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The Liberalised Remittance Scheme (LRS) offers a practical alternative for investors looking to avoid these inflated costs and directly invest in international markets.
The premium pricing challenge
RBI and SEBI regulations limit mutual funds’ international investments, including ETFs, with caps of $7 billion for foreign equities and $1 billion for international ETFs.
These caps, set in 2007, have led to a supply-demand imbalance, resulting in ETFs trading at inflated prices.
Arihant Bardia, CIO and Founder of Valtrust, explains, “The artificial scarcity created by these regulatory limits has caused ETFs to trade at higher prices, which can hurt long-term returns.”
Investors seeking ETFs tied to global indices like the Nasdaq 100, which tracks top tech companies, are especially affected by this premium pricing.
The high demand for these ETFs, combined with the limited supply, has made it increasingly difficult for investors to buy in at reasonable prices.
How LRS can provide a cost-effective alternative
To avoid paying inflated prices for international ETFs, investors can consider the Liberalised Remittance Scheme (LRS), which allows Indian residents to remit up to $250,000 per year for investment purposes.
By using LRS, investors can bypass the premium pricing on Indian exchanges and directly purchase ETFs from global markets at their true value.
Bardia says, “Investors using the LRS route can buy ETFs directly from international exchanges, avoiding the inflated prices seen on Indian exchanges. This offers a more cost-effective way to invest in overseas assets.”
Understanding the tax implications of LRS
While LRS allows investors to bypass ETF premiums, it does come with a 20% Tax Collected at Source (TCS) on remitted funds.
However, Bardia points out that this is not a final tax.
“The TCS is a collection mechanism, not a final tax. Investors can claim it as a credit during their income tax filing, effectively reducing the impact of this charge,” he explains.
Despite the TCS, the LRS route can still be a more cost-effective option than buying inflated ETFs on Indian exchanges, especially for those investing in high-demand, tech-heavy indices.
First Published: Dec 21, 2024 6:03 PM IST
