Is it better to invest directly in foreign stocks?

Even if one invests directly in foreign stocks, an investor will not get the benefit of concessional tax treatment available for listed domestic equities, as such benefit is available only for equities listed on recognized stock exchanges (Which is effectively recognized only by domestic stock exchanges. Govt.). Benefits of short holding period to qualify as long-term asset after 1 year, and concessional tax rates of 15% for short-term capital gains and 10% for long-term capital gains of equities listed on domestic stock exchanges are limited to The period to qualify as long term for foreign shares would be 2 years, and the tax rate on long term gains would be 20% and there would be normal slab rates of tax for short term capital gains.

A scheme initiated by a FoF or domestic mutual fund, which typically invests in either foreign exchange-traded funds or foreign stocks, would not qualify as an equity-oriented mutual fund, given its entire holding in equity or equity underlying instruments. as it will not hold 65% stake in domestically listed equity shares or in a fund investing 90% of its investment in such domestic equities. Hence such investments will not give the benefit of concessional tax rates of 10% or 15% available to equity-oriented mutual fund units. The holding period in such cases would be 3 years to qualify as long-term capital gains, while the capital gains tax rates would be the same as for foreign direct equity.

While there is not much difference in the mode of taxation, apart from the longer holding period for mutual fund units, the problem actually lies in the detailed disclosure to be made by a taxpayer with respect to his foreign assets. Tax Returns. A taxpayer having foreign assets has to mandatorily file tax return even if his income is below the taxable limit. A separate Schedule FA is to be filled by the taxpayer disclosing foreign assets and income on such properties. These details have to be given even if the shares are held for a day or two. The detailed disclosure is much more than what is required to be given for domestic shares, where one is claiming a profit of 10%.

Such disclosure is required regardless of income level of the taxpayer, unlike household assets, where limited disclosure of the total cost of different types of assets is required, only if the taxable income is high. ₹50 lakhs. The worst part of this disclosure is that failure to disclose any foreign assets can be fined ₹10 lakh under black money law! You can’t afford to make a single mistake, and if you’ve traded multiple foreign stocks, you may spend more time filling out this schedule than you can spend on the rest of your tax return.

This is because tax authorities view all individuals holding foreign assets as potential tax evaders, thanks to some taxpayers keeping accounts in Switzerland and other tax havens. This is despite the fact that it has been allowed for resident Indians to hold foreign assets for almost two decades. It is also highly likely that your case may be taken up for verification by the tax department as a high-risk matter, simply because of your foreign assets, or you may receive a notice from the investigation wing of the tax department on your taxes. Cross-verify the information they receive from foreign tax authorities with the return. To claim credit for foreign tax deducted at source, you will also need to file a separate form before filing your return.

The hassle and effort involved is sometimes not worth the extra returns that you can earn by investing in foreign equities. Unless you are a large scale investor and can either hire an accountant or take the time yourself to keep an eye on your various overseas stocks, you are better off investing in schemes of domestic mutual funds. may invest in foreign stocks, in which case such detailed disclosures are not required.

Gautam Nayak is a Partner at CNK & Associates LLP.