Why is there a limit on buying US stocks

As an Indian investor, you might have heard of the LRS or Liberalised Remittance Scheme that facilitates direct cross-border capital flows and investment. However, did you also know that the LRS sets a limit to buying US stocks? According to LRS, you can remit a maximum of $250,000 annually to buy US stocks.

Deep Dive Into LRS 

If you’ve Googled ‘how to invest in the US stock market?’ you must be familiar with the Scheme. With economic liberalisation policies coming into effect from 1990 onwards, the Regulatory Authority introduced the LRS in 2004 on the recommendation of the Tarapore Committee as the next step to making India an open economy.

Back in 2004, the remittance limit for LRS was $25,000. Given the micro and macroeconomic changes in the country, this limit is now set at $250,000. Thus, resident Indians (including minors) can remit up to $250,000 annually for current and capital account transactions.

Remittances made for buying US stocks come under capital account transactions of the LRS mandate. As such, they are subject to the following rules:

• You can open and hold a foreign currency account with a bank abroad.
• Invest in various asset classes like stocks, mutual funds, equities, ETFs, etc.
• You must maintain a capital account for at least one year before making the first remittance.
• No remittances to countries identified as non-cooperative countries by the Financial Action Task Force.
• Remittance for margin calls is prohibited.
• As per the 2023 budget proposal, a TCS of 20% is applicable on LRS remittances for US stock market investments.

The Rationale for the Limit 

The LRS empowers Indian residents to invest in the US, allowing them to partake in the fruits of a relatively-stable and powerful market. However, most investors question its existence. Here’s why the limit is important:

• While investing in the US has benefits, it also comes with risks. The LRS limit balances out the risk of investing abroad.
• Maintaining a stable foreign exchange reserve is important. Hefty outward remittances can destabilise India’s foreign exchange reserves, affecting its ability to meet debt and interest obligations.
• The LRS limit helps cap excessive speculative investments.
• Without the upper limit, investors looking to buy the best US stocks would remit unlimited funds impacting the foreign exchange rate and thereby weakening the Rupee.
• The limit helps regulate the flow of domestic and international investment, preventing capital flights from India. The absence of the limit could see investors migrating to the US market, limiting the Indian economy’s growth and investment prospects.
• High imports in the country need to be funded through foreign exchange reserves. Without a cap on the LRS, India would face a dearth of funds for import funding.

However, the limit is also set and cannot be altered even if investment proceeds are remitted back to India. Moreover, it also impedes investments of more than $250,000. So, investors looking to remit more funds feel handicapped by the limit.

Alternative Route 

While the LRS limit’s benefits outweigh its cons, you continue investing in US stocks once you've exhausted the limit with indirect investments like mutual funds and ETFs. However, SEBI has also set an aggregated industry-wide upper limit of $7 Billion for such indirect investments.

No matter how you decide to buy US stocks, the easiest way of doing so is through Fi Money. On Fi, you can invest in commission-free mutual funds or directly in the raging FAANG stocks through a simple and user-friendly interface.

Frequently Asked Questions 

1. Are Indians allowed to invest in US stocks? 

Yes. Indians can invest in US stocks directly by opening an overseas brokerage account or indirectly via mutual funds and ETFs.

2. What is the limit on investing in US stocks? 

Under the LRS, Indian residents can remit up to $250,000/per financial year to invest in US stocks directly. For the mutual fund route, this limit is an industry-wide aggregated cap of $7 Billion.

3. How do I buy large amounts of shares? 

You can buy large amounts of shares by following the fractional investment route. Here, you can buy parts of multiple stocks, diversifying your holdings and growing your portfolio.