Digital technologies have shrunk the world. The opportunity to create wealth by just a swipe or a click of a button sitting anywhere in the world and investing in stock markets across has become seamless. More so for Indian investors, who have been taking advantage of this new world of possibilities increasingly over the past year.
The benefits of global diversification of portfolio are many, including shielding yourself from heavy losses brought about by any big volatility in a particular stock market. In recent times, the COVID19 pandemic has shown investors the flipped side of such market swings and pushed this diversification further.
If you are yet to ride the bus, these are five things you much absolutely know in order to make better investment decisions:
1. Can you invest?
The answer is: Yes. Any Indian can start investing in global equities with as little money they are willing to risk. The Reserve Bank of India, though, limits overseas investments at $250,000 annually under its Liberalized Remittance Scheme.
2. Where to start?
Exchange-Traded Funds, or ETF, would be a place to make a start, even though investors can directly purchase stocks on exchanges. ETFs are an assortment of different assets that are benchmarked against an index, investment strategy or sector.
3. The secret to diversification
A key plus point to investing in a US stock is that, unlike in India shares where investors have to buy a share as a whole, one can own a fraction of their pick. So even though stocks are expensive in the global markets, a small investor can still be an owner. This may not give the stockholder voting rights, but does not take away the right to a dividend.
4. Understanding tax implications
Although non-American investors are not required to pay tax in the US, Indians are liable to pay capital gains tax in India as per their duration of their investment. If held for less than 2 years, the investor is liable to pay short-term capital gains tax and long-term capital gains tax if longer. For dividend payouts, Indian investors needed to pay 25% of the amount in the US. The dividend Indian investors receive is minus this tax. However, since India and the US have a double tax avoidance treaty, India investors receive a credit on the tax deducted in the US.
5. Tax collected at source
According to the Finance Bill 2020, a 5 percent tax collected at source (TCS) is applicable on all remittances over Rs 7 lakh. This is applicable on expenses incurred on items such as investment in real estate, stocks and bonds, and foreign education. The TCS can be claimed as a refund on filing of income tax returns.
Article by Ms. Ashma Zaveri, Chief Operating Officer, MNCL.