Investing from India
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This page intends to provide information to retail Indian residents investing in India. While Vanguard is yet to enter the Indian market, it is possible to apply the Bogleheads principles for portfolio construction. This page provides information on available investment options and their features, including the tax treatment of various financial instruments.
Savings and investing in India
Retail investors in India have access to the investments below:
- Fixed Deposits (FDs): These are debt instruments similar to CDs in the US. Term ranges from 7 days to 10 years. Balance up to Rs 100,000 at each bank is guaranteed by the government. Deposit can be made at any bank or post office.
- Recurring Deposits (RDs): These are similar to FDs except that monthly contributions are made instead of an upfront lumpsum. Interest rate and term is fixed upfront.
- Public Provident Fund (PPF): PPF is a debt saving instrument where investments earn a small spread over the prevailing government bond yields. Interest rate is declared every quarter by the government and entire account balance is fully guaranteed by the Central government. PPF taxation is EEE in nature, meaning that contributions, accumulations and withdrawals are tax-free. Maximum yearly limit for investment is Rs 150,000. The account matures in 15 years and investors can withdraw the entire balance. Alternatively, investors have a choice to extend the account in bunches of 5 years indefinitely.
- National Pension System (NPS): NPS is a defined contribution retirement plan similar to 401(k) plans offered in the US. The portfolio consists of four components: Equities, Corporate bonds, Government bonds and Alternative Investment. Investors can choose their asset allocation as per their risk tolerance and age. Portfolio is re-balanced once a year on investor's birthday. NPS taxation is EEE in nature, meaning that contributions, accumulations and withdrawals are tax-free. Investors are required to buy an annuity with at least 40% of portfolio amount on withdrawal on retirement at age 60.
- Employees' Provident Fund (EPF): EPF is retirement plan where equal amount is contributed by employee and employer every month and the account earns an interest as declared by the central government every year. The usual amount of contribution is 12% of basic pay. An employee can choose to contribute more through Voluntary Contribution Fund (VPF).
- Sukanya Samriddhi Yojana (SSY) (English: Girl Child Prosperity Plan): SSY is a saving scheme similar to PPF and is targeted at parents of girl children. It encourages parents to save for education and marriage of girls. Unlike PPF, the account matures in 21 years and contributions can be made for first 14 years. The girl on attaining the age of 18 can withdraw up to 50% of the account balance for higher education. Tax treatment is similar to PPF but SSY currently earns slightly higher interest than PPF.
- Mutual Funds and ETFs: India has a large stock and debt market and there are thousands of mutual funds available for investors. These funds include equity mutual funds and debt mutual funds of various categories. There are also a large number of Gold ETFs available.
- Sovereign Gold Bonds (SGBs): In order to stop the large import of gold in India due to high demand, Reserve Bank of India (RBI) launched SGBs to encourage people to hold gold in paper format. Currently, it is one of the best ways to hold gold since there is no expense ratio, and SGBs pay 2.5% interest annually. On maturity, the amount equal to market value of gold in India is paid out, as published by India Bullion and Jewellers Association.
Index funds in India
Benchmarks and Underlying securities
As per the direction of Securities and Exchange Board of India (SEBI), Association of Mutual Funds of India (AMFI) classifies all listed stocks in India into large-cap, mid-cap and small-cap once every six months. The categorisation is as below in the decreasing order of market cap:
- Large-cap: Stocks ranked 1 to 100
- Mid-cap: Stocks ranked 101 to 250
- Small-cap: Stocks ranked 251 and below.
The two major stock exchanges in India are National Stocks Exchange (NSE) and Bombay Stock Exchange (BSE). Both own subsidiaries that provide benchmarks that mutual funds track. BSE Sensex and Nifty 50 are oldest and most popular equity benchmarks but over time broader benchmarks have been introduced.
- BSE Sensex: Constituting 30 largest and most liquid stocks in terms of free-float market capitalisation listed on BSE.
