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How to Use ETFs to Invest in US Markets from India

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Bearing in mind the above factors, the US stock market has in recent years become one of the preferred destinations for Indians to invest and diversify their portfolios by obtaining direct exposure to international organizations. As for the effective ways of achieving the above goal, one must consider the use of exchange-traded funds (ETFs). This article will give insight on how to invest  in US stock markets using ETFs for trading from India and also practical knowledge on how investment through ETFs would enable investors to avoid tax in India.

Understanding ETFs

Exchange Traded Funds or ETFs refer to investment funds that are traded in easy and familiar ways that are very similar to that of equities. They own securities for example equities, goods or bonds, and commonly use an arbitrage mechanism aimed at maintaining the trading very near to the net asset value even though very occasionally trading at a discount to it might occur.

ETFs are especially considered by those investors who need broad market access, specifically in the American market while avoiding chances in odd individual shares. Investors can get diversification, and relatively easy exchanges, and regarding price, they cost less than mutual funds.

Advantages of Investing in ETFs that Track the US Market

Diversification: 

ETFs allow for focusing on the sectors and companies that make up the stock market while minimizing the risk because of the direct investment in equities.

Access to Leading Companies: 

The following are the benefits of direct investment in ETFs: India-based investors can own global giants such as Apple, Google, and Amazon through ETF investments.

Cost-Effective: 

In most cases, ETFs have lower fee charges than mutual funds, meaning the investors are charged less when they invest in these funds.

Liquidity: 

ETFs are publicly managed investment funds listed in the stock exchange markets and are very liquid and flexible that investors can purchase and sell in the Short-term trading session.

Steps to Invest in US Market ETFs from India

Open a Trading Account with an International Broker: 

The first process of investing in the US stock market is staking a trading account with a broker who operates in the international market. Some brokers from India are associated with brokers from the USA so that the former clients can easily invest in those respective stocks or ETFs.

Complete KYC and Compliance Requirements: 

Compliance with all KYC rules or any other related requirement before conducting the first business transaction. This mostly involves coming along with identification cards and other relevant documents notably the residential documents.

Fund Your Account: 

Use the guides and tutorials below to deposit money into your trading account. We also want to point out that this can include conversion of the currency from INR to USD, and there could be certain fees for such operations.

Choose the Right ETF: 

Look at the nature of the investment and decide on an ETF that is appropriate for your investment portfolio. There are mainly three broad types of ETFs available in the market these are sector-specific ETFs, index-based ETFs, and thematic ETFs.

Place Your Order: 

After choosing the right ETF, an investor should be able to place his order through the trading platform of the broker he has chosen.

Popular US Market ETFs

SPDR S&P 500 ETF (SPY): 

Represents the S&P 500 index and, therefore could be useful for investing in 500 of the largest companies in the United States of America.

Invesco QQQ ETF (QQQ): 

Follows the Nasdaq-100 Index, this index contains one hundred largest non-financial companies with their stocks listed on the Nasdaq Stock Market.

Vanguard Total Stock Market ETF (VTI): 

Excellent for gaining significant exposure to the entire US market.

Tax Implications for Indian Investors

Arising out of the above insights, investors from India need to understand tax factors relevant to the US market ETFs. Here’s how different aspects are taxed:

Capital Gains Tax:

Short-Term Capital Gains (STCG): Since it is a short-term capital asset, these ETFs attract taxation under the IT Act @ the rate applicable to the investor’s income in India if sold within 36 months from date of purchase.

Long-Term Capital Gains (LTCG): The short-term profits are subject to payment of tax at the rate of 10%, while the long-term gains are those ETFs held for a period exceeding 36 months are taxed at 20% with indexation.

Dividend Income:

The US withholding tax of 25 per cent is applicable on the dividends paid to the nonresident of the USA received from the US ETFs. However, under the applicable bilateral treaty Between India and the US in the form of a Double Taxation Avoidance Agreement (DTAA), this particular tax can be credited against one’s total tax in India.

As per the progressive income tax structure of India, the dividends paid to the investors are chargeable to tax in the income tax slabs of the recipients.

Foreign Exchange Gains/Losses:

Swap points attributed to the exchange fluctuation between the USD and INR are also taken into consideration regarding tax liabilities in India.

Reporting and Compliance

FEMA and the Income Tax Act are the laws in India that apply to investors and their operations within the country. This includes:

Disclosure of Foreign Assets: 

Now, the Indian resident is bound to report all his foreign assets in his income tax return, which would include investment in US ETFs as well.

Reporting of Income: 

Any remuneration received from any source in the US or any income accrued in the US through capital gains from stocks and other investment avenues must be declared to the Indian Income Tax Department.

Risks and Considerations

All in all, certain advantages are associated with investing in US market ETFs, but this has its share of risks and downsides. Here are some factors to consider:

Currency Risk: 

This means that the exchange rate is a factor that can affect return movements. Hence, a depreciating rupee means higher returns up to the level of investments in INR, but a rising rupee has lower returns in the same currency.

Market Risk: 

This shows that even the US markets can to some extent be volatile and Economic or political factors may impact the market.

Regulatory Risk: 

Fluctuations in the rules relating to foreign investments in the US or India may affect the revenue and the level of compliance with the laws.

Conclusion

For Indian investors, investing in US market ETFs is one of the ways through which they can invest in other international markets without directly getting involved in the stocks market with high risk. Indian investors interested in investing in the US stock market through ETFs can find ways of getting the most out of the US including ways of mitigating various risks and taking effective tax advantage.

Before concluding to take a certain investment decision or course of action you should seek the professional opinion of a financial planner or tax consultant as the case may be to avoid making into wrong investment decision as well as to enable you to work out the best strategies that will suit you depending on the goal that you want to achieve.

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