How To Build A Tax-Efficient Portfolio Across Indian And Global Assets

For a serious Indian investor interested in diversifying across global markets through international equities, overseas funds, and foreign assets, the real question is no longer “What return will I earn?” but “How much will I retain after tax and compliance?” In cross-border investing, taxation may reshape your actual inflow. The real measure of portfolio success not just returns, but post-tax, post-compliance returns, especially where Indian and global tax rules intersect. 

1. Begin With The Domestic Tax Structure 

Broadly, Indian investments fall into three categories: 

• Equity-oriented (listed shares, equity mutual funds, index funds)

• Non-equity funds (most debt, gold, and many international funds)

• Fixed income (fixed deposits, bonds, small savings schemes)

Equity investments benefit from concessional long-term capital gains taxation, while short-term gains are taxed at a fixed rate, whereas most debt and interest products are taxed at slab rates which can be on a higher side if one falls under higher tax slabs. Dividends are also taxed at slab rates, which makes growth options generally more feasible for investors in higher tax brackets.

2. Adding Global Assets: Structure Before Exposure

Global exposure to Indian investors usually comes through: 

• International mutual funds (India-domiciled)

• Direct foreign stocks and ETFs under the Liberalised Remittance Scheme (LRS)

“For Indian tax purposes, overseas equities, foreign mutual funds, ETFs, and even US stocks are treated as unlisted assets. Long-term capital gains are taxed at a flat 12.5 per cent without indexation, while short-term gains are taxed at the investor’s slab rate as compared to Indian equities. Additionally, dividends from foreign companies are fully taxable at slab rates in India, even though the tax has already been deducted overseas,” says CA Parag Jain, Tax Head, 1 Finance.

Investments usually route under RBI’s Liberalised Remittance Scheme (LRS), which permits up to USD 250,000 per individual per financial year. Higher remittances attract TCS, adjustable against final tax liability.

With proper documentation and disclosures, Double Taxation Avoidance Agreements (DTAA) provide relief from double taxation by taking foreign tax credit.

Case example:

Assume Shraddha, 34, in the 30 per cent tax slab, invests Rs 25 lakh in US ETFs under LRS. After three years, the value of investment rises to Rs 35 lakh.

Capital gain = Rs 10 lakh. Long-term capital gains tax applies at 12.5 per cent (holding period > 24 months).

Tax = Rs 1,25,000 i.e., post-tax proceeds = Rs 33.75 lakh

Assume she also received Rs 1.5 lakh as dividend during this period. The US deducts 25 per cent (Rs 37,500) as withholding tax. In India, the entire Rs 1.5 lakh is taxable at 30 per cent = Rs 45,000. After claiming foreign tax credit of Rs 37,500 under DTAA (by filing Form 67), her additional tax payable in India is Rs 7,500.

Now compare this with an India-domiciled international fund taxed at slab rates. The same Rs 10 lakh gain at 30 per cent would result in Rs 3 lakh tax - significantly higher than the Rs 1.25 lakhs LTCG on direct ETF holding.

“However, direct investing requires checking LRS, disclosing foreign assets (FA Schedule) in the ITR and proper documentation to claim tax credit. For disciplined investors investing in direct overseas ETFs may be more tax-efficient over the long term. Global funds (India based) offer easier compliance but with a potentially higher tax cost,” informs Jain. 

3. A Practical Retirement Scenario

Consider Fenil, age 54, who is approaching retirement. He invested USD 20,000 i.e. (Rs 15 lakh) in US stocks when the exchange rate per dollar was Rs 75. The investment appreciated by 12 per cent to USD 22,400 in dollar terms. With the current exchange rate being approximately Rs 91 per dollar, the sale proceeds become Rs 20.38 lakh.

In the same year, he earns FD interest of Rs 3 lakh and falls in the 30 per cent tax slab.

Due to currency depreciation, Fenil’s taxable gain increased in rupee terms. Even with volatility in the market, long-term capital gains on global equity investments were taxed less than FD interest due to slab rate taxation (higher).

“If before retirement, Fenil had prioritized long-term capital gains, planned redemptions across financial years, and reduced exposure to instruments that are slab-taxed, his income stream would have been more tax-efficient and smoother,” says Jain.

4. Where Investors Typically Lose Efficiency

In practice, inefficiency often comes from behaviour:

• Excessive Trading/Churning in overseas stocks

• Ignoring currency change taxation in rupee terms

• Not claiming foreign tax credit properly in ITR

• Failing to disclose foreign holdings in the ITR foreign asset schedule

Disciplined, low-turnover portfolios typically deliver better post-tax outcomes.

5. Compliance Is Not Optional

Global investing comes with responsibility:

• Monitoring LRS limits and TCS

• Reporting foreign assets in ITR

• Filing Form 67 in India for foreign tax credit

• Maintaining documentation for at least eight years

“Over a decade, the portfolios that compound best are the ones where return, risk, tax, and compliance were aligned from the beginning and are rarely those chasing the highest CAGR,” says Jain.

A tax-efficient portfolio is not created at year-end. It is designed at the allocation stage.