Overseas investment by Indian residents is regulated by the Indian exchange control regulations. On Aug. 22, 2022, the Government and the Reserve Bank of India issued a new framework that provides more clarity, covers wider economic activity and the revised reporting requirements.
An overseas investment by an Indian resident individual can either be in the form of overseas direct investment (ODI) or overseas portfolio investments (OPI). Here’s a detailed guide on the merits and demerits of overseas investment, the exchange control regulations and tax reporting requirements for overseas portfolio investment (OPI) in the case of Indian residents or individuals.
Ways of Overseas Investment for Indian Residents under the Overseas Portfolio Investment
The overseas investment by an Indian resident must be within the overall ceiling of the Liberalized Remittance Scheme (“LRS’”. Under LRS, an Indian resident can utilize up to $250,000 per financial year (April to March) cumulatively towards permissible investments (OPI and ODI route) and other purposes such as private visits outside India, gift or donations, maintenance of relatives abroad, medical treatment abroad, education abroad, etc.
The definition of “Overseas Portfolio Investment” or “OPI” has been clearly spelled out in the new framework, which was not the case in the erstwhile regulations. Indian residents can make overseas investment as within the overall LRS limit.
Investment in shares of listed foreign entities
Resident Indians can invest in shares of foreign companies listed on overseas stock exchanges with less than 10% stake and must not have control over the foreign entity in which the investment is being made.
For instance, a resident Indian buying stocks of Amazon, Apple, Microsoft, Tesla etc. by opening a demat account with foreign entity would generally be covered under this category. The investments would be under the overall limit of LRS as discussed above and also there is no reporting requirement under the new framework (i.e. half yearly filing of Form OPI not required).
Resident Indian can open an overseas trading account with an Indian broker having tie-up with international brokers such as ICICI Direct, HDFC Securities, Kotak Securities, and Axis Securities etc. or directly open an account with a foreign broker having presence in India like Charles Schwab, Ameritrade, Interactive Brokers, etc.
Investment in international mutual funds
Indian residents who are not keen in investing directly in shares of foreign entities can alternatively look at investing in international Mutual Funds schemes which have exposure to international markets and which in turn invest in foreign stocks.
There are several international exchange-traded funds (ETFs) available that allow access to Nasdaq and other leading global indices. The investments would be under the overall limit of LRS and also there is no reporting requirement under the new framework (i.e. half yearly filing of Form OPI not required).
Investment in listed debt instruments
Indian residents desirous of investing in an international market with a steady income stream can make investment in listed bonds of foreign government, listed corporate bonds of foreign entities etc.
Similar to investment in foreign equities and listed debt instruments, the investments in listed debt instruments would be covered within the LRS limit and also there is no reporting requirement under the new framework (i.e. half yearly filing of Form OPI not required).
Acquisition of foreign securities by way of inheritance
Indian residents can acquire shares of a foreign entity or other foreign securities by way of inheritance from a person resident in India or from a person resident outside India. Acquisition of foreign securities by way of inheritance shall not be reckoned towards the LRS limit.
The limit of LRS shall not be applicable as there is no remittance outside India and also there is no reporting requirement under the new framework (i.e. half yearly filing of Form OPI not required).
Acquisition of foreign securities by way of gift
Indian residents can also freely acquire shares of a foreign entity or other foreign securities by way of gift from another Indian resident who is a relative. A resident individual may acquire foreign securities by way of gift from a person resident outside India in accordance with the provisions of the Foreign Contribution (Regulation) Act, 2010.
Acquisition of foreign securities by way of gift shall not be reckoned towards the LRS limit as there is no remittances outside India and also, shall not require reporting under the new framework.
Investment in entities located in IFSC (GIFT City in Gujarat)
Investment made by an Indian resident in entities located in “International Financial Services Centre” or “IFSC” i.e., the GIFT City is considered as an overseas investment. An Indian resident is permitted to invest in equity capital of entities located in IFSC within the overall limit of LRS as well as it can make investment (including sponsor contribution) in the units of an investment fund or vehicle set up in an IFSC.
Indian residents are also permitted to invest in foreign stocks through the international stock exchange established in IFSC. Some of the entities already in existence in IFSC in GIFT city Gujarat, which provide a platform for investing abroad include India International Exchange (IFSC) Limited (India INX) and NSE International Exchange (NSE IFSC).
