Vested’s mission is to make investing in the US stock market simple for investors from India. Many Indian investors seem to believe that they are not allowed to invest in foreign stocks. This is not true! In fact, it is via the LRS that Indians can legally invest abroad. Read below for more details.
What is the LRS?
Prior to 2004, Indian residents required approval from the Reserve Bank of India (RBI) every-time they sent money overseas because the RBI wanted to limit capital outflow. The RBI was concerned that excessive outflow of money would destabilize the rupee and make it lose value.
The RBI feared that if everyone starts selling rupees and buying USD, the value of the rupee would fall and the value of the dollar would increase. Since India’s economy heavily relies on foreign imports which are paid in USD, the prices of everyday goods would go up and destabilize the economy.
However, the RBI realized that open cross-border flow of capital is important for economic growth. Therefore, in 2004 the RBI instituted a new policy to relax cadivital outflow control. This new policy is called the Liberalized Remittance Scheme (LRS). Under the LRS, individuals can send money across borders without seeking approval from the RBI. The LRS has made it easier for Indian residents to study abroad, travel, and make investments in other countries.
How much can you remit or send?
Over the years, the maximum amount you can remit has changed (Figure 1). Currently, the limit is at US $250,000 per year per individual. The RBI continues to monitor its current account deficit and the value of the rupee. It may adjust the maximum limit of LRS over time.
What is OK under the LRS:
Under the LRS, Indian residents can remit money overseas for travel, education, medical care, purchase of shares and property, care of relatives living abroad, gifts, and donations. Individuals are also permitted to open, maintain, and hold foreign currency accounts with overseas banks for carrying out transactions.
What is not OK under the LRS?
Generally, you cannot remit money that comes from certain sources, such as winnings from gambling and lottery, dividends from certain companies, and interest payments from non-resident rupee bank accounts. Individuals also cannot remit money for any prohibited or illegal activities such as margin trading.
Furthermore, once an individual hits the maximum US $250,000 per year per individual limit, the individual must acquire special permission from the RBI. There are also some countries and organizations you are not legally allowed to remit money to as listed by the Financial Action Task Force (FATF).
To monitor the total amount of remittance sent by individuals, the RBI requires remitters to fill out and submit a Form A2, which is provided by RBI-appointed Authorized Dealers. The form captures the remittance amount, the purpose, and the individual’s PAN number. Once the form is received, the Authorized Dealer will verify the information and process the remittance.
5% TCS is now applicable to the LRS
In the 2020 Union Budget, the Government introduced a 5% TCS (Tax collected at Source) on remittances undertaken via the Liberalised Remittance Scheme (LRS) above INR 7 lakh. This new rule goes live from October 1st 2020.
Why did the government introduce this TCS?
The step was taken after a study conducted by the Income-tax Department showed that a large number of individuals sending out money had not filed income tax returns. The Income-tax Department discovered that 36% of individuals carrying out foreign remittances did not file tax returns.
Therefore, the TCS is introduce to widen the tax net and ensure tax compliance and NOT to further burden the existing taxpayers.
How will TCS work?
Starting from 1st October 2020, Authorised Dealers (typically banks and remittance companies) will collect 5% Tax at Source once LRS remittance(s) made by an individual who have remitted more than 7 Lakh in a Financial Year (Apr-Mar).
Two important notes here:
- The 5% is deducted only on the amount above 7 lakhs. For example, if you remit INR 10 Lakh in a year, 5% will be calculated on 3 lakhs i.e. INR 15,000 will be deducted as TCS
- For the current financial year, any remittances made post March 2020 will count towards the 7 lakh threshold. For example, if you have transferred INR 6 lakhs before October and you transfer additional INR 5 lakhs after October 2020, then the 5% TCS will be calculated on INR 11 lakhs INR 7 lakhs = INR 4 lakhs. So, 5% of 4 lakhs which is INR 20K will be debited as TCS
- Note that no back-dated TCS will need to be paid. So in case you have already made remittances more than INR 7 lakhs before October 2020, no TCS is payable
Is the TCS applicable for investing in equities abroad?
Yes, TCS shall be applicable to all the remittances under LRS including equity investments abroad (which falls under the S0001 purpose code).
Different purposes have different TCS rates applicable. Here’s a quick summary by purpose of remittance:
|Nature of remittances
|Education expenses financed through a loan (you will need to show proof of loan sanction)
|0.5% in excess of INR 7 lakhs in a financial year
|Education expenses not financed through a loan
|5% in excess of INR 7 lakhs in a financial year
|Overseas Travel Package
|5% of the entire amount remittedNote: There’s no 7 lakh threshold,all transactions applicable for the TCS
|International Transaction on Debit Cards
|5% of the entire amount remitted
Note: Same as above. All transactions are applicable
|Transfer from Domestic Account to NRO account
|5% in excess of INR 7 lakhs in a financial year (if purpose of transfer under LRS i.e Loan to NRI/Gift to NRI etc)
|For any other purpose (including investments)
|5% in excess of INR 7 lakhs in a financial year
Can we claim credit for the 5% TCS?
Yes! The tax paid during TCS is not additional tax on the fund transfer. The TCS will be reflected as tax credit in your Form 26AS. Therefore, the amount of TCS can be claimed as credit against tax payable while filing income tax returns. In case the TCS is higher than your tax payable, you will get a refund. Ig you are interested in reading more about the TCS.
It is a common misconception that Indian residents cannot invest in the US. Under the LRS, residents of India can remit USD and invest in US stocks, as long as investors follow the maximum limit guidelines outlined above and purchase USD through an Authorized Dealer. In fact, in 2017, Indian residents remitted a total of USD 442 million to invest in foreign equities and debt.
For the most up to date regulations regarding the LRS please visit here. Please see article 6(iii) for specific LRS regulations regarding investments in equity.
We are hard at work building a platform that enables investors from India to invest in US stocks, and we will help you go through the remittance process. Interested in learning more? Please visit us at https://www.vested-finance.go-vip.net/.
Please note that this article is meant to be informative and not to be taken as an investment/tax advice. Tax laws are subject to change and may vary depending on your circumstances. Thanks for reading!