Unlike direct purchase of cryptos, investing in an ETF is subscribing to units or securities issued by a regulated fund — a feature that most think is a kosher trade. However, some of the Indian banks refuse to remit funds overseas if the money is invested in cryptos or offshore funds and pooled vehicles that invest in cryptos and track the prices of bitcoin and other digital currencies.
There is no specifical ban on resident individuals investing in cryptos abroad under the Reserve Bank of India’s liberalised remittance scheme (LRS). Nonetheless, some banks insist on undertakings from customers that they would not invest in cryptos thanks to RBI’s misgivings about virtual digital assets (VDAs).
According to wealth managers, instead of making fresh transfers some Indians have invested in the recently launched ETFs out of idle funds lying in overseas bank accounts.
“Many Indian residents have used the LRS route to buy fungible tokens or cryptos overseas. Few of them have invested in units of funds or ETF funds which in turn have invested in cryptos. It is a grey area as RBI has not come out with clarification whether this is allowed. But irrespective of what RBI says, investors would have to pay income tax on gain on sale at maximum marginal rate and also disclose in foreign assets schedule of their income tax form,” said Rajesh P Shah, partner at Jayantilal Thakkar and Company, which offers FEMA and tax advisory among other services.
A month ago, the SEC approved 11 crypto ETFs from asset managers such as Blackrock, Invesco and Fidelity.Virtual Digital Assets (VDAs) are defined very widely and taxable under special provision of section 115BBH of the Income Tax Act at the flat rate of 30% without allowing any offset of losses.”However, units held by investors in a collective investment vehicle like an ETF would fall within the scope of the definition of the term ‘securities’ as defined under section 2(h)(ib) of Securities Contracts (Regulation) Act, 1956. Therefore, for investors seeking to invest in Bitcoin may prefer investing it through such ETFs. One may take the position that taxation of such investments would be similar to taxability on investment in other foreign securities and may not be treated as VDAs. Even from FEMA perspective, existing provisions of FEMA permits persons resident in India to invest in securities issued in foreign exchange under LRS limits,” said Siddharth Banwat, a chartered accountant.
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