In recent times, owing to increasing financial awareness, Indian investors are diversifying their investment portfolio not only in terms of asset classes but geographically too. The US is one of the favourite destinations for those wanting to invest directly in international stocks. This is being done by availing of the Liberalised Remittance Scheme (LRS) introduced by the RBI, through which one can remit up to $250,000 for investing in foreign securities, among other purposes.
However, things might change for some in view of the announcements in Budget 2023. Currently, if investors remit more than ₹7 lakh for investing in foreign securities under LRS, tax collected at source (TCS) of 5 per cent is applied while there’s no TCS for remittance up to ₹7 lakh. However, July 1, 2023, onwards, there won’t be any such threshold while any amount of such foreign remittance will attract TCS of 20 per cent. Here’s a lowdown on TCS and its implication for investors.
How it works out
To illustrate, imagine you are an Indian resident keen to purchase US stocks. Let’s say you remit ₹1 lakh in your overseas broking account through HDFC Bank. During the process, HDFC Bank shall deduct ₹20,000 as TCS and hence only ₹80,000 goes into the broking account. However, that ₹20,000 can be adjusted against your tax liability during income tax return (ITR) filing. Further, if the TCS you are subject to is higher than your tax liability, you can receive the excess amount as refund. Hence, this 20 per cent TCS is not a cost for you but can create a cashflow mismatch as the amount can be blocked for a certain time period. Its impact is varied for different class of investors.
For self-employed persons who are the advance taxpayers, there won’t be a material impact as they can regularly adjust TCS against their advance tax liability. However, this is a dampener for certain salaried class investors as they need to wait till their ITR filing to adjust the TCS and that chunk of amount remains blocked till then and some more time from then if you are supposed to receive refund. Assuming all information is correct, you file return well in time before due date of July 31, and everything goes smoothly, the refund turnaround time shall be anywhere between one and three weeks from the date of filing, as per Archit Gupta, Founder and CEO, Clear. Else, it may also take a few months if there are complexities relating to ITR filing.
Further, you may also receive interest on refund to the tune of 0.5 per cent per month. When ITR is filed on or before the due date, interest is calculated from April 1 of the year following the FY till the date on which the refund is granted. Otherwise, interest is considered from the date return is filed till you receive refund.
Though seen as a mixed bag, it can change the way of investing in foreign stocks. A majority of those investing in foreign stocks through platforms such as Vested Finance and Stockal are those with small-ticket investments to the tune of, say, ₹1-3 lakh. Such investors currently pay no TCS but will have to shell out more cash upfront for the same investment post July 2023.
What you should do
Besides diversification benefit, LRS route provides an opportunity to invest in leading global technology and innovation companies while also giving the benefit of dollar appreciation versus the rupee. The small-ticket investors, especially the salaried class ones who want to capitalise on this opportunity, might have to rejig their strategy to soften the impact of the new proposal.
You can consider remitting lumpsum amount to your overseas trading account in, say, mid-March and file your return well before due date, say, in June when you can adjust the TCS and can also receive refund within a few weeks provided there are no complexities. If you repeat this exercise every financial year and plan your investments in this manner, you might have better liquidity as your funds won’t be locked in for a longer period. Once money is remitted in the brokerage account, you can invest the same over the year in US stocks as per the opportunity spotted. However, do note that this is an ideal scenario while it can work differently for different investors. The advantage here is that, while your money is in an overseas account, you are invested in USD which is an asset class on its own, providing diversification benefits. Further, investors can consider remitting lumpsum amounts that they plan to invest before July 2023 to avoid 20 per cent TCS for the time being. Transferring in lumpsums also comes with benefits of lower charges as there are few fixed charges applied every time money is transferred.