Overseas funding by Indian residents is regulated by the Indian trade management laws. On Aug. 22, 2022, the  Government and the Reserve Bank of India issued a brand new framework that gives extra readability, covers wider financial exercise and the revised reporting necessities. 

An abroad funding by an Indian resident particular person can both be within the type of abroad direct funding (ODI) or abroad portfolio investments (OPI). Here’s an in depth information on the deserves and demerits of abroad funding, the trade management laws and tax reporting necessities for abroad portfolio funding (OPI) within the case of Indian residents or people. 

Modes of Overseas Investment for Indian Residents underneath the Overseas Portfolio Investment

The abroad funding by an Indian resident should be throughout the total ceiling of the Liberalized Remittance Scheme (“LRS’”. Under LRS, an Indian resident can make the most of as much as $250,000 per monetary 12 months (April to March) cumulatively in the direction of permissible investments (OPI and ODI route) and different functions comparable to personal visits outdoors India, reward or donations, upkeep of relations overseas, medical therapy overseas, schooling overseas, and so forth. 

The definition of “Overseas Portfolio Investment” or “OPI” has been clearly spelled out within the new framework, which was not the case within the erstwhile laws. Indian residents could make abroad funding as throughout the total LRS restrict. 

Investment in shares of listed overseas entities 

Resident Indians can spend money on shares of overseas firms listed on abroad inventory exchanges with lower than 10% stake and should not have management over the overseas entity by which the funding is being made. 

For occasion, a resident Indian shopping for shares of Amazon, Apple, Microsoft, Tesla and so forth. by opening a demat account with overseas entity would typically be coated underneath this class. The investments can be underneath the general restrict of LRS as mentioned above and likewise there is no such thing as a reporting requirement underneath the brand new framework (i.e. half yearly submitting of Form OPI not required).

Resident Indian can open an abroad buying and selling account with an Indian dealer having tie-up with worldwide brokers comparable to ICICI Direct, HDFC Securities, Kotak Securities, and Axis Securities and so forth. or instantly open an account with a overseas dealer having presence in India like Charles Schwab, Ameritrade, Interactive Brokers, and so forth.

Investment in worldwide mutual funds 

Indian residents who should not eager in investing instantly in shares of overseas entities can alternatively take a look at investing in worldwide Mutual Funds schemes which have publicity to worldwide markets and which in flip spend money on overseas shares. 

There are a number of worldwide exchange-traded funds (ETFs) out there that permit entry to Nasdaq and different main world indices. The investments can be underneath the general restrict of LRS and likewise there is no such thing as a reporting requirement underneath the brand new framework (i.e. half yearly submitting of Form OPI not required).

Investment in listed debt devices 

Indian residents desirous of investing in a world market with a gradual revenue stream could make funding in listed bonds of overseas authorities, listed company bonds of overseas entities and so forth. 

Similar to funding in overseas equities and listed debt devices, the investments in listed debt devices can be coated throughout the LRS restrict and likewise there is no such thing as a reporting requirement underneath the brand new framework (i.e. half yearly submitting of Form OPI not required).

Acquisition of overseas securities by the use of inheritance

Indian residents can purchase shares of a overseas entity or different overseas securities by the use of inheritance from an individual resident in India or from an individual resident outdoors India. Acquisition of overseas securities by the use of inheritance shall not be reckoned in the direction of the LRS restrict. 

The restrict of LRS shall not be relevant as there is no such thing as a remittance outdoors India and likewise there is no such thing as a reporting requirement underneath the brand new framework (i.e. half yearly submitting of Form OPI not required).

Acquisition of overseas securities by the use of reward

Indian residents may also freely purchase shares of a overseas entity or different overseas securities by the use of reward from one other Indian resident who’s a relative. A resident particular person might purchase overseas securities by the use of reward from an individual resident outdoors India in accordance with the provisions of the Foreign Contribution (Regulation) Act, 2010. 

Acquisition of overseas securities by the use of reward shall not be reckoned in the direction of the LRS restrict as there is no such thing as a remittances outdoors India and likewise, shall not require reporting underneath the brand new framework.

Investment in entities positioned in IFSC (GIFT City in Gujarat)

Investment made by an Indian resident in entities positioned in “International Financial Services Centre” or “IFSC” i.e., the GIFT City is taken into account as an abroad funding. An Indian resident is permitted to spend money on fairness capital of entities positioned in IFSC throughout the total restrict of LRS in addition to it might probably make funding (together with sponsor contribution) within the models of an funding fund or automobile arrange in an IFSC.

Indian residents are additionally permitted to spend money on overseas shares via the worldwide inventory trade established in IFSC. Some of the entities already in existence in IFSC in GIFT metropolis Gujarat, which give a platform for investing overseas embody India International Exchange (IFSC) Limited (India INX) and NSE International Exchange (NSE IFSC). 

