How to Invest in US ETFs from India: Direct and Indirect Routes

Investing in financial markets is no longer limited to geographical boundaries. Building wealth through investments has found several channels, exchange-traded funds (ETFs) being one of them.

It is an investment fund that has its fingers in multiple underlying assets, including equities, debt instruments, or commodities. It acts like an individual stock that can be bought and sold on an exchange. Its universe comprises commodities as well as a large and diverse collection of stocks.

Investors choose ETFs for income generation and hedging risk in a portfolio. The first ETF in the US was the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index.

An investor in India holding their entire portfolio within the domestic market means tying their wealth to one nation. Buying American ETFs allows Indian investors to own stakes in coveted global technology, healthcare, finance and consumer goods leaders, diversify across international markets, and thus participate in the world's largest economy.

They can also protect against currency depreciation over long investment horizons.

What is a US ETF and how does it work for Indian investors?

Like stocks, an exchange-traded fund (ETF) is traded on public stock exchanges. In the US market, equity ETFs pool investor capital to replicate major benchmark indices like the S&P 500 or Nasdaq-100. The biggest advantage of these funds is their broad portfolio diversification alongside real-time trading flexibility.

For an Indian investor, a US-listed ETF represents direct unit ownership in a fund regulated by the US Securities and Exchange Commission. An American ETF unit gives you fractional ownership across every company in that index.

US ETFs trade during American market hours, unlike Indian equity mutual funds where net asset value (NAV) is calculated once daily after market close.

Exchange-traded funds serve as foundational building blocks for international asset allocation and wealth management, as confirmed by data tracked by global bodies such as the Investment Company Institute.

Market participants can execute buy or sell orders at live market prices throughout the trading session because of ETFs’ liquidity structure.

Why should Indian investors buy US exchange-traded funds?

Indian investors get three core structural advantages by expanding equity holdings beyond domestic markets: geographical diversification, currency movement protection, and global technology sector exposure.

Technology Sector Toe-hold: American exchanges host leaders in artificial intelligence, semiconductors, software, and pharmaceuticals. Indian investors can participate in international enterprise growth via US ETFs and avoid single-stock risk.

Besides, many of these international business models have no direct equivalent listed on local domestic exchanges like the National Stock Exchange of India (NSE) or BSE Limited.

Geographical diversification: It has been shown to lower portfolio risk. US exchanges represent over 40 per cent of total global market capitalisation, and India accounts for roughly three per cent. If you allocate capital across both regions, your wealth does not rely solely on domestic economic cycles.

Dollar assets: Assets in US dollars offer a potential hedge to your portfolio against currency depreciation. Historically, the US dollar has appreciated against the Indian rupee over multi-year periods, boosting rupee-denominated returns.

Consider this scenario as an example. You make an initial investment of ₹10,00,000 converted to US dollars. If the ETF records annual capital appreciation of eight per cent in dollar terms, and the rupee depreciates by three per cent against the dollar, your effective annual return in rupee terms reaches approximately 11 per cent before transaction costs and taxes.

How to buy US ETFs from India: Direct vs Indirect Route

Indian resident individuals can buy American exchange-traded funds through two primary channels: direct investments in US-domiciled ETFs or indirect investments through domestic Indian mutual fund schemes.

The Direct Investment Route: You can open an international trading account with a brokerage platform that supports investments under the Reserve Bank of India Liberalised Remittance Scheme, convert rupees to dollars, and remit capital to an overseas custodian.

• Asset Scope: Access to US-listed ETFs across broad indices, sectors, fixed income, and commodities, subject to the brokerage platform's offerings and applicable regulations.
• Ownership Structure: Direct unit ownership in US-domiciled funds.
• Execution Mechanics: Orders execute during US stock exchange trading hours.
• Transaction Currency: Trades execute directly in US dollars.

The Indirect Investment Route: This allows you to buy units of domestic Fund of Funds or Indian-listed ETFs managed by domestic asset management companies that invest in foreign target funds.

• Asset Scope: Limited to domestic mutual fund schemes offering international mandates, subject to applicable regulations.
• Transaction Currency: Transactions occur entirely in INR.
• Ownership Structure: You hold units of an Indian mutual fund scheme registered with the Association of Mutual Funds in India (AMFI).
• Execution Mechanics: Investments operate through standard domestic banking, UPI, or systematic investment plans.

How to invest in US ETFs using the RBI Liberalised Remittance Scheme?

The Reserve Bank of India (RBI) regulates outward foreign currency remittances by resident individuals through the Liberalised Remittance Scheme (LRS). This central bank framework governs outward capital transfers to overseas brokerages.

Remittance Limits and Eligibility Under LRS

As per RBI guidelines, an individual resident can remit up to US $250,000 per financial year (1 April to 31 March) for any permissible current or capital account transaction or a combination of both. (RBI guidelines). This threshold covers foreign stock and ETF investments.

Eligibility is restricted to resident individuals, including minors through legal guardians. Hindu Undivided Families, partnership firms, and corporate entities cannot use the LRS allowance for portfolio investments.

