Every Equity Investor should maintain some part of their portfolio diversified into foreign companies. This can be achieved through Foreign brokers or Mutual Funds and ETFs that invest in abroad markets. Investing abroad has many benefits such as exposure to the top global companies like Facebook, Amazon, Ford, etc. The tax implications on investments made outside India are different as foreign Equity is taxed as Debt Mutual Funds
Investing abroad is done for the purpose of diversification and getting exposure in multiple Nations. This is done to enjoy the growth opportunities of other countries. It also provides exposure to the companies that are not listed on the Indian Stock Exchanges. As the famous saying prevails, “Never put all your eggs in one basket”, the same saying goes with Stock Markets. Due to this, it is suggested, one should not concentrate their portfolio into one single Asset Class or Country.
Top companies like Amazon, Facebook, Netflix, etc, have a global presence but are listed on U.S stock exchanges. To get exposure to these companies one can invest mainly by 2 common methods.
1. Directly Investsting through a Stock Broker
Investing directly in shares of foreign companies is a way to invest in international companies. For this one needs to have a brokerage account from an abroad broker. After this one can wire the funds to the broker and start investing in their desired companies as per their requirements.
2. Investing Indirectly through foreign ETFs and Mutual Funds
One can also invest in abroad markets indirectly through Mutual Funds Or ETFs that invest in abroad companies.
Many listed ETFs track the NASDAQ 100 and S&P 500 Index and give identical returns as them. Investing in them will give the same benefit as investing in the top 500 companies of the S&P 500.
Taxation is an important part when it comes to investing. One should know the tax regime and the exact percentage at which they have to pay taxes on their gains. Tax is paid on 2 types of returns-
1. Capital gains
Capital gains are the realized gains or profits which one enjoys at the time of selling a particular stock. For example, “A” had bought the shares of Airtel at Rs 400 and sold them after 2 years at Rs 600 then the gain of Rs 200 is known as Capital Gain or the profit earned while selling the share on a later date.
For International investments, the tenure of capital gains is different than in India. In the domestic market if one sells the shares within a year or 365 days the gain is taxed under short-term capital gains tax (STCG) at 15%. On the other hand if one sells the securities post 12 months or 1 year then the gain is taxed under “Long term capital gains tax” (LTCG) and is taxed at the rate of 10% post 1 lakh which is exempted under any taxes.
The taxation on Internation equity is similar to Debt Mutual Funds in India. If one sells their Abroad Equity holding within 36 months or 3 years then that is treated as “Short Term Capital Gains” and is taxed as per the tax slab of an individual. On the other hand, one sells their international shares or mutual funds after a period of 36 months then it is treated as “Long Term Capital Gains Tax” and is taxed at 20% with Indexation.
Apart from Capital Gains, dividends are another income source that is taxable when it comes to equity investing. In India, the taxes on dividends are paid by the individuals as per their tax bracket. If a person receives dividends from abroad companies then that shall be reflected under “Income from other sources” and will be taxed as per the individual's tax bracket. One thing to watch while receiving dividends is, one should note the country from which the company that is paying the dividend is. This is to ensure that one does not pay the taxes twice under DTA (Double taxation Avoidance). If this is not applicable then one should follow Sec 91 for filing taxes.
There is one main difference in the taxation method of Domestic Equity and International Equity. The tenure for STCG (Short Term Capital Gain) is 12 months for Indian Equity whereas International equity is treaded similar to Debt Mutual Funds and the STCG is applicable if the holding period is less than 36 months.
Investing abroad is a good way to diversify your overall portfolio and get certain benefits like gain from Currency depreciation, Global exposure in the top companies of the world, etc. One should also maintain the tax records properly for the Income Tax filing. The main taxation difference between Indian equity and international equity is that the time period for STCG. Indian equity is taxed under Short term Capital Gains tax if sold under 12 months whereas Internation Equity is taxed under STCG if sold within 36 months.
I think that investments play a significant part in an individual's financial planning, and that diversity is essential in this regard. People have begun to favor investing in US stocks since it is relatively simple nowadays, but it is critical that they thoroughly research the tax consequences so that they do not get into problems.