Recent Issues: Indian Love Affairs with Overseas Properties
The recent increase in regulatory scrutiny by the Reserve Bank of India (RBI), the Enforcement Directorate (ED), and the Income Tax Department has made overseas property transactions by resident Indians a high-risk activity. Violations are being investigated under FEMA, the Black Money Act, and PMLA.
In this note we have tried to provide a conservative and compliant approach to acquisition of overseas residential property by resident individuals under the Liberalised Remittance Scheme (LRS), incorporating practical, legal, and regulatory precautions.
Regulatory Framework Snapshot
| Regulation | Key Provisions |
|---|---|
| FEMA, 1999 | Govern cross-border asset acquisition by residents |
| LRS (Master Direction No. 7/2015-16) | Allows resident individuals to remit up to USD 250,000/year for permitted transactions including property purchase |
| Black Money Act, 2015 | Penalizes undisclosed foreign assets with tax @30% and penalty up to 90% |
| PMLA, 2002 | Triggers when illegal or unaccounted funds are routed through foreign transactions |
Recent Regulatory Crackdowns
| Date | Agency | Description |
|---|---|---|
| Jan 2025 | ED | Notices issued for Dubai real estate purchases; tracing money laundering and LRS breaches (Economic Times) |
| Feb 2025 | ED | HNIs investigated for owning UK property through offshore firms, using UK beneficial ownership registry (Mint) |
| 2023–24 | RBI | Flagged misuse of LRS and ODI for indirect property investment; clarified property buying rules under LRS (ET BFSI) |
Permitted Transactions (Strict Interpretation)
- Direct acquisition of residential or commercial property abroad for personal use or long-term investment
- Total remittance per resident individual must not exceed USD 250,000/year
- Payment must be made from own tax-paid personal funds only
- Remittance only through Authorized Dealer (AD) banks using Form A2 with full declaration
- Property must be in permitted jurisdictions (e.g., USA, UK, UAE, Australia, Singapore, etc.) – Take care of restricted countries/FATF negative list
Prohibited or High-Risk Transactions
| Transaction Type | Risk | Reason |
|---|---|---|
| Buying in Pakistan, Nepal, Cuba, Iran, North Korea | ❌ Not permitted | Jurisdictions restricted under LRS/FEMA |
| Using foreign loans/EMI plans for property purchase | ❌ Prohibited | Treated as foreign borrowing; violates FEMA |
| Buying through offshore trusts or shell companies | ⚠️ High Risk | Triggers Black Money Act & PMLA if structure is unclear |
| Deferred payment or post-possession plans | ⚠️ Risk of reclassification as loan | Deferred liability = foreign credit facility |
| Under-reporting or non-reporting of foreign assets | ❌ Prohibited | Penalised under Income Tax Act and BMA |
Foreign Asset Disclosure & Tax Compliance
Under the Indian Income Tax Act, resident individuals are required to:
- Disclose all foreign assets and financial interests annually in Schedule FA of the Income Tax Return (ITR), including:
- Foreign real estate
- Bank accounts held abroad
- Any direct or beneficial interest in overseas entities
- Disclose any foreign income (e.g., rent, gains) and pay taxes accordingly
- Avail Foreign Tax Credit (FTC) if tax is paid in the host country, by filing Form 67
Consequences of non-disclosure
| Non-Compliance | Consequences |
|---|---|
| Omission of foreign property in ITR | Deemed as undisclosed foreign asset under Black Money Act |
| No foreign income disclosure | Tax evasion, penalty up to 300% of tax due + prosecution |
| Late or incorrect ITR filing | Penal interest + disallowance of FTC benefit |
| Repeat non-compliance | Triggers PMLA and ED scrutiny for potential money laundering |
Guidance on Installment or Under-Construction Plans
Allowed with caution:
Important Regulatory Concern: While construction-linked plans (CLPs) are technically not prohibited under LRS if structured as stage-wise remittances, the RBI has expressed discomfort in recent supervisory interactions and correspondence—especially regarding Dubai-based real estate offers that feature long-term installment schemes, deferred liabilities, or post-possession obligations.
Such plans are often recharacterised as disguised credit or external commercial borrowing. RBI and ED have reportedly taken adverse views where property purchases under CLPs are viewed as creating foreign debt exposures.
Hence, it is strongly recommended to avoid:
- Schemes involving future-dated payment obligations or interest accruals
- Post-possession payment triggers
- Agreements with non-cancellable deferred plans outside LRS cap
To remain compliant:
- Each installment must be remitted separately under LRS
- No possession allowed before full payment
- No interest-bearing clauses or deferred obligations
- Must resemble real estate milestone-linked payment, not a credit facility
Do’s and Don’ts for Resident Indian Investors
✅ Do’s
- ✅ Use only tax-paid personal funds via LRS route
- ✅ Stay within the annual USD 250,000 LRS cap
- ✅ Make remittances through Authorized Dealer Banks with proper documentation
- ✅ Disclose property ownership in Schedule FA of ITR annually
- ✅ Declare all rental or sale income abroad and claim FTC if applicable
- ✅ Maintain full and proper documentation for title, remittances, and property taxes
- ✅ Consult Indian and foreign legal/tax advisors before any investment
❌ Don’ts
- ❌ Do not exceed the LRS cap by splitting remittances among family members
- ❌ Do not use foreign loans, EMI schemes, or post-possession deferred payment models
- ❌ Do not route funds through business accounts or third-party intermediaries
- ❌ Do not acquire property via offshore shell companies or nominee holders
- ❌ Do not fail to report foreign property or income in your ITR
- ❌ Do not invest in restricted countries (Pakistan, North Korea, etc.)
- ❌ Do not ignore documentation and tax formalities in the host country
Legal & Tax Red Flags to Avoid
| Red Flag | Description | Law Violated |
|---|---|---|
| Benami holding via offshore entities | Property held indirectly to mask ownership | FEMA, BMA, PMLA |
| Use of family accounts to split remittances | Circumventing USD 250k limit | FEMA LRS rules |
| Undisclosed property in ITR | Missing Schedule FA disclosure | Black Money Act |
| Buying property via borrowed funds abroad | Not allowed under LRS | FEMA restrictions |
| Deferred payment plans with foreign developers | Treated as foreign debt | FEMA, PMLA |
Summary Recommendations
- Be conservative: Avoid complex structures or indirect ownership
- Use clean, tax-paid funds under LRS from personal account
- Ensure strict compliance with RBI reporting and Income Tax disclosures
- Avoid any structure that could be seen as an attempt to camouflage ownership, defer liability, or bypass LRS cap
- Maintain robust documentation for every stage
Need Assistance?
Our team advises HNIs, Resident Indians, and promoters on legally structured, fully compliant cross-border transactions.
📧 Contact us at: info@biz2india.in