using this route, and hence, the usage of the limit has to be kept in mind. The various guidelines that come with the scheme need to be followed, and this has to be done at the time of the transfer of the funds abroad. For example, your bank can ask you to show where the amount that you want to transfer has come from and whether tax has been paid on it.

There are two aspects of the tax element of an investment in stocks abroad.

The first impact hits the investor at the time of making the investment because, under the rules, there will be a tax collected at the source for such investments. The rate now is 20% when the remittance exceeds Rs 7 lakh in a year, so the investor needs to factor this into their cash flow consideration as they will have a lower amount left in their hands to invest once the TCS impact is accounted for.

The other aspect is the taxation of the gains that may arise on the shares that are bought on the overseas stock exchange. The gains from the sale of shares would be classified as capital gains. The shares are, in this case, listed on US stock exchanges, which are not recognised stock exchanges in India, so the holding period for the classification into short-term and long-term capital gains is 24 months. Short-term capital gains for shares sold before 24 months will be added to the individual's income. Long-term capital gains will be taxed at a 20% rate with the benefit of indexation.

One significant element that has to be considered when investing in stocks in the US is that you will need to open an account with a foreign brokerage firm or one that allows you access to the US markets.

This is significant because your local brokerage account will not work, and additional paperwork and effort have to be made to open and activate the account. The other aspect that one has to deal with is the fees that are charged to the brokerage account. These fees might not seem to be high at first sight, but they might not be cost-effective for small trades. Hence, it might be prudent to check out the cost and then see the kind of trades that need to be undertaken to ensure that the cost is not high and does not affect the overall economics of the entire transaction. If you are planning to invest a slightly larger amount and create a portfolio of stocks, then it will be far more effective than just undertaking this entire process for one or two investments.

Arnav Pandya is founder of Moneyeduschool