Tax Framework Distinguishes Resident Indian Investors in GIFT City from Global Counterparts

Investing in Global Markets: A Guide for Resident Indians

Resident Indians interested in investing in global markets have three main options to consider: investing through GIFT City, purchasing shares on the National Stock Exchange of India's International Exchange (NSEIX), or using a foreign broker.

India's share of global market capitalization is roughly 3-4 percent. Many investors opt for a 10-20 percent international exposure in their equity portfolios, with some choosing to invest solely in the US market.

GIFT City

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

One option for investing in global markets is through GIFT City-based global mutual funds, such as Parag Parikh Financial Advisory Services IFSC Nasdaq 100 FoF, DSP Asset Managers Global Equity Fund, and Edelweiss Asset Management Greater China Fund. In these funds, taxation occurs at the fund level, meaning the fund pays the required tax before calculating and declaring the Net Asset Value (NAV). This results in investors usually not having to pay separate capital gains tax at the time of redemption.

NSEIX

Another route is through Unsponsored Depository Receipts (UDRs) listed on NSEIX. These products mirror the price movement of US stocks, providing Indian investors with indirect exposure to foreign companies. UDRs are offered by NSE IX, giving investors a way to participate in the US market without directly owning shares.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

Foreign Broker

The third method is to buy US stocks directly through foreign brokers on global investing platforms. In this route, investors can directly own shares of companies listed in the US market, but they need to separately handle taxation and foreign investment rules applicable in India.

Taxation

For mutual funds operating through GIFT City and investing in markets such as the US, taxation is applied at the fund level. However, investors buying foreign stocks or ETFs directly through international brokers are taxed separately in India. The tax treatment differs depending on the holding period, with long-term capital gains taxed at 12.5 percent if the investment is held for more than two years. Short-term capital gains are taxed according to the investor's income tax slab.

The key difference in tax treatment is who pays the tax. In the GIFT City structure, the fund pays the tax, and the amount received by the investor is tax-exempt in their hands. In direct investing through a foreign broker, the investor pays the tax personally. This difference becomes important in short-term capital gains, with the GIFT City route taxed at the highest surcharge rate of 42.75 percent effective tax rate. In contrast, direct investing is taxed according to the investor's income slab, with a surcharge of 10 percent for someone earning between Rs 50 lakh and Rs 1 crore.