Why LRS route for investing in capital markets abroad is mainly for HNIs

Those with small amounts should skip it owing to high costs and elaborate tax-related compliances

Mutual funds can no longer invest in overseas stocks or mutual funds since they hit their $7 billion limit. They can still invest in overseas exchange traded funds (ETFs) for which there is a separate $1 billion limit (the exception are fund houses that have exhausted their individual sub-limits).

Due to this curb, many retail investors are thinking of investing overseas via the Liberalised Remittance Scheme (LRS) route, which allows each resident individual to remit up to $250,000 overseas in a financial year. According to the Reserve Bank of India (RBI) bulletin, investment in overseas equities and debt via the LRS route rose to $104.5 million in March 2022.

Before taking this path, investors must understand the full implications of doing so.

Access to wide range of instruments

Even when the current restrictions were not in place, the number of international options available via the mutual fund route was limited. “The LRS route offers investors access to a broader array of investment options. On a platform like ours, investors can get access to several geographies—US, Euro­pean, Asian, etc.—and sectors. They can also invest in high-quality active fund managers, exchange traded funds (ETFs), unlisted equities and debt,” says Himanshu Gupta, chief operating officer, Kristal.AI.

This route also allows investors to build a portfolio in the currency in which they intend to spend the money. “They can thus hedge themselves against the rupee’s tendency to depreciate around 4-5 per cent on an average against the US dollar annually,” says Gupta.

Options available

In recent times, many platforms have become available that enable investors to invest abroad via the LRS route. Some, like Interactive Brokers and Saxo, offer investors access to products. Some, like Kristal.AI, offer access to curated products and also offer advice for portfolio construction.

Another option that has opened up only a few months ago is the National Stock Exchange (NSE) International Exchange (NSE-IFSC) set up in Gift City. “Currently we offer investors access to the 50 top stocks in the US but will expand our offerings soon,” says Ravi Varanasi, group president, NSE. In Gift City, NSE has launched the depository receipt (DR) programme for US stocks. “All the DRs are held in the depository in Gift City in the investor’s name and the entire setup is regulated by the regulator in Gift City. This is a safe route for investors,” adds Varanasi.

Investors can also go via India INX Global Access IFSC (INX GA), a special purpose veh­icle set up by BSE’s India International Exchange. India INX has tied up with Interactive Brokers.

Tax compliance becomes burdensome

Those investing in foreign securities must be careful while filing their income-tax returns (ITRs). “Investors must disclose their capital gains, losses, and dividends in their ITRs to reduce the risk of litigation,” says Suresh Surana, founder, RSM India.

The return-filing procedure becomes more onerous. “You may no longer be able to file using the Sahaj form and will instead have to use one of the more elaborate ones,” says Avinash Luthria, a Sebi-registered investment advisor and founder, Fiduciaries.

In Schedule FA (foreign assets), investors must reveal de­tails of all assets held outside India, and income from those assets.   Luthria says the Income-Tax Department treats foreign inve­stments very seriously and even an accidental mistake on the taxpayer’s part could land him in a soup.

Markets like the US levy withholding tax. To avoid double taxation, investors have to follow the appropriate procedure, which adds to their compliance burden. If the investor passes away, and the corpus is above a threshold limit, some countries impose an estate tax.

At the time of sending money overseas, investors are subject to tax collected at source (TCS). “Under Section 206C(1G) of the Income-Tax Act, the remittance received by the authorised dealer under LRS is subject to 5 per cent TCS in excess of Rs 7 lakh remitted in a financial year,” says Surana.

Hire a competent chartered accountant who can help you handle all this complexity.

Factor in all costs

Understand all the costs before you embark on this route. When you send money overseas, there is usually a transaction fee and an exchange rate markup. Due to these costs, transferring small amounts at regular intervals for doing a systematic investment plan (SIP) is not viable.

Understand all the components of the fees charged by the platform. Some charge an advisory fee that could range from 0.5 to 1.5 per cent. In addition, there is a fund management cost (the expense ratio of an active fund) that could range from 0.5 to 1.5 per cent. ETFs have a lower expense ratio of 7 to 40 basis points.

Who should go for it

Given the plethora of costs involved, this route is suited for high-net-worth individuals. “Investors who can invest at least $50,000 (around Rs 39 lakh) should ideally opt for the LRS route,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

Adds Luthria: “Given the compliance burden, consult your chartered accountant before taking this route.”    

Novice investors should begin by investing in a low-cost, broad-based index fund or ETF. “Two good products that the novice investor may go for are the Vanguard S&P 500 ETF and the Vanguard Total World Stock ETF,” says Luthria.

If the amount you can invest is small, stick to domestic equities and to mutual funds that invest in foreign ETFs.

If you intend to take the LRS route for access to individual overseas stocks, think again. “When the bulk of active, US-based fund managers fail to beat their benchmarks, the chances of a retail investor based in India doing so are minuscule,” says Luthria.

Taxation of foreign stocks and MFs

• International mutual funds (including index and eexchange-traded funds) get treatment on a par with debt funds
• Capital gains are treated as long-term if the holding period is more than 36 months, short-term if it is up to 36 months
• In case of foreign stocks, capital gains are treated as long-term if the holding period is more than 24 months, short-term if it is up to 24 months
• For all these products, long-term capital gains are taxed at 20 per cent with indexation
• Short-term capital gains are taxed at slab rate
• Any dividend received from a foreign (or Indian) stock is taxed in the investor’s hands at slab rate

Source: RSM India

How foreign ETFs and stocks are taxed
 

Capital Asset	Exchange Traded Funds (ETFs)		Foreign stocks - Listed/ Unlisted
Period of Holding	Over 36 months	Up to 36 months	Over 24 months	Up to 24 months
Classification	Long-Term Capital Asset	Short-Term Capital Asset	Long-Term Capital Asset	Short-Term Capital Asset
Basic Tax	@ 20% u/s 112 of the IT Act (With Indexation)	As per marginal slab rates applicable to the investor	@ 20% u/s 112 of the IT Act (With Indexation)	As per the marginal slab rates applicable to the investor

Source: RSM India

Sanjay Kr Singh