Law Firm in India

Investing Overseas - All You Need to Know

The article talks about all aspects of overseas investment including eligibility criteria, process of investment, declarations, paperwork and others.

In current times, Indians are continuously looking out for options to expand their gains, enter new markets, procure intellectual property, etc. One of the ways to achieve this goal is by investing in foreign companies either as an individual investor or an institutional investor.

Now, you might think foreign investments work the same way as domestic investments. And while they might, internally, there are several criteria and key pointers you need to keep in mind before parting with your money towards overseas shares and bonds. What are these criteria? Are you an eligible investor? What are the documents required? There are so many questions!

Keep reading to find your answers.

Is It Possible for You to Invest in Overseas Shares and Bonds?

Absolutely. Whether you are an individual or an organization looking to diversify your market reach, it is possible to invest in foreign shares and bonds.

  • Foreign Shares

As an individual, you can invest in foreign stocks via three routes:

  1. Through Indian brokers:You can take the help of full-service Indian brokers (Axis Securities, ICICI Direct, Reliance Money, etc.) who have tie-ups with foreign brokers. Here, all you need to do is open an overseas trading account with the Indian broker’s foreign partner. Once the account is open, start investing and creating your portfolio in foreign stocks.
  2. Through foreign brokers: Another way to invest in foreign stocks is with the help of international brokerage firms. While there are a select few brokerage firms that let Indian citizens set up accounts for trade in overseas stocks, these brokerages provide you a direct leeway to foreign investments in the USA. Charles Schwab International Account, TD Ameritrade and Interactive Brokers are examples of imminent international brokerage firms for Indian citizens.
  3. Through apps: Startup Apps such as IndMoney, Webull, etc. are popular apps that let you invest in foreign stocks. These apps are simple to use and provide ease of access with their user-friendly interface, letting you experience trading in global markets.
As an institution, you might have several reasons to move towards overseas stocks. A simple way to do so is by becoming a Foreign Institutional Investor (FII).

Simply put, an FII is an institution that invests in a country outside its registered headquarters. Officially used in China, the term refers to an entity investing in another nation’s financial markets. Herein, an institutional investor can include mutual funds, insurance companies, investment banks, etc.

Therefore, if you are a mutual fund in India that sees a high-growth opportunity in a company listed in the USA, what will you do? As an FII, you are within your rights to purchase shares in the US stock market (Nasdaq). The purchase will not only open the doors to your investment as an FII but will also make it convenient for Indian citizens to purchase such stocks (through indirect investment via your mutual fund).

  • Foreign Bonds

Several foreign companies issue bonds to raise money for their business. Such firms are known as ‘issuers of bonds’, and the person who loans out the required money (in exchange for bonds) is the investor.

You can easily buy foreign company bonds through your overseas trading account. Another way to buy company bonds is through Exchange Trade Funds (ETFs). ETFs usually purchase short-term and long-term bonds that allow investors to diversify their portfolios without putting their money in a high-risk zone.

You can also invest in a second form of bonds known as government bonds wherein you buy bonds directly from the government, i.e., no middleman or broker is involved. For example, if you wish to invest in the US government’s bonds, you can check their Treasury Direct website that lets you purchase bonds with ease.

What are the Eligibility Criteria?

For you to be able to invest in foreign shares and bonds, it is essential to stay updated with and qualify the eligibility criteria. Scroll on to check whether you, an individual or institutional investor, are competent to invest in overseas shares or bonds.

  • For Institutional Investors

You are eligible for foreign investments if you are:

  1. A company incorporated in India
  2. A government body created under an Act of Parliament
  3. A partnership firm registered under the Indian Partnership Act, 1932
  4. A Limited Liability Firm
  5. Any other entity (as notified by the RBI)
  • For Individual Investors

You are competent to participate in foreign investments if you are a Resident Individual as defined under Section 2(v)(i) of FEMA, 1999.

  • Other Parties

Other than individual and institutional investors, there are other organizations that can invest in overseas shares and bonds. These are:

  1. Proprietorship or unregistered partnership firm
  2. Trust registered under the Indian Trust Act, 1882
  3. Society registered under Societies Registration Act, 1860
Now that we have cleared the air around the eligibility concerns, we’ll discuss a step-by-step process to investing in foreign shares and bonds.

