Is it better to invest directly in foreign stocks?



Under foreign exchange control regulations, resident Indians are allowed to withdraw foreign currency up to $ 250,000 per year for a variety of purposes, including travel and investment abroad. In recent times, a large number of investors have been tempted to invest in stocks listed overseas, given the attractiveness of higher yields, with the added benefit of the depreciation of the Indian rupee against foreign currency. Many banks and brokers offer this possibility to invest directly in foreign stocks. In addition, a large number of domestic mutual funds have recently launched funds of funds (FoF) or programs that also invest in such foreign stocks. From a tax point of view, is it better to invest directly in foreign stocks or to invest through programs offered by domestic mutual funds?

Even if one invests directly in foreign stocks, an investor will not benefit from the preferential tax treatment available for listed domestic stocks, since such a benefit is available for stocks listed only on recognized stock exchanges (which means in fact only national scholarships recognized by the government). The advantages of a reduced holding period to qualify as long-term assets after 1 year, and the preferential tax rates of 15% for short-term capital gains and 10% for capital gains. Long-term values ​​are limited to stocks listed on national stock exchanges. The holding period for foreign stocks to qualify as long-term would be 2 years, and the tax rate on long-term gains would be 20% and normal tax rates for short-term capital gains. .

FoF or a system issued by a domestic mutual fund, which normally invests either in foreign exchange-traded funds or in foreign stocks, would not be considered an equity-focused mutual fund because all of its participation may be in shares or underlying equity instruments, since 65% of its participation would not be in shares listed on the domestic market or in funds investing 90% of their investments in such national shares . Such investments would therefore also not yield the benefits of the 10% or 15% preferential tax rates available for equity-focused mutual fund units. The holding period in such cases would be 3 years to qualify as long-term capital gains, while the capital gains tax rates would be the same as for direct foreign stocks.

While there is not much difference in the method of taxation, apart from a longer holding period for UCI units, the problem actually lies in the detailed declarations that a taxpayer has to make on his foreign assets. in the tax returns. A taxpayer with assets abroad is required to file an income tax return, even if his income is below the taxable limit. There is a separate FA Schedule for a taxpayer to complete, disclosing foreign assets and income from those assets. These details should be provided even if the shares have been held for a day or two. Detailed disclosure is much more than that required for domestic actions, where the benefit of the 10% rate is claimed.

Such disclosure is required regardless of the income level of the taxpayer, unlike domestic assets, where limited disclosure is required of the total cost of various types of assets, only if the taxable income exceeds ??50 lakh. The worst part about this disclosure is that a failure to disclose any foreign asset could result in a penalty of ??10 lakh under the black money law! You can’t afford to make even one mistake, and if you’ve traded a lot of foreign stocks, you might spend more time filling out this chart than you spend on the rest of your reporting. income.

Indeed, the tax administration considers all persons holding assets abroad as potential tax evaders, as some taxpayers have been found to have accounts in Switzerland and in other tax havens. This is despite the fact that the holding of foreign assets has been permitted for resident Indians for almost two decades now. It is also very likely that your case will be taken over for verification by the tax service solely because of your assets abroad, as a high-risk case, or that you will receive a notice from the investigation service of the tax service seeking to cross-check the information they receive from foreign tax authorities, with your tax returns. In order to claim a foreign tax credit withheld at source, you must also file a separate form before you file your return.

The hassle and effort involved are sometimes not worth the extra return you can earn by investing in foreign stocks. Unless you are a large-scale investor and can either afford to hire an accountant or take the time to keep an eye on your various foreign certificates, you may be better off investing in programs. domestic mutual funds that invest in foreign stocks, in which In this case, no such disclosure is required.

Gautam Nayak is a partner at CNK and Associates LLP.

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