How to use LRS for overseas investment

The Union Budget for 2024-25 introduced a slew of changes to India’s taxation policy, underscoring the government’s commitment to simplify the tax structure. The changes are expected to push high-net-worth individuals to take a fresh look at their investment strategies, particularly with regards to their international investments. 
 

To be sure, international investments already feature in the portfolio construct of HNIs as it helps in diversification with global asset classes but also provides and optimizes asset allocation. Among the changes, the one related to long-term capital gains is favorable for overseas investment for HNIs because it is expected to provide a level-playing field with domestic investments.
 

This comes at a time when there is heightened interest among high net-worth individuals (HNIs) to US equities given the buzz around the likes of Nvidia and Tesla. But do you know investing in an overseas market is easier than you would think? Let’s explore the Reserve Bank of India’s Liberalised Remittance.
 

What is LRS? 

Popularly known as the LRS, this foreign exchange policy was introduced in 2004. Under the LRS, resident Indians are allowed to remit $250,000 for a variety of purposes including investment, education, travel, medical treatment, and gifts.  The limit is applicable per individual and any unused limit is not allowed to be carried forward. Hence, it is advisable to plan your remittances much in advance. For the purpose of investment, LRS can be used to buy foreign bonds and stocks, overseas property, invest in mutual funds, and also set up ventures abroad. 
 

There are several benefits of using LRS for the purpose of investment. It enables HNIs to construct a diversified portfolio along with exposure to global assets and help mitigate fluctuations in the domestic market. In addition, it helps in global estate planning and also earn higher returns in case of appreciation in the currency of the underlying asset. 
 

However, there are two important taxation aspects that need to be kept in mind. Firstly, remittances of INR700,000 in a financial year will attract tax collected at source. The tax rate depends on the purpose of remittance and TCS can be reclaimed later while filing ITR. Secondly, it is important to check if India has a tax treaty with the country you are investing in order to avoid double taxation. 
 

To start overseas investment, investors will need to open a trading account. This can be opened with  foreign brokers that have operations in India or any domestic broker that has tied-up with their foreign broking firm. While services being offered are important deciding factors, investors also need to weigh different costs to make an informed decision on which broker to select. There are some key costs such as brokerage fees, currency conversion charges, remittances fees, etc. Some of the new-age fintech brokers also provide such services at lower costs. But it is to be noted that these investments are more D-I-Y (do-it-yourself) kind and hence are more suitable for low-ticket investors and retail investors.  
 

Encouraging changes 

Under the current regulatory landscape and following the budgetary changes, the case for using LRS for overseas investment has strengthened. 
 

The changes in the capital gains tax have made international funds, fund of funds, and gold funds attractive for investors. International fund is a category of mutual funds that invests in companies listed outside of India. 
 

In the Union Budget, the Finance Minister announced reduction in the holding period for these funds to more than 24 months from more than 36 months earlier with 12.5% as the long-term capital gain tax. No changes related to short-term capital gain tax were announced.
 

Earlier, if the investment held for less than three years, they were considered short-term and gains were taxed at the investors’ income tax slab rate. Investments held for over three years were considered as long-term and taxed at 20%. 
 

The changes in the taxation have made international funds attractive. In addition, since the investments in these funds are made in Indian rupee, they are not included to calculate the LRS limit. However, there is a catch. 
 

Fund houses are currently not accepting investment in these schemes. The market regulator Securities and Exchange Board of India has barred fund houses from accepting fresh subscriptions in overseas stocks because the MF industry was close to breaching the available limit of $7 billion. Industry experts suggest that fresh inflows will be possible once a space is available, either because of the fall in the value of the portfolio or there is a spike in redemptions. 
 

Thankfully, the LRS route is available for HNIs to continue to make investment in fast growing US stocks. 
 

LRS provides a simple way for Indian investors to get exposure to the overseas market. HNIs with access to professional advisory services can make the best use of this route.