The investments in entities located in IFSC would be covered under the overall limit of LRS and there is no reporting requirement under the new framework (i.e. half yearly filing of Form OPI not required).
Acquisition of sweat equity shares issued by foreign entities
Foreign entities often issue sweat equity shares to the employees or directors at a discount or for consideration other than cash, for providing their know-how or making available rights like intellectual property rights or value additions by whatever name it is called.
Resident individuals can acquire sweat equity shares of such foreign entities, whether listed or unlisted, up to 10% of its equity capital.
There is no limit on the amount of remittance made towards said acquisition of sweat equity shares, though, such remittances shall be reckoned towards the LRS limit of the person concerned.
For instance, a resident individual can remit $300,000 for payment towards sweat equity shares, but thereafter for that financial year, he cannot make other remittance under the LRS as the limit would be exhausted.
Acquisition of shares or interest under employee stock ownership plan (ESOP) or employee benefits scheme
Overseas entities often issue shares under the ESOP/Employee benefit schemes to the Indian residents who are employed with or are directors of an office in India or branch of an overseas entity or of an Indian entity in which the overseas entity has direct or indirect equity holding.
Resident individuals can acquire shares or interest under ESOP or Employee Benefits Scheme offered by such overseas entities, whether listed or unlisted, up to 10% of its paid up capital. There is no limit on the amount of remittance made towards said acquisition of shares, such remittances shall be reckoned towards the LRS limit of the person concerned as discussed above.
In this case, the employer company has to report about the sweat equity shares in Form OPI within 60 days from the end of the half-year in which such OPI is made.
Acquisition of minimum qualification shares of foreign entity
An Indian resident can also acquire minimum qualification shares issued for holding a management post in a foreign entity up to 10% of the paid up capital of such foreign listed or unlisted entity having no control.
The remittances for acquisition of such minimum classification shares would be covered under the overall limit of LRS and there is no reporting requirement under the new framework (i.e. half yearly filing of Form OPI not required).
Reporting Requirements For an International Investment
Under Foreign Exchange Regulations:
The Indian resident intending to make remittance towards investment in foreign entities has to submit bank specific documents (pertaining to LRS, which is procedural compliances for remittances outside India) at the time of making remittance.
As discussed above, there is no other compliance under the new framework in the hands of Indian Resident for making investment under OPI, except in cases where OPI is by way of acquisition of sweat equity shares or employee stock ownership plan (ESOP) where the employer is required to report it in Form OPI.
Under Income Tax Act (IT Act):
Under the IT Act, every Resident and Ordinarily Resident (RoR) individual is required to furnish details of investment in foreign stocks / assets in “Schedule FA” (i.e. Schedule of Foreign Assets) of their Income Tax Return.
In case of non-disclosure of foreign investments in the income tax return, the income tax authorities can issue a notice to the individual for such undisclosed assets and can also treat such income tax return as a defective return u/s 139(9) of the IT Act.
Also, “The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (‘BMA’)” imposes a more stringent penalty of INR 10 lakh for non-disclosure of a foreign asset in Schedule FA.
OPI – Tax Collected at Source (TCS) on remittances of above INR 7 lakh under LRS
An Indian resident remitting funds outside India under LRS will be required to pay an additional amount in the form of TCS at the rate of 5% to the authorized dealer bank on an amount in excess of INR 7 lakh. Suppose an individual intends to remit INR 20 lakh in the financial year, in such case he will be required to additionally pay INR 65,000 [(INR 20 lakh – INR 7 lakh) * 5%].
Further, in case the resident individual does not possess a PAN card or an Aadhar card, then TCS would be collected at a higher rate of 10%.
Merits and Demerits of Overseas Investment
The principal merits of overseas investment are:
- Benefit from the recent moderation in valuations of key stock market indices worldwide.
- Investment in global blue chips stocks such as Apple, Microsoft, Tesla, Amazon and others.
- Reduce country and currency risk due to investment in different countries and different currencies which results in diversification of the portfolio. We have seen the weakening of several currencies including the Indian rupee against the U.S. dollar through 2022.
The principal demerits of the overseas investment are:
- Need for greater understanding of the relevant market and the companies.
- Greater compliances and reporting requirements in India.
- Higher tax incidence on capital gains as compared to Indian listed shares
Bottom Line
Over the past few years, the portfolio investment outside India by Indian residents has increased manifold and hence, the changes have far-reaching implications.
