Indian investors have lately shown increased interest in offshore equities and FANG stocks. Facebook, Amazon, Netflix and Google are some of the prominent choices. Portfolio diversification, opportunities in offshore markets and the global footprint of FANG like stocks are drivers for wealth-owners to create an overseas portfolio. Technology and digitalisation have also enabled greater convenience of investment in overseas financial stocks and products.
As investors chase the returns and benefits from the offshore investment, it is important to understand applicable BITs i.e. Banking, Investment restrictions and Taxes on such investments.
Banking: Regulations permit an individual resident investor to make portfolio investments within the overall annual limit of USD 2,50,000 under the liberalised remittance scheme. The investor is only required to submit FORM A2 while remitting funds. The income earned can be retained outside for reinvestment and there is no mandatory requirement to repatriate it back to India.
Investment: Portfolio investment can be made in shares and debt instruments including mutual funds and venture capital funds. Investments in companies engaged in real estate, banking and financial services are also permissible. It is not mandatory for the investee to be a listed entity. Further, the ODI/FDI restrictions do not apply to portfolio investments. Investments can be made to any country other than Pakistan and those identified non-cooperative countries by FAFT. It is important to note that remittance for the incorporation of a foreign entity or for holding a stake that gives rights for managing the affairs of the offshore entity are not covered under the portfolio investment route, and there are other restrictions and conditions applicable to such investments.
Taxes: Starting October 2020, at the time of overseas remittance the bank would make a tax collection of 5% where amounts exceed USD 9454 (Rs 700,000) in a year. Full credit for such tax collected is available to the remitter against taxes due on income.
Once invested, earnings from overseas investments can typically take the form of a dividend, interest, or capital gains. Dividends and interest are liable to tax as ordinary income and at applicable slab rates, with the exception that the surcharge on dividend income is capped at 15% for the highest slab. Amount of dividend or interest received needs to be grossed up for any taxes paid or deducted outside India. The credit of such foreign tax should be separately claimed in the tax return.
Capital gain on shares held for more than 24 months (36 months for debt and other instruments) are treated as long term capital gain (LTCG). LTCG is taxed at the rate of 22.9% and can go as high as 28.5% depending on applicable surcharge rate on the different slabs of income. Gain on shares held for less than 24 months (36 months for other instruments) is treated as short term gain and is taxed as per applicable slab and surcharge rates. Here again credit of taxes paid overseas can be claimed.
Another important aspect is the currency conversion rate for income arising in foreign currency. One needs to apply the Telegraphic Transfer (TT) buying rate as on the last day of the month immediately preceding the month in which the income becomes due.
Finally, as part of the tax return, the individual is required to disclose details of capital gains (Schedule CG), income from outside India along with taxes paid outside India (Schedule FSI) and tax relief claimed for taxes paid outside India (Schedule TR). In case the total income of the resident investor exceeds Rs 50 lakh, or the total income includes any amount of capital gain, the investor is also required to disclose details of foreign assets (Schedule FA).
Investors should factor these aspects to get the maximum bite out of their investments in FANG. There are other aspects of risks, currency volatility, and transactions costs that should also be factored before investing in the overseas markets.