How to Buy Indian Stocks From the United States

Investing in international markets offers a pathway to portfolio diversification and exposure to growth opportunities outside the domestic economy. For investors in the United States, the Indian stock market presents an appealing prospect due to its dynamic growth trajectory and expanding economic landscape. Navigating this market from the US involves understanding specific investment vehicles and regulatory frameworks. This guide outlines the available avenues for US investors to access Indian equities, detailing the mechanisms, associated costs, and tax considerations involved in such investments.

Investment Pathways for Indian Stocks

US investors primarily access Indian equities through indirect means. American Depository Receipts (ADRs) serve as a common method, enabling US investors to trade shares of Indian companies on US stock exchanges. An ADR is a certificate issued by a US bank, representing shares of a foreign company held in custody by that bank. These instruments trade in US dollars and are subject to US regulatory oversight.

Prominent Indian companies like Infosys, Tata Motors, and HDFC Bank have ADRs listed on US exchanges, allowing investors to participate in their growth. Global Depository Receipts (GDRs) also represent shares of foreign companies, but they are traded on non-US exchanges, such as London or Luxembourg. GDRs are primarily a mechanism for Indian companies to raise capital from international investors outside the US, and do not provide a direct trading avenue for individual US retail investors within US markets.

Another accessible pathway involves Exchange-Traded Funds (ETFs) and mutual funds focused on the Indian market. These funds pool money from investors to buy a diversified portfolio of Indian stocks, offering broad market exposure. Examples include the iShares MSCI India ETF (INDA) or the iShares India 50 ETF (INDY), which track indices composed of leading Indian equities. These instruments can be purchased through standard US brokerage accounts.

Direct stock purchases on Indian exchanges are not practical for individual US investors. Regulatory requirements in India, such as a Demat (dematerialized) account and Foreign Portfolio Investor (FPI) regulations, create significant hurdles for retail participation. These complexities steer US investors toward ADRs or India-focused funds as more viable alternatives.

Selecting an Investment Platform

Choosing an appropriate US brokerage firm is an important step for investing in Indian equities. Major US brokerage firms often provide access to international investments, including Indian ADRs and a selection of India-focused ETFs and mutual funds. These platforms act as the gateway for US investors to participate in the Indian market indirectly.

When selecting a brokerage, investors should prioritize platforms that offer the specific Indian ADRs or India-focused funds they intend to purchase. The availability of research tools and a user-friendly interface can enhance the investment experience. Reliable customer support is also a consideration for addressing any account-related inquiries or technical issues.

Security measures, such as coverage by the Securities Investor Protection Corporation (SIPC), are important. SIPC protects securities customers of its members up to $500,000, including $250,000 for claims for cash, if the brokerage firm fails. Opening an account involves submitting personal identification, financial information, and funding the account, similar to opening any domestic investment account.

Understanding Associated Costs and Currency Exchange

Investing in Indian stocks through US-based instruments involves various costs. Brokerage commissions are charged for buying or selling ADRs, ETFs, or mutual fund shares, varying from a few dollars per trade to percentage-based fees. For ETFs and mutual funds, an expense ratio represents the annual fee charged as a percentage of invested assets to cover fund management and operational costs, ranging from 0.25% to over 1.00% annually for international funds.

American Depository Receipts may also incur custodian fees, which are small charges levied by the depository bank for managing the ADR program. These fees, often between $0.01 to $0.05 per share, are deducted from dividend payments or directly from the investor’s account. Some brokerages might also impose foreign transaction fees if the investment involves underlying foreign currency conversion. These fees can range from 0.20% to 1.00% of the transaction value.

The exchange rate between the US Dollar (USD) and the Indian Rupee (INR) influences investment returns. Fluctuations in the USD/INR rate can impact the value of dividends received or the proceeds from selling an investment. For instance, if the US dollar strengthens against the Indian Rupee, the investment’s value could decrease, even if the underlying stock price in India remains stable or rises. Currency conversion occurs automatically through the brokerage, and some brokers may apply a spread to the exchange rate, acting as an implicit fee.

Navigating Tax Obligations

Understanding the tax implications is important for US investors in Indian equities. Dividends received from ADRs, India-focused ETFs, or mutual funds are subject to US federal income tax. The tax rate depends on whether dividends are classified as “qualified” or “non-qualified.” Qualified dividends, generally from eligible foreign corporations and held for a specified period, are taxed at preferential long-term capital gains rates (0% to 20% depending on income bracket). Non-qualified dividends are taxed at ordinary income tax rates, which can be as high as 37%.

When these investments are sold, any profit realized is subject to US capital gains tax. Short-term capital gains, from assets held for one year or less, are taxed at ordinary income tax rates. Long-term capital gains, from assets held for more than one year, benefit from the lower preferential rates, 0%, 15%, or 20%, based on the investor’s taxable income.

To prevent double taxation, where income is taxed by both India and the US, the US offers a foreign tax credit. This credit allows US investors to reduce their US tax liability by the amount of income tax paid to a foreign country, such as Indian withholding taxes on dividends. To claim this credit, investors file IRS Form 1116 with their federal income tax return.

Beyond income and capital gains taxes, US investors have reporting requirements for foreign financial assets. The Report of Foreign Bank and Financial Accounts (FBAR), FinCEN Form 114, must be filed electronically if the aggregate value of foreign financial accounts exceeds $10,000 at any time during the calendar year. Certain US individuals holding specified foreign financial assets exceeding specific thresholds (e.g., $50,000 on the last day of the tax year or $75,000 at any time for single filers living in the US) may need to file IRS Form 8938 with their income tax return. While India may impose withholding taxes on dividends, US investors address this through the foreign tax credit mechanism rather than direct filing with Indian tax authorities. Consulting a tax professional is advisable for specific guidance on these complex tax obligations.