In recent times, there has been a significant rise in interest among Indian residents, particularly the nouveau riche, in acquiring immovable property outside India. The Indian foreign exchange law does allow resident Indians to make such acquisitions. Currently, the prime market for these investments is the United Arab Emirates (UAE). With lenders offering customized financial products, Indian buyers are finding great value in overseas deals compared to the soaring real estate prices in metropolitan cities like Mumbai. However, this enthusiasm for lucrative investment options and accessible financial products may lead to some regulatory oversight under Indian exchange control laws, which could be costly. This article aims to highlight the grey areas that may pose concerns in the near future.
Brief Background
Indians have traditionally been
inclined to invest in real estate. Extending this tradition internationally,
affluent Indian residents are now showing interest in the growing real estate
sector in the UAE. Often, these properties are more affordable than those in
Mumbai and other major metropolitan cities. When considering factors like
expected rental yield in foreign currency and potential future resale value due
to the region's increasing geostrategic importance, Indian residents are often
tempted to invest in overseas real estate.
Property developers abroad, including
many notable Indian real estate players, have found unique ways to fund and
capitalize on this interest among Indian buyers. With debt being much cheaper
outside India, there exists an arbitrage opportunity for Indian residents,
making such financing more affordable in terms of loan repayments.
Most options require a down payment of
up to 20% of the property value, with the balance to be paid in installments
over up to 8 years. However, Indian buyers attracted by the
"installment" model must be cautious of the ‘foreign exchange obligation’
created under such arrangements, as it is technically prohibited under FEMA
regulations.
What the Indian Law
Says
Section 3 of FEMA: Dealing in Foreign
Exchange, etc.
Subject to the general or special
permission of the Reserve Bank, no person shall:
- Deal in or transfer any foreign exchange or foreign security to any
person not being an authorized person.
- Make any payment to or for the credit of any person resident outside
India in any manner.
- Receive any payment by order or on behalf of any person resident
outside India in any manner, otherwise through an authorized person.
- Enter into any financial transaction in India as consideration for
or in association with the acquisition or creation or transfer of a right
to acquire any asset outside India by any person.
Section 6 of FEMA: Capital Account
Transactions
- According to Section 6(4) of FEMA, a person resident in India can
hold, own, transfer, or invest in any immovable property situated outside
India if such property was acquired, held, or owned by him/her when he/she
was resident outside India or inherited from a person resident outside
India.
- A resident individual can send remittances under the Liberalised
Remittance Scheme (LRS) for purchasing immovable property outside India.
The remittance under the LRS may be consolidated among relatives, provided
such relatives, being persons resident in India, comply with the terms and
conditions of the Scheme.
- A person resident in India may acquire immovable property outside
India from a person resident outside India:
- By way of inheritance.
- By way of purchase out of foreign exchange held in an
RFC account.
- By way of purchase out of the remittances sent under
the LRS instituted by RBI.
- Out of the income or sale proceeds of the assets,
other than ODI, acquired overseas under the provisions of FEMA.
Simply put, an individual can remit
$250,000 to buy a home overseas, or a family can pool a larger amount, with
each member contributing $250,000 (the yearly limit), to acquire a bigger
property outright. However, it is noteworthy that these avenues do not include
leverage (i.e., institutional borrowing) as a mode of acquiring immovable
property outside India. Such acquisition is permitted only through accumulated
funds in a prescribed manner.
Conclusion
From a reading of Sections 3 and 6 of
FEMA, it is clear that transactions involving the purchase of immovable
property (whether a 'ready-to-move-in' apartment or a property under
construction) outside India, with payments made in installments over years, may
come under scrutiny. This is because such deals inherently involve an element
of 'leverage', which FEMA prohibits.
Way Forward
Indian residents should consider this
aspect carefully, in consultation with their (Indian or foreign) bankers and
consultants/lawyers. If the transaction is scrutinized by RBI, there could be
severe penalties for contravention of FEMA regulations. This may render the
currently 'lucrative' investment deals less attractive.
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