Remittance Mechanics and Rules to Remit Funds Lawfully

• Purpose Code Selection: Authorised Dealer Category-I banks process portfolio investment transfers under the applicable RBI purpose code for overseas portfolio investment.
• Mandatory Identification: A valid Permanent Account Number (PAN) is required for every outward transfer.
• Cash Repatriation Timelines: Uninvested cash balances in a foreign brokerage account may be subject to repatriation requirements under applicable RBI regulations. Check the current rules with your authorised dealer bank before remitting funds.

How to invest in US ETFs through Indian mutual funds?

Investors seeking international exposure without managing foreign exchange transfers can choose domestic mutual funds for a convenient path. Asset management companies in India launch international Fund of Funds and index-tracking schemes regulated by SEBI.

Operational Framework

An Indian asset management company creates a domestic fund structure that collects rupee capital from local investors. The domestic scheme then buys units of an underlying US ETF (such as an S&P 500 index fund) or constituent index shares directly. Your holding reflects in your domestic mutual fund statement alongside local equity funds.

Advantages of Domestic Mutual Funds

• Rupee Denomination: Investments, systematic investment plans, and redemptions execute in Indian rupees through local banking channels.
• Simplified Administration: No outward remittance forms or foreign bank accounts are required.
• Low Entry Threshold: Allocations can begin with small amounts, often starting at ₹500 per month.

Industry Investment Caps

SEBI regulates overall limits on foreign investments across domestic mutual funds, including limits for foreign securities and foreign ETFs. When total inflows approach these thresholds, fund houses can enforce a temporary suspension of new lump-sum subscriptions or pause fresh SIPs. Monitor Association of Mutual Funds in India (AMFI) releases regularly to stay updated on the latest capacity availability.

Step-by-step Process to Open an Overseas Trading Account

Setting up and funding an international brokerage account via the direct investment route requires six distinct steps:

Step 1: Select an International Brokerage Platform. The platform should accept Indian resident investors. You can open accounts directly with international broker-dealers or use domestic Indian fintech platforms partnering with US broker-dealers or clearing firms. Confirm what investor asset protection applies to your account, including whether the platform or custodian is covered by the US Securities Investor Protection Corporation.

Step 2: Submit Know Your Customer Documentation. Upload clear digital copies of required identity and address verification documents:

• Permanent Account Number card for tax verification.
• Identity and address proof, such as a valid Indian passport, Aadhaar card, or bank statement.
• Bank statement from the linked Indian bank account used for outward remittances.

Step 3: Complete US Tax Form W-8BEN, or the Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). It is an IRS document used by foreign individuals to certify non-US status and claim tax treaty benefits. During account setup, non-US citizens must complete Form W-8BEN where required. Once you fill this form, your non-resident status is certified for US tax purposes. This allows your brokerage to apply the applicable dividend withholding tax rate under the India-US Double Taxation Avoidance Agreement.

Step 4: File Form A2 with your authorised dealer bank. You can submit Form A2 through your Indian bank's online portal or branch. Specify the remittance amount in US dollars, enter the foreign broker's clearing bank details, and select the applicable purpose code for overseas portfolio investment.

Step 5: Convert INR to USD and fund your account. Your bank converts your INR balance into USD at the spot exchange rate plus the currency conversion mark-up. Funds move through the global Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment network, arriving in your overseas account within one to three business days.

Step 6: Execute your ETF trading order. Search for your chosen ETF ticker symbol on the platform interface. Select a market order or limit order, enter your desired dollar amount or unit count, including fractional units if supported, and submit the trade during active US exchange operating hours.

Tax on US ETFs for Indian investors: Capital Gains and Dividends

Cross-border equity investments are governed by tax rules across two legal jurisdictions — the US, where the ETF is domiciled, and India, where the investor resides.

Taxation of Dividend Income

• US Dividend Withholding Tax: The US Internal Revenue Service imposes a standard 30 per cent tax on dividend payments to foreign investors. Submitting Form W-8BEN may reduce this withholding rate under the applicable tax treaty. The brokerage automatically deducts the applicable tax before crediting net dividends.
• Indian Income Tax: Dividend income is added to your total annual income in India and taxed at your applicable personal income tax slab rate.
• Foreign Tax Credit Claim: To avoid double taxation, eligible taxpayers may claim a Foreign Tax Credit for tax withheld in the US, subject to Indian tax rules and the applicable documentation requirements, including Form 67 where required. (https://www.incometax.gov.in/iec/foportal/help/statutory-forms/popular-form/form67-um)

Taxation of Capital Gains

• US Capital Gains Regulations: The US generally does not charge capital gains tax on non-resident Indian investors selling units of US-domiciled ETFs, subject to applicable exceptions.

• Indian Capital Gains Tax Rules: The Indian tax treatment of overseas ETFs depends on the fund's classification and the applicable tax provisions:

Short-Term Capital Gains: The holding period and tax treatment depend on the applicable classification of the ETF under Indian tax law. Long-Term Capital Gains: The holding period and tax rate depend on the applicable classification of the ETF under Indian tax law.

