How to Invest in US Stock Market From India

Investing in the US stock market is increasingly popular for Indian residents diversifying portfolios. Understanding mechanisms and regulations is essential for this overseas investment.

Understanding Indian Regulatory Requirements

Indian residents investing overseas must navigate regulatory frameworks set by the Reserve Bank of India (RBI). The primary regulation is the Liberalized Remittance Scheme (LRS) under the Foreign Exchange Management Act (FEMA), 1999. This scheme permits individuals to remit funds abroad for various permissible transactions.

The LRS sets an annual limit of USD 250,000 per financial year (April to March) for all individual remittances. This cumulative limit applies across all bank accounts and is tracked using the Permanent Account Number (PAN).

Investments in overseas shares, securities, and mutual funds are permissible under LRS. However, the scheme prohibits remittances for activities like margin trading, lottery tickets, or forex trading. Remitting over USD 250,000 generally requires prior RBI approval, except for specific purposes like education or medical treatment.

Selecting Your Investment Approach

Indian residents have two primary pathways to engage with the US stock market, each with distinct advantages. Understanding these helps investors align strategy with financial objectives.

Direct investment involves opening a brokerage account with access to US exchanges, either through US-based or Indian firms. These platforms allow purchasing assets like US-listed shares, Exchange Traded Funds (ETFs), and American Depository Receipts (ADRs). Fractional ownership is also available, making US stocks more accessible.

Indirect investment is primarily through Indian mutual funds or ETFs focusing on US or global equities. These funds pool money to invest in diversified US stock portfolios, offering exposure without direct management. Many Indian fund houses offer “feeder funds” investing in foreign mutual funds, simplifying the process. This method suits those seeking professional management and diversification.

While both methods facilitate investment, regulatory distinctions exist. Indian residents can engage in delivery-based investing, buying and holding US stocks, ETFs, or mutual funds. However, RBI regulations prohibit intraday trading, derivative trading, and short-selling in US securities.

Preparing for Account Opening and Fund Transfers

Before investing, Indian residents must prepare necessary documentation and information. This ensures compliance with Indian and US regulatory requirements, streamlining account opening and fund transfers.

Opening a US brokerage account for direct investment requires personal identification and financial documents. These include a Permanent Account Number (PAN) card, Aadhaar card, and a valid passport. Proof of address, such as a recent utility bill, is mandatory. Brokerage firms or banks may request income proof, like bank statements or income tax return (ITR) acknowledgments, to verify fund sources.

Beyond identification, investors must complete US tax compliance forms. A Foreign Account Tax Compliance Act (FATCA) declaration is essential, involving self-certification of tax residency. Indian financial institutions report US-linked accounts to Indian tax authorities, who transmit data to the US Internal Revenue Service (IRS). The W-8BEN form must also be prepared. This form declares non-US tax residency and allows claiming reduced withholding tax rates on US-sourced income, like dividends, under the India-US Double Taxation Avoidance Agreement (DTAA).

Preparing for fund transfers under the Liberalized Remittance Scheme (LRS) involves coordinating with an authorized Indian bank. Investors must provide details for the receiving US account, including beneficiary name, account number, and SWIFT code. Indian banks require an A2 form for outward remittances, specifying investment in foreign securities. For remittances exceeding INR 10 lakh in a financial year, Tax Collected at Source (TCS) may apply, collected by the bank at transfer.

Executing Your Investment and Managing Funds

With preparatory steps complete, investors can proceed with account opening, fund transfer, and trade execution. The initial phase involves formally opening the brokerage account, typically online. Investors submit pre-gathered documents like PAN card, proof of address, and passport for Know Your Customer (KYC) verification. This process ensures identity and suitability. Once documents are verified, the brokerage account is activated, generally within a few business days.

After account activation, transfer funds from the Indian bank account to the US brokerage account. This process begins by approaching an Authorized Dealer bank in India, facilitating outward remittances under the Liberalized Remittance Scheme (LRS). The investor must submit the A2 form, providing remittance purpose details, the beneficiary US brokerage account, and the amount. The Indian bank conducts compliance checks, including LRS limit verification, before processing the transaction. Funds are typically remitted via SWIFT networks, taking two to five working days to reflect.

Once funds are available, investors can place buy and sell orders for US stocks and ETFs. Brokerage platforms offer various order types, such as market orders (executing immediately) and limit orders (specifying a maximum buy or minimum sell price). Investors select securities, enter quantity, choose order type, and submit the trade request. Understanding bid-ask spread and market volatility is important when placing orders.

Managing funds includes withdrawing investments back to India. When repatriating funds, investors initiate a withdrawal request through their US brokerage platform, selling assets if in cash, and requesting a USD balance transfer to their Indian bank account. The brokerage processes this, sending funds via wire transfer back to India. Upon receipt, the Indian bank conducts regulatory checks, converts USD to INR, and credits the amount. This repatriation generally takes several business days.

Taxation of US Stock Market Investments

Navigating US stock market investment tax implications is important for Indian residents, as both the United States and India may claim generated income. Understanding the interplay between both countries’ tax laws, particularly through the Double Taxation Avoidance Agreement (DTAA), is essential for compliance and avoiding excessive taxation.

From a US tax perspective, dividends from US stocks are subject to withholding tax. Without proper documentation, this rate can be as high as 30% for non-resident aliens. Submitting the W-8BEN form allows Indian residents to claim India-US DTAA benefits, typically reducing US withholding tax on dividends to 25%. The US does not impose capital gains tax on non-resident aliens from US stock sales, provided they are not physically present in the US for 183 days or more in the tax year, and the income is not “effectively connected” with a US trade or business.

On the Indian side, income from US stock investments, including dividends and capital gains, is fully taxable for Indian residents. Dividend income is added to total income and taxed at the applicable slab rate. Capital gains are categorized by holding period. If US stocks are held for 24 months or less, gains are short-term capital gains (STCG) and taxed at the marginal income tax slab rate. For holdings exceeding 24 months, gains are long-term capital gains (LTCG) and taxed at 12.5%, with cost indexation benefit.

To prevent double taxation, the India-US DTAA allows Indian residents to claim a foreign tax credit (FTC) for US tax paid. To avail this credit, investors file Form 67 along with Schedule TR and Schedule FSI in their Indian Income Tax Return (ITR). This ensures US tax paid offsets Indian tax liability on the same income. Proper reporting and timely submission are necessary to claim the foreign tax credit.