- BSE Sensex 50/Nifty 50: Constituting 50 largest stocks in terms of free-float market capitalisation listed on BSE/NSE.
- BSE Sensex Next 50/ Nifty Next 50: Constituting next 50 (rank 51-100) largest stocks in terms of free-float market capitalisation listed on BSE/NSE.
- BSE 100/Nifty 100: Total of Sensex 50/Nifty 50 and Sensex Next 50/Nifty Next 50 benchmarks.
Large-cap space is where passive investment is gaining popularity.
BSE MidCap, BSE 150 MidCap, Nifty MidCap 50, Nifty MidCap 100, Nifty MidCap 150:
There are only a few Mid-cap ETFs available in India currently.
BSE SmallCap,BSE 250 SmallCap, Nifty SmallCap 50, Nifty SmallCap 100, Nifty SmallCap 150
Currently there is only one Small-cap index fund (no ETFs) available in India.
BSE 500/NSE 500: These are broadest equity benchmark available in India and are sum total of BSE 100/NSE 100, BSE 150 Midcap/NSE Midcap 150 and BSE 250 SmallCap/Nifty SmallCap 250.
Stock index funds
Currently, Index mutual funds (excluding ETFs) are available in India only for large-cap indices. Most index funds benchmark to Sensex, Nifty 50 or Nifty Next 50. Some of the good options are:
|HDFC Index Fund Nifty 50 Plan - Direct||0.10%||Nifty 50|
|UTI Nifty Index Fund - Direct||0.10%||Nifty 50|
|UTI Nifty Next 50 Index Fund - Direct||0.27%||Nifty Next 50|
|ICICI Prudential Nifty Next 50 Index Fund - Direct||0.39%||Nifty Next 50|
Stock ETFs is the most active area for passive investments in India today with almost all AMCs coming out with ETF products. Some ETFs attractive for buy-and-hold investors are listed below:
|ICICI Prudential Nifty ETF||0.05%|
|HDFC Nifty 50 ETF||0.05%|
|Nippon India ETF Nifty BeES||0.05%|
|SBI ETF Nifty 50||0.07%|
|Nippon India ETF Junior BeES||0.15%|
|Motilal Oswal Midcap 100 ETF||0.20|
|Motilal Oswal M50 ETF||0.15%|
|ICICI Prudential S&P BSE 500 ETF||0.29%|
Bond index funds and ETFs
Since the Indian bond market is dominated by gilt securities, the only index funds are based around Gilts of 10-year maturity. Some of the available index funds are:
|ICICI Prudential Constant Maturity Gilt Fund||0.17%||CRISIL 10-Year Gilt|
|SBI Magnum Constant Maturity Fund||0.33%||CRISIL 10-Year Gilt|
|DSP 10Y G-Sec Fund||0.25%||CRISIL 10-Year Gilt|
The only 3 available ETFs are:
|Reliance ETF Long Term Gilt||0.04%||NIFTY 8-13 yr G-Sec Index|
|SBI ETF 10 Year Gilt||0.14%||NIFTY 10 yr G-Sec Index|
|LIC MF G-Sec Long Term ETF||0.26%||NIFTY 8-13 yr G-Sec Index|
Investment in equity and equity-oriented mutual funds and ETFs for more than 1 year qualifies for long-term taxation, while the same time for debt-oriented mutual funds is 3 years. Below are the tax rates for these:
- Equity MF short-term capital gain: 15% plus surcharges
- Equity MF long-term capital gain: 10% (exempted up to a gain amount of Rs 100,000 per year)
- Debt MF short-term capital gain: Marginal tax rate of the individual
- Debt MF long-term capital gain: 20% with indexation, plus surcharges
Some strategies for tax efficiency:
- Since there is no wash-sale rule in India and equity MF capital gains attract no tax up to a gain of Rs 100,000 per year, it is advised to sell and immediately buy equity funds to increase cost basis. In other words, gains up to Rs 100,000 should be booked every year. This ensures utilisation of exempted limit for the year.
