New-age stock investing platforms eye LRS relief for retail investors

New-age stock investment platforms may write to the government to exempt the proposed 20% levy on foreign remittances under the Liberalised Remittance Scheme (LRS) for retail investors investing in US equity instruments, and restrict the new regime only to high-net individuals (HNIs) and high-value transactions, multiple people aware of the matter told ET.

In the budget, finance minister Nirmala Sitharaman proposed to raise the tax collected at source (TCS) to 20%, from 5% earlier, and remove the Rs 7 lakh limit below which TCS was previously not applicable on foreign remittances.

Stock investment platforms such as IndMoney, Vested Finance and Stockal, among others, think the proposed increase in TCS on such transactions will deal a blow to the wealth management industry and hurt retail investors, sources added. Around eight such platforms are expected to jointly write to the Central Board of Direct Taxes and other stakeholders soon.

'Closed loop system'

They have also sought the support of industry body Internet and Mobile Association of India, the people said, requesting anonymity.

The platforms' view is that the proposed tax could impact retail investors interested in buying US stocks and exchange traded funds, sources said.

Under LRS, each Indian resident can remit up to $250,000 (up to Rs 2 crore) overseas in any given financial year. TCS on foreign remittances under LRS was introduced in 2020 to monitor the remittances and correlate them with income tax returns.

"These firms have been arguing that unlike other forms of foreign remittances, such as for purchase of property, travel or transfer to relatives, investment in foreign equities is a closed loop system, where gains come back to an Indian bank account," said one person aware of industry discussions. "So, the retail investor shouldn't be punished. Another argument is that investments under LRS have led to expansion of the market (of retail investing) and are still less than 10% of overall foreign remittances (from a risk standpoint)."

According to the latest RBI data, total outward remittances under LRS stood at $19.6 billion in 2021. Of this, investment transactions in foreign equity and debt were $746.5 million, or 3.8% of the overall foreign remittances under LRS.

IndMoney, Stockal and Vested Finance did not respond to ET's queries until press time on Thursday.

The government's latest proposal comes close on the heels of the Reserve Bank of India (RBI) banning State Bank of Mauritius (SBM) India from all transactions under the LRS. As a result, players like IndMoney and Vested Finance, which partnered with SBM India, had to change transaction flows to help users load US brokerage accounts, ET reported last month.

Another person aware of discussions said, "Platforms enabling investment in foreign equities is a small nascent community at present. The final representation has not been finalised; however, it may provide government stakeholders a view on the impact of the new TCS regime, the potential of these platforms to grow the market and possible risks."

"They are arguing that if retail investors are taxed heavily, the industry and use case (of US stock investing) may die down," the person added.


The platforms are expected to argue that the proposed higher tax will leave investors with less liquidity for trades, increase upfront costs and discourage retail investors from buying US stocks.

To be sure, investors can avail of TCS credit against their capital gains in the same financial year.

"The perception is that retail investors investing in foreign equities are HNIS, which isn't the case. Retail investors investing in the global equity markets do so from a long-term gains standpoint, so applying for TCS credit in the short term (and the same fiscal year) is not a viable option for many," one of the people cited above said.

Customers invest Rs 12,000-15,000 on average in US equities through LRS transactions using these platforms, and nearly 50% of such retail investors have annual incomes less than Rs 15 lakh, two people told ET.

The foreign equity investment use case has led to the creation of over one million US brokerage accounts, enabled by these platforms.

"The move to collect higher TCS will definitely lead to lesser participation of retail investors in this asset class, and will impact asset diversification for a middle-income investor. The US investing use case also held the promise of increasing the net of individuals paying taxes," said one of the people quoted earlier.