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Investing in India for US Investors: Currency Risks, Taxation, and Market Realities

India’s economic landscape has been drawing increasing attention from US investors, presenting both opportunities and challenges. This blog post explores key considerations for investing in India for US Investors.

Positive Sentiment About India

India’s economic trajectory has garnered significant interest among US investors, particularly following Prime Minister Narendra Modi’s consolidation of power for a third term. This political stability, coupled with robust economic fundamentals, has created a favorable outlook for India’s market potential.

The country’s strong macroeconomic growth, coupled with sustained double-digit corporate earnings growth, underpins the ongoing bull market in Indian equities. Despite a brief economic slowdown in Q2 and Q3 of FY25, India’s macroeconomic environment remains stable, providing a positive outlook for Indian markets in 2025.

Key factors contributing to this optimism include:

  • Continued infrastructure spending, particularly in airports, ports,  railways and highway construction
  • Boost to select manufacturing sectors such as defense, electronics, aerospace, and renewables
  • Potential reduction in GST rates to stimulate consumption
  • Focus on energy transition and diversification of energy sources

India Currency Risk for US investors

One crucial factor for US investors to consider is the persistent depreciation of the Indian Rupee (INR) against the US Dollar (USD). This trend can significantly impact returns for dollar-based investors.

To illustrate the impact of currency depreciation on US investments in India, let’s consider a concrete example. In January 2015, 1 USD was equivalent to approximately 61 INR. Fast forward to January 2025, and 1 USD is now worth around 86 INR7. This represents a staggering 41% depreciation of the Indian Rupee against the US Dollar over the past decade.

If a US investor had placed $1,000 in Indian assets in January 2015, the value of this investment would now be only $709 in USD terms, assuming no growth in the underlying assets. To merely break even and recover the original $1,000 investment, the Indian assets would need to have grown by 41% in INR terms just to offset the currency depreciation.

This scenario underscores the significant currency risk faced by US investors in the Indian market. To put it in perspective, an annual growth rate of approximately 4% would be required simply to maintain the original value of the investment in USD terms.

Comparing this to a benchmark US investment, such as the Vanguard S&P 500 ETF (VOO), further highlights the challenge. On January 26, 2015, VOO was priced at $188.41, and by January 24, 2025, it had risen to $559, representing a remarkable 196% appreciation. This translates to an annualized return of about 20%.

Consequently, for a US investor to justify investing in India rather than in the US market, they would need to achieve returns of at least 24% annually (20% to match the S&P 500 performance plus 4% to offset currency depreciation). This substantial hurdle emphasizes the critical importance of carefully evaluating potential returns and understanding the full impact of currency risk when considering investments in the Indian market.

US-India Taxation on Investments

Taxation is a critical aspect for US investors looking at Indian investments. The tax implications can be complex and vary depending on the type of investment:

  1. US-India Double Taxation Avoidance Agreement (DTAA): The US and India have a DTAA in place, which can help prevent double taxation on the same income. This agreement provides relief to US investors by allowing them to claim credit for taxes paid in India against their US tax liability.
  2. Tax Deducted at Source (TDS): India follows a TDS system where tax is deducted upfront, and refunds are processed during tax filing. This applies to various types of income, including dividends, interest, and capital gains.
  3. Capital Gains Tax: Short-term capital gains (on investments held for less than 36 months) are taxed at the individual’s income tax rate, while long-term capital gains are taxed at 20% with indexation benefits.
  4. Dividend Taxation: As of 2020, dividends are taxable in the hands of shareholders at their applicable tax rates. Previously, companies paid a Dividend Distribution Tax.
  5. Foreign Portfolio Investors (FPI): FPIs are subject to different tax rates depending on the type of income. For instance, long-term capital gains on listed equity shares are taxed at 10% without indexation benefit.
  6. Permanent Establishment (PE) Risk: US investors need to be cautious about creating a PE in India, which could lead to higher tax liabilities.
  7. FATCA compliance for US investors in India: FATCA requires US investors in India to self-declare their tax status and provide details of their financial accounts to Indian institutions. These institutions then report this information to Indian tax authorities, who share it with the US IRS to combat tax evasion. Failure to comply can result in account freezing or investment suspension.

It’s crucial to note that there are limited experts who understand both US and Indian tax systems comprehensively. Investors should seek advice from professionals well-versed in cross-border taxation between the two countries. Additionally, staying updated with the frequent changes in Indian tax laws is essential for US investors to optimize their tax positions and ensure compliance.

Best investments in India for Americans

For US investors, considering investments in India makes sense under the following scenarios:

  1. Higher Returns: When the average return is likely to exceed your US return by more than 5%, accounting for currency fluctuations and additional risks.
  2. Diversification: India offers exposure to one of the world’s fastest-growing major economies, potentially balancing a US-centric portfolio.
  3. Sector-Specific Opportunities: Certain sectors in India, such as technology and healthcare, may offer unique growth prospects. The best sectors to invest in India are broadly considered to be IT, Renewable Energy, Banking and Financial Services, Healthcare and Pharmaceuticals, and Electric Vehicles. However, this list is subjective, so please conduct your own research.
  4. Long-Term Outlook: Given the volatility and currency risks, a long-term investment horizon is often more suitable for Indian investments.
  5. Personal Reasons: As mentioned earlier, investments like property for personal use during visits to India can be justified for non-financial reasons.

How to invest in India from the USA

Investing in India from the USA can be done through several methods, depending on your status as a US resident or Non-Resident Indian (NRI). Here are the main options:

  1. American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs): US residents can invest in Indian companies through ADRs listed on US exchanges like NYSE and NASDAQ, or GDRs on the London Stock Exchange. These can be purchased through US brokers like Robinhood.
  2. US-based ETFs: Invest in US-based ETFs that focus on India, such as INDA. This approach avoids complications with PFIC (Passive Foreign Investment Company) rules.
  3. Direct investment through international brokers: Use brokers like Interactive Brokers that offer access to Indian exchanges. You’ll need to open an account and may face additional fees and currency conversion costs.
  4. For NRIs:
    • Open an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account with an Indian bank.
    • Obtain a PAN (Permanent Account Number) card.
    • Use the Portfolio Investment Scheme (PIS) to invest in stocks, mutual funds, and ETFs.

Conclusion

In conclusion, while India presents an intriguing economic narrative, US investors should approach Indian investments with significant caution in 2025. The persistent currency depreciation, complex taxation landscape, and the need to significantly outperform US markets make India a challenging investment destination.

For most US investors, allocating funds to Indian markets is not recommended unless:

  1. Seeking geographic diversification
  2. Making personal-use investments (like property)
  3. Having specialized knowledge of the Indian market

The high hurdle of needing to generate 24% annual returns just to match US market performance makes India an unattractive investment option for the average US investor at this moment. Prudent investors would be better served focusing on more predictable and transparent markets.

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