- Tax loss harvesting has limited use. Capital losses can only be offset against capital gains and not against any other income source. Long-term loss can only be offset against long-term gain while short-term loss can be offset against either short-term gain or long-term gain. Losses can be carried forward up to a maximum of 8 years.
- A point to be noted is that International equity mutual funds are treated as debt-oriented MFs for taxation purpose, i.e., they qualify for long term capital gains only after 3 years and are taxed at 20% with indexation.
The largest broker by number of clients in India is Zerodha and is ideal for buy-and-hold investors. It charges zero brokerage for equity delivery and hence charges no brokerage on buying or selling ETFs (Rs 20 brokerage for intra-day trades). It charges Rs 300 per year as account maintenance fees. Largest expense borne by investors is Securities Transaction Tax (STT) which is charged at 0.1% of traded amount.
Other brokers include ShareKhan and other full-service brokers like ICICI Securities, HDFC Securities etc.
Investing in Foreign Assets
There are two ways of investing in foreign assets. One by Indian Mutual Fund (of which you can choose pure foreign equity funds which are taxed as debt funds or hybrid funds having 65% Indian Equities 35% Foreign Equities which are taxed as Indian Equity fund) method and the other by investing using foreign brokerage account like Interactive Brokers. If using Indian Mutual Fund and one doesn't mind debt fund taxation they can use S&P 500 and Nasdaq 100 index funds from Motilal Oswal. If one wants equity fund taxation than here is list of funds investing via 65/35 structure:
- Aditya Birla SL International Equity Fund Plan B
- Axis ESG Equity Fund
- Templeton India Equity Income Fund (Emerging Markets Only)
- Parag Parikh Long Term Equity Fund
- Axis Growth Opp Fund
- Aditya Birla SL Dividend Yield Fund
- SBI Focused Equity Fund
- Franklin India Focused Equity Fund
- Franklin India Bluechip Fund
- IDFC Multi Cap Fund
- Franklin India Equity Advantage Fund
- Franklin India Prima Fund
- SBI Magnum Global Fund
- ICICI Pru MNC Fund
- Kotak Pioneer Fund (Foreign=Tech Fund)
- Franklin India Technology Fund
- DSP Natural Res & New Energy Fund
- DSP Healthcare Fund
- SBI Technology Opp Fund
- Aditya Birla SL Digital India Fund
- Aditya Birla SL Pharma & HealthCare Fund
- ICICI Pru FMCG Fund
Out of these 65/35 funds only one fund Parag Parikh Long Term Equity uses currency hedging and as a result earns 5-6% returns due to inflation and interest rate differences between USA (country in which the fund invests majority of foreign assets in) and India.
If one wants to want invest Overseas Mutual Fund ETF/Mutual Fund (listed in foreign stock exchange like NYSE/LSE/NASDAQ by using Charles Schwab/Interactive Brokers/Vested Finance):
Part A: Reporting of foreign assets and income
You must fill out more detailed IT returns: You cannot use Saral ITR form if you hold any foreign assets (even if those are acquired by default, such as via company stock awards or 401k when you were an NRI.) If you possess any foreign holdings, including bank accounts or stocks or real estate or just cash in foreign brokerage accounts, you are required to fill out FA & FSI schedules of ITR 2/ ITR 3 or others as applicable.
This is true even if you have no other income to disclose, or even if your taxable income is below tax limit!
Even if you have had no foreign transactions during the year and only passively held any foreign assets, you must fill up FA schedule.
Disclose foreign income including dividends: You have to fill out the FSI schedule to show transactions resulting in Income from Foreign Sources, and ensure that this income is also included in your total income computation.
You have to include any capital gains (short-term or long-term) in CG schedule.
This is applicable even if you don't receive any proceeds in your Indian bank account and/or you let the gains stay with your broker as cash balance, or use it for another investment or deposit to overseas bank account
You have to include the Foreign Dividend income in OS schedule under "Income from Other Sources - Dividends"
This is applicable even if you hold stocks with automatic dividend reinvestment option, or even if you don't actually receive the dividend in your Indian bank accounts and it stays with the broker as cash balance or you transfer it to your overseas bank account!
