Indian Investors Face Heightened Scrutiny on Overseas Real Estate Purchases
Acquiring international real estate in destinations like Dubai, London, or Singapore has become a coveted goal for many Indian investors. However, recent enforcement actions underscore that such purchases can attract significant regulatory attention if Foreign Exchange Management Act (FEMA) regulations are not meticulously followed.
Earlier this month, the Directorate of Enforcement conducted searches under FEMA, 1999, targeting high net-worth individuals who had purchased multiple properties in Dubai without using proper outward remittances through authorized banking channels. Since foreign properties cannot be seized directly, equivalent immovable assets in India valued at Rs 27.83 crore were attached as a consequence.
Key Compliance Checkpoints for Indian Investors
1. Adhering to the LRS Limit
Under the Liberalised Remittance Scheme (LRS), resident individuals are permitted to remit up to USD 250,000 per financial year without prior RBI approval to acquire overseas immovable property. This limit is per individual and applies across all bank accounts. Attempts to circumvent this cap by splitting payments among family members or using multiple banks are ineffective. Experts warn that misdeclaring the purpose of remittance or registering property in another person's name to bypass limits can trigger compliance inquiries and penalties.
2. Prohibition on Overseas Borrowing
FEMA strictly prohibits residents from borrowing abroad to finance property purchases. Even informal arrangements, such as having relatives overseas make payments with plans for later reimbursement, may be treated as violations. Developer EMI schemes can also be interpreted as creating foreign borrowing obligations, leading banks to block remittances and enforce regulatory actions.
3. Importance of Documentation and Banking Trails
All payments must be processed through authorized dealer banks using correct purpose codes. Transactions conducted outside the banking system, often referred to as hawala, are illegal. Risks extend beyond illegal transfers; missing agreements, incorrect declarations, or inadequate source-of-fund documentation can resurface years later, particularly when investors attempt to sell the property or repatriate funds. Banks typically require complete remittance records, tax proofs, and transaction documents before allowing money to return to India.
4. FEMA Compliance Does Not Ensure Tax Compliance
A common misconception is that FEMA approval automatically guarantees tax compliance. India taxes residents on global income, meaning rental earnings and capital gains from overseas property must be declared in Indian income tax returns. Failure to disclose foreign assets or income may invite action under the Black Money Act, which imposes steep penalties and potential prosecution in serious cases.
5. Managing Repatriation Timelines
FEMA rules also govern post-purchase activities. Rental income or sale proceeds may be retained abroad only if reinvested; otherwise, funds must generally be repatriated to India within prescribed timelines, typically 180 days. Holding funds overseas without reinvestment beyond this period may be treated as a violation, leading to further scrutiny.
Ongoing Compliance Obligations
Owning foreign property entails continuous responsibilities, including local tax filings, rental disclosures, and ownership reporting requirements in the destination country. Non-compliance abroad can delay or block sale proceeds and create complications under Indian regulations, emphasizing the need for diligent adherence to both domestic and international laws.
