 "mutual fund")
If you are thinking in investing in foreign stocks, mutual funds or cryptocurrencies abroad, be aware that you will have to spend more since the applicable tax collected at source (TCS) on foreign remittance has been increased to 20 per cent from the existing 5 per cent effective 1 October 2023, except in certain cases.
Under this rule, a 20% TCS will be levied on all remittances abroad, including investments in foreign stocks, mutual funds, cryptocurrency, and property. Additionally, if you are investing in a domestic mutual fund, and having exposure to foreign stocks, the same will not be considered as a foreign remittance under LRS and thus will not attract TCS.
TCS is an extra amount that is collected by a seller as a tax on specified goods from buyers at the time of sale over and above the sale amount and is remitted to the government account.
Under this rule, a 20% TCS will be levied on all remittances abroad, including investments in foreign stocks, mutual funds, cryptocurrency, and property. Additionally, if you are investing in a domestic mutual fund, and having exposure to foreign stocks, the same will not be considered as a foreign remittance under LRS and thus will not attract TCS.
TCS is an extra amount that is collected by a seller as a tax on specified goods from buyers at the time of sale over and above the sale amount and is remitted to the government account.
When investing in foreign assets, such as foreign stocks, and transferring money abroad for these investments, your bank or financial institution may collect TCS on the amount exceeding the specified threshold ( Rs 7 lakh), subject to fluctuating rates and thresholds that can change over time.
"No doubt, investing in foreign assets and crypto can be a good way to diversify your portfolio and generate high returns. However, it is important to be aware of the potential risks, such as double taxation and currency risk. For instance, it is immaterial whether your investment in foreign stocks, foreign mutual funds or cryptocurrencies, is through a domestic or foreign broker, as the investment would still attract TCS @ 20%. However, the only differentiating factor would be the commissions and currency conversion rate," said Vipul Jai Partner, PSL Advocates & Solicitors.
What this means is that under the Liberalized Remittance Scheme (LRS), a flat rate of 20% Tax Collected at Source (TCS) will be imposed on such investments, irrespective of whether they are made through institutions like Motilal Oswal or by other means. It's important to note that this TCS is non-refundable.
"The applicability of TCS under LRS should be primarily driven by the dominant nature of the fund in which the investment is made. If the fund is predominantly comprised of foreign stocks, then LRS regulations should apply, triggering the 20% TCS on the investment. However, if the fund's composition does not primarily consist of foreign stocks, then LRS regulations may not be applicable, and the 20% TCS may not be levied," said -Ankit Rajgarhia, Principal Associate, Karanjawala & Company, Advocates.
Rajgarhia explains this with an example:
Consider an individual in India who decides to diversify their investment portfolio by venturing into foreign assets and cryptocurrencies. They begin by investing in foreign stocks through an international brokerage account and transferring a substantial amount of funds overseas. Under Indian tax laws, the Tax Collected at Source (TCS) comes into play, applying to specific foreign remittances made under the Liberalized Remittance Scheme (LRS). As a result, their bank collects TCS on the amount exceeding the specified threshold, with the rates and thresholds susceptible to change over time.
Simultaneously, the investor is intrigued by the potential of cryptocurrencies and decides to explore this emerging asset class.
"However, the regulatory landscape for cryptocurrencies in India is somewhat uncertain, as the government has voiced concerns and is contemplating potential regulatory measures. Depending on how these cryptocurrency regulations evolve, our investor's foray into the world of digital assets could involve varying tax and legal consequences," said Rajgarhia.
"However, the regulatory landscape for cryptocurrencies in India is somewhat uncertain, as the government has voiced concerns and is contemplating potential regulatory measures. Depending on how these cryptocurrency regulations evolve, our investor's foray into the world of digital assets could involve varying tax and legal consequences," said Rajgarhia.
To further diversify their portfolio, the investor also decides to invest in foreign stocks through a renowned Indian brokerage firm like Motilal Oswal.
"Such firms play a crucial role in assisting investors with compliance with Indian tax regulations. They ensure that essential taxes, including TCS, are collected and properly deposited. However, it's important to note that, even with this assistance, the liability for TCS under the Indian Tax regime remains a key consideration for any Indian investor delving into foreign investments," explained Rajgarhia.
Point to note: It is possible to buy foreign stocks directly through Motilal Oswal, in which case the remittance for the purchase of such stocks will come under LRS and the TCS on LRS. On the other hand buying units of a fund that then invests a part in foreign stocks does not constitute LRS and will not be covered.
In light of these developments and uncertainties, investors may consider exploring tax-efficient alternatives, such as domestic mutual funds with foreign exposure. These funds may offer a more favourable tax treatment, as they are not subject to the 20% TCS under LRS, provided that the dominant nature of the fund is not primarily foreign stocks.
"Such firms play a crucial role in assisting investors with compliance with Indian tax regulations. They ensure that essential taxes, including TCS, are collected and properly deposited. However, it's important to note that, even with this assistance, the liability for TCS under the Indian Tax regime remains a key consideration for any Indian investor delving into foreign investments," explained Rajgarhia.
Point to note: It is possible to buy foreign stocks directly through Motilal Oswal, in which case the remittance for the purchase of such stocks will come under LRS and the TCS on LRS. On the other hand buying units of a fund that then invests a part in foreign stocks does not constitute LRS and will not be covered.
In light of these developments and uncertainties, investors may consider exploring tax-efficient alternatives, such as domestic mutual funds with foreign exposure. These funds may offer a more favourable tax treatment, as they are not subject to the 20% TCS under LRS, provided that the dominant nature of the fund is not primarily foreign stocks.