The investments in entities positioned in IFSC can be coated underneath the general restrict of LRS and there’s no reporting requirement underneath the brand new framework (i.e. half yearly submitting of Form OPI not required).

Acquisition of sweat fairness shares issued by overseas entities 

Foreign entities usually problem sweat fairness shares to the staff or administrators at a reduction or for consideration aside from money, for offering their know-how or making out there rights like mental property rights or worth additions by no matter identify it’s referred to as.

Resident people can purchase sweat fairness shares of such overseas entities, whether or not listed or unlisted, as much as 10% of its fairness capital. 

There is not any restrict on the quantity of remittance made in the direction of mentioned acquisition of sweat fairness shares, although, such remittances shall be reckoned in the direction of the LRS restrict of the individual involved. 

For occasion, a resident particular person can remit $300,000 for fee in the direction of sweat fairness shares, however thereafter for that monetary 12 months, he can’t make different remittance underneath the LRS because the restrict can be exhausted. 

Acquisition of shares or curiosity underneath worker inventory possession plan (ESOP) or worker advantages scheme 

Overseas entities usually problem shares underneath the ESOP/Employee profit schemes to the Indian residents who’re employed with or are administrators of an workplace in India or department of an abroad entity or of an Indian entity by which the abroad entity has direct or oblique fairness holding.

Resident people can purchase shares or curiosity underneath ESOP or Employee Benefits Scheme provided by such abroad entities, whether or not listed or unlisted, as much as 10% of its paid up capital. There is not any restrict on the quantity of remittance made in the direction of mentioned acquisition of shares, such remittances shall be reckoned in the direction of the LRS restrict of the individual involved as mentioned above.

In this case, the employer firm has to report concerning the sweat fairness shares in Form OPI inside 60 days from the top of the half-year by which such OPI is made.

Acquisition of minimal qualification shares of overseas entity

An Indian resident may also purchase minimal qualification shares issued for holding a administration submit in a overseas entity as much as 10% of the paid up capital of such overseas listed or unlisted entity having no management. 

The remittances for acquisition of such minimal classification shares can be coated underneath the general restrict of LRS and there’s no reporting requirement underneath the brand new framework (i.e. half yearly submitting of Form OPI not required).

Reporting Requirements For an International Investment 

Under Foreign Exchange Regulations:

The Indian resident desiring to make remittance in the direction of funding in overseas entities has to submit financial institution particular paperwork (pertaining to LRS, which is procedural compliances for remittances outdoors India) on the time of creating remittance. 

As mentioned above, there is no such thing as a different compliance underneath the brand new framework within the arms of Indian Resident for making funding underneath OPI, besides in instances the place OPI is by the use of acquisition of sweat fairness shares or worker inventory possession plan (ESOP) the place the employer is required to report it in Form OPI. 

Under Income Tax Act (IT Act):

Under the IT Act, each Resident and Ordinarily Resident (RoR) particular person is required to furnish particulars of funding in overseas shares / property in “Schedule FA” (i.e. Schedule of Foreign Assets) of their Income Tax Return. 

In case of non-disclosure of overseas investments within the revenue tax return, the revenue tax authorities can problem a discover to the person for such undisclosed property and may also deal with such revenue tax return as a faulty 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 extra stringent penalty of INR 10 lakh for non-disclosure of a overseas asset in Schedule FA. 

OPI – Tax Collected at Source (TCS) on remittances of above INR 7 lakh underneath LRS  

An Indian resident remitting funds outdoors India underneath LRS will probably be required to pay an extra quantity within the type of TCS on the charge of 5% to the approved vendor financial institution on an quantity in extra of INR 7 lakh. Suppose a person intends to remit INR 20 lakh within the monetary 12 months, in such case he will probably be required to moreover pay INR 65,000 [(INR 20 lakh – INR 7 lakh) * 5%]. 

Further, in case the resident particular person doesn’t possess a PAN card or an Aadhar card, then TCS can be collected at the next charge of 10%.

Merits and Demerits of Overseas Investment

The principal deserves of abroad funding are:

• Benefit from the latest moderation in valuations of key inventory market indices worldwide. 
• Investment in world blue chips shares comparable to Apple, Microsoft, Tesla, Amazon and others.
• Reduce nation and forex danger as a consequence of funding in numerous international locations and totally different currencies which leads to diversification of the portfolio. We have seen the weakening of a number of currencies together with the Indian rupee towards the U.S. greenback via 2022. 

The principal demerits of the abroad funding are:

• Need for higher understanding of the related market and the businesses.
• Greater compliances and reporting necessities in India.
• Higher tax incidence on capital beneficial properties as in comparison with Indian listed shares

Bottom Line

Over the previous few years, the portfolio funding outdoors India by Indian residents has elevated manifold and therefore, the modifications have far-reaching implications.