You have to reconcile all your transactions to Indian financial year & accounting period (Apr 1 – March 31) and ensure that you do have all the statements to back up those transactions.
While reporting your foreign holdings and transactions, you cannot use that day's exchange rate as available from RBI or FBIL! There are some weird and arcane rules about how the foreign transactions are to be converted into INR. We have to use specific month-end rates from SBI!) This applies to purchase/sale transactions as well as dividends and tax withholdings / credits.
SBI Telegraphic Transfer (TT) rates are available online, on their own website, for a given day. However, their historical rates are not readily available. IT Department demands that you use the previous month-end’s rates, and not the rates as per your actual transaction date. This means, you must carefully download and preserve all the month-end TT rates throughout the financial year. Note: A person compiled SBI TT rates from 2nd July 2020 so you don't have to do it from 2nd July.
Part B: Reporting of foreign taxes paid / withheld and claiming tax relief for the same. Report your tax relief claim: You need to fill out Form 67 that details the foreign transactions (dividends), US IRS withholdings etc. and also provide supporting documents (such as 1042-S from your broker, as well as any broker statements.) The form should ideally be submitted before you file your ITR for the given assessment year.
This form can be filled out online (in the incometaxindiaefiling.gov.in portal after you log in) and can be submitted online along with proofs, since these past few years. You do get an acknowledgement with a reference number.
Claim tax relief in ITR for any foreign taxes paid: You need to fill out schedule TR of ITR for any tax relief you are claiming. (In Excel utility, TR & FA are on the same page.)
You can claim tax relief under section 90 or 90A or 91, depending upon whether DTAA exists with that country or not.
In FA schedule, you have to also mention the article of DTAA under which tax relief is claimed.
As an example: Looking at the case of US, where IRS withholdings are at the rate of 25%: Since OS gets added in your income computation and thus overall tax computation, and since TR gets included in your tax computation as a credit similar to Indian TDS, you would effectively be paying the 5% or so of difference to Indian ITD, or taking some money back if you are in lower than 25% tax brackets.)
i. In case of US, you can claim TR under section 90, articles 10 & 25.
All the steps above would ensure that your foreign assets are reported in ITR, your foreign income is included in your income computation and your withheld foreign taxes are accounted for in your tax computation.
Part C: In practice: This is where the things get murkier.
It seems that presently, there is little information exchange available between US IRS and Indian ITD, at least as far as small tax payers are concerned. Even if there is info exchange, maybe ITD pays only limited attention to entire set of data. Therefore, CPC is not in a position to validate the foreign taxes paid to IRS.
This, even though you ensure that your foreign broker has your Indian PAN recorded with him and he mentions the same in 1042-S form. (1042-S is the US-equivalent of Form 16-A that we get in India from Banks as TDS statement.)
As a result, CPC simply expresses its inability to process any ITR that has its TR schedule filled out and just transfers it to your Jurisdictional AO, who can happily sit on your ITR for years without processing it. (or sometimes, he processes the ITR without giving any Foreign Tax relief, which in turn may result in a tax demand.)
In effect, you are never certain if rest of the sections of your ITR are in order, and you are not sure if you would really be given foreign tax credit, and you're not sure when you will be issued any refunds due.
Part D: Repercussions of Non-compliance Failure to report your foreign assets or income invites penal action under Black Money Act 2015.
Undisclosed foreign income and asset will be taxed at a flat rate of 30 percent.
Concealment of income and assets and evasion of tax in relation to foreign assets will be liable for prosecution with punishment of rigorous imprisonment up to 10 years
Penalty for concealment of income and assets to be levied at 300 percent of the tax sought to be evaded
Penalty of Rs. 10 lakhs may be levied on non-filing of tax return or filing of tax return with inadequate disclosure of foreign assets
- Bogleheads® forum topic: , TedSwippet. Aug 29, 2020