Tax Collected at Source Rules

Under Section 206C(1G) of the Indian Income Tax Act, 1961, outward foreign remittances processed under LRS may attract Tax Collected at Source (TCS), depending on the purpose of remittance and the applicable threshold and rate.

• TCS applicability and rates depend on the purpose of remittance and the applicable rules for the relevant financial year.

TCS is an advance tax collection, not an additional expense. The bank collects TCS during remittance and deposits it against your PAN. You can adjust this TCS against your overall annual tax liabilities or claim a refund when filing your Indian income tax return.

Hidden Costs and Charges of Investing in US ETFs From India

First, evaluate net investment returns. Measure all operational transaction costs associated with converting currency and transferring capital overseas.

• Foreign Exchange Conversion Margins

Commercial banks add a currency conversion mark-up over prevailing interbank foreign exchange rates when converting rupees to dollars and vice versa. This margin varies by provider and transaction.

• Platform and Custody Costs

While many international platforms offer zero-commission trades on core US ETFs, some providers charge monthly maintenance fees, custody charges, or withdrawal processing fees when transferring money back to India.

• Outward SWIFT Wire Processing Fees

Indian authorised dealer banks charge flat processing fees and cable charges for dispatching funds overseas. These fees vary by bank and transaction, and may be subject to applicable Goods and Services Tax (GST).

• ETF Expense Ratios

The institutional fund manager operating the US ETF deducts an annual expense ratio directly from fund assets. Major US equity index ETFs feature low expense ratios, frequently between 0.03 per cent and 0.15 per cent per year, although charges vary by fund.

• Impact of Fixed Costs on Transfer Sizes

Fixed transfer fees usually impact small investment amounts more heavily than larger transactions. Transferring ₹5,00,000 abroad, for example, makes a fixed ₹1,000 SWIFT fee represent 0.2 per cent of the capital. Transferring ₹20,000 makes the same ₹1,000 fee equal 5 per cent of the invested amount. The impact of fixed transaction fees on net returns therefore varies with the amount transferred.

Key Risks to Evaluate Before Buying American ETFs

International ETFs expand investment opportunities, but investors should also consider several risk factors beforehand.

Foreign Exchange Volatility: Investments are subject to exchange rate fluctuations between the INR and the USD. If the rupee appreciates against the dollar during your holding period, your asset value in rupee terms will decline, even if the underlying US ETF price stays constant in dollar terms. Data tracked by central banks like the Reserve Bank of India and the Federal Reserve highlights how interest rate differentials influence currency movements.

Tracking Error and Liquidity Spreads: Tracking error measures how closely an ETF follows its benchmark index. Administrative expenses, cash holdings, and rebalancing timing create minor performance differences. ETFs with high daily trading volumes generally have tighter bid-ask spreads and may help minimise execution friction.

Time Zone Differences and Operational Hours: American stock exchanges operate during US Eastern Time. Live trading hours fall between 7:00 PM and 1:30 AM IST during US daylight saving time, and 8:00 PM to 2:30 AM IST during standard time. Investors placing orders outside active market hours should understand how their brokerage handles such orders.

Mandatory Tax Disclosures Under Schedule FA: Resident Indian citizens holding foreign assets directly may need to declare overseas accounts, stocks, and ETF holdings in Schedule FA (Foreign Assets) of their annual Indian Income Tax Return (ITR), depending on their filing requirements. Omitting required foreign asset disclosures can attract financial penalties under Indian tax laws.

FAQs

How can I invest in US ETFs from India?

Indian investors can invest in US ETFs directly through an overseas brokerage account using the Liberalised Remittance Scheme (LRS) or indirectly through eligible Indian mutual funds and ETFs that offer international exposure.

What is the LRS limit for investing in US ETFs?

Under the RBI’s Liberalised Remittance Scheme, resident individuals can remit up to US $250,000 per financial year for permitted transactions, subject to applicable regulations.

Is investing in US ETFs taxable in India?

Yes. Income from US ETFs may be subject to Indian tax, depending on its nature and the applicable tax rules. Dividend income and capital gains may have different tax treatments.

What is the tax on US ETF dividends for Indian investors?

US dividends paid to Indian investors may be subject to US withholding tax. The applicable rate depends on US tax rules and the India-US tax treaty. Dividend income may also be taxable in India, subject to applicable provisions.

Can I invest in US ETFs through an Indian mutual fund?

Yes. Eligible Indian mutual funds, including international Fund of Funds, can provide exposure to overseas markets. Their ability to accept fresh investments may depend on applicable regulatory limits and scheme restrictions.

What are the charges for investing in US ETFs from India?

Potential costs include currency conversion fees, bank remittance charges, brokerage or platform fees, custody charges and the ETF’s expense ratio. The charges vary by provider and fund.

What are the risks of investing in US ETFs from India?

Key risks include market volatility, currency fluctuations, tracking error, liquidity differences, transaction costs and changes in applicable tax or regulatory rules.

Do Indian investors need to file Schedule FA for US ETFs?

Indian residents holding reportable foreign assets may need to disclose them in Schedule FA of their income tax return. The requirement depends on the taxpayer’s circumstances and applicable filing rules.