Process to Invest in Foreign Shares and Bonds:

A. For Overseas Shares

Once you’ve opened an overseas trading account under Reliance Money/ Kotak Securities/ ICICI Direct etc., here’s what you need to do next:

  1. Fill and submit a separate account opening form with your KYC details (Know-Your-Customer documents)
  2. Transfer money to the international partner of your domestic brokerage firm. To transfer the funds,
  • Submit an application cum declaration form under the Liberalized Remittance Scheme (LRS)
  • Sign a form for the FEMA declaration (Form A-2 for the purchase of foreign exchange under LRS)
  • Sign a form authorizing your designated bank as the authorized dealer

When these steps are complete, you can now buy or sell foreign stocks online.

B. For Overseas Bonds:

Here’s what a common process to purchase foreign bonds looks like:

  1. Log in to your overseas trading account or bonds selling sites such as IndiaBonds
  2. Enter the investment amount
  3. Transfer the required amount by using a suitable payment gateway
  4. Await your bid clearance (bond allotment)
  5. Check the allotment and credit of bonds in your overseas trading account
Let us now quickly check out the required documents and declarations to avoid any hassle at the time of investment.

Overseas Investment: Required Paperwork

A foreign investment would require you to clear the following prerequisites:

A. KYC Documents

Your Know-Your-Customer Document should include:
  • Identification and Verification of the Beneficial Owner (BO)
  1. Name and Address
  2. Date of Birth
  3. Tax Residency Jurisdiction
  4. Nationality
  5. Acting alone or in a group (if more than one BO, then the name and address of each member is required)
  6. Percentage shareholding of BO
  7. Tax Residency Number
  8. If BO is a company represented by service providers, information of all owners or effective controllers is required
  • Declarations: An investor is required to fill in the following declarations to invest in overseas shares or bonds:
  1. Submit an application cum declaration form under the Liberalized Remittance Scheme (LRS)
  2. Sign a form for the FEMA declaration (Form A-2 for the purchase of foreign exchange under LRS)
When you are done with the paperwork and investments, there will, of course, come a time when you’ll wish to divest and bring in the money back with the profits earned. The question is, what happens when you sell your overseas investments and bring back the money to your country’s bank account?

When we sell a foreign investment, the gains are taxed at a different rate as compared to gains from domestic investments. For example, if such gains have already been taxed in the USA, they can now not be taxed in India owing to the Double Tax Avoidance Agreement (DTAA).

Further, if a mutual fund scheme or stock (listed in foreign exchange) is held for two years or less, the gains are referred to as Short Term Gains. This amount is added to the investor’s income and taxed accordingly (as per slab rate). However, if the investments are held for more than two years, they are termed as Long-Term Capital Gains. These gains are taxed at 20% after cost indexation.

While domestic sales avail an exemption of Rs 1 lakh per year, such exemption is not available in overseas sales.

Paperwork Required to Bring Back Funds Invested in Overseas Shares and Bonds

A tax resident of India is required to disclose all foreign income and assets in their IT returns. Such disclosure is mandatory even if the asset(s) has reaped zero income, or is sold before the end of the financial year. Further, filing IT returns is mandatory for investors owning foreign assets. The declaration is necessary even when an investor’s total income is below Rs 2.5 lakhs (or the exemption limit at that time). Taxpayers declaring foreign assets need to file their returns in ITR-2 or ITR-3.

Apart from this, there are various charges involved in foreign investments. These charges are:

  • TCS: As per the RBI’s Liberalized Remittance Scheme, a 5% Tax Collected at Source (TCS) is applicable on remittance above Rs 7 lakh.
  • Capital Gains and Dividend Tax: For Indian citizens, the USA charges dividends at the rate of 25%. An investor can claim credit for the tax paid abroad to avoid double taxation under the DTAA. Further, while capital gains tax is not applicable in the USA, an investor is liable to pay such taxes in India.
  • Bank Charges: Foreign exchange conversion fees and transfer fees are charged by banks in India.
  • Brokerage Fee: Buying or selling of shares requires investors to pay the broker’s fee in India.
  • Foreign Exchange Rate: These rates impact not only the value but also the number of units allotted during the sale or purchase of foreign shares.

While this article has tried to elucidate the various facets of overseas shares and bonds, there are several other forms of investment options such as ETFs, Certificates of Deposit, Mutual Funds, etc. To know more about domestic and foreign investments, and get the best possible assistance near you, contact us at 

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