Buying property abroad? What Indians need to know about the rules, risks and restrictions

Remittances under LRS can also be consolidated in respect of relatives.

Buying property in another country can be appealing for Indian investors due to potential returns, second residency, diversification and lifestyle benefits. However, it is often a minefield because of a range of legal, financial and practical challenges.

Entering into such transactions as an Indian involves several risks, including legal and regulatory challenges, ownership restrictions in certain countries and issues regarding compliance with local tax laws.

Let’s take a look at the restrictions on foreign ownership of land or property by Indians, key things to keep in mind when buying property in overseas locations and the penalties for non-compliance with the Foreign Exchange Management Act (FEMA) or income tax rules.

Are there any restrictions on foreign ownership of land or property by Indians?

Resident Indians, under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS), can remit up to $250,000 per year to buy residential or commercial property abroad. However, for investment in certain countries like Pakistan, Bangladesh, North Korea and Iran, prior approval from the central bank is required.

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Remittances under LRS can also be consolidated in respect of relatives, provided they are resident in India and comply with the LRS. Therefore, a family of four can jointly transfer $1 million in a financial year to purchase a property jointly in their names. To buy property more than the LRS limit, a general or specific permission from the Reserve Bank of India (RBI) is required.

“An individual resident Indian can also acquire immovable property jointly with a relative who is a person resident outside India, provided there is no outflow of funds from India. However, such transactions are subject to disclosures and taxation on rental income earned or capital gains on sale of such property, in India,” said Jatin Arora, advocate and founder of Arora Law Offices.

The United Arab Emirates, especially Dubai is among the most preferred destinations for resident Indians to buy property for golden visa or investment purposes.

In Dubai, foreign nationals can own property in designated freehold areas, granting them full ownership rights.

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“They can also purchase leasehold properties for a term of up to 99 years in areas not designated for freehold ownership. Buyers are typically required to make a minimum investment, and residency benefits may be linked to certain property investments. All transactions must be registered with the Dubai Land Department, which oversees property ownership and ensures compliance with local regulations,” said Aditya Bhattacharya, partner, King Stubb & Kasiva, Advocates and Attorneys.

Is prior approval from the RBI required for this transaction?

RBI approval is not needed for buying residential or commercial property abroad under LRS, as long as the purchase is within the $250,000 annual limit. However, approval is required for agricultural/plantation land or if the limit is exceeded.

“When buying property abroad, Indian residents must ensure that the details of the properties are adequately disclosed in necessary filings made under FEMA and income tax rules. Further, any receipt and expenses incurred in relation to the overseas property also must be adequately accounted for and wherever necessary, remitted to India,” said Kinjal Champaneria, partner at law firm Solomon & Co.

Can Indians take loans from overseas banks?

One can take a loan from an Indian bank to avail of the benefits of LRS. However, loans from foreign banks can be more complex. While it is possible to secure loans from foreign banks, the terms and conditions can vary greatly, and they may have specific requirements regarding remittances.

Can one buy overseas property using crypto?

Buying overseas property using cryptocurrency or other virtual assets is technically possible in some countries, but for Indians, it poses significant legal risks.

“For Indian residents, it is not advisable to bypass Indian banking channels when buying overseas property. In addition to FEMA regulations, there may be scrutiny from income tax authorities regarding the source of income. Therefore, all foreign transactions by Indian residents must be routed through authorised dealers (usually Indian banks) to ensure compliance and necessary reporting,” said Champaneria.

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Under Indian foreign exchange laws, all overseas investments must be routed through authorised banking channels, and using crypto directly for such transactions violates these regulations.

“Bypassing Indian banks, whether through cryptocurrency or hawala channels(informal transfers), is illegal and may attract scrutiny from the Enforcement Directorate (ED) and the Income Tax Department. When buying overseas property, it is essential to understand local laws, ensure the legitimacy of the funding source, comply with tax obligations in both countries, and disclose the property in your Indian tax filings to avoid legal and compliance risks,” said Shrishail Kittad, senior partner, IndiaLaw LLP.

What are the penalties for non-compliance with FEMA or income tax rules?

Under FEMA, several compliances including the filing of foreign liabilities and assets (FLA) return are supposed to be undertaken. The FLA return has to be filed annually with the RBI. Non-compliances in the disclosure or improper disclosure thereof could lead to the following penalties:

“For contravention, up to three times the sum involved or Rs 2 lakh (whichever is higher). If the contravention continues, then Rs 5,000 per day after the first day. Other consequences include assets being confiscated and even ED proceedings,” said Rajarshi Dasgupta, executive director, tax, AQUILAW.

Under the Income-tax Act, failure to report foreign income/assets can attract a penalty of Rs 10 lakh per undisclosed foreign asset and prosecution that could result in a prison term ranging from six months to seven years.

General tax non-compliance also includes interest on unpaid tax and penalties ranging from 50 percent to 200 percent of the tax due.

How to repatriate rental income or sale proceeds back to India?

The cardinal principle to be followed in the case of any such repatriation is that it should be undertaken through regular banking channels following necessary compliances as per FEMA. Other aspects include usage of NRO accounts—non-resident (ordinary) bank accounts that expat Indians can have in India—if the income is held abroad and needs to be transferred, and compliance with the income tax provisions like proof of tax paid abroad (if any), maintaining proper and authenticated property sale deed/rental agreement and so on.

How should one report foreign assets such as a property in Indian income tax returns?

“A resident and ordinarily resident (ROR) individual in India must report any foreign asset, including overseas property, in their ITR (income tax return). If taxes were paid abroad, the individual may claim foreign tax credit by submitting relevant forms and filings with the income tax authorities,” said Champaneria.

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In the case of an ROR individual, global income is taxable in India. One must report rental income and pay tax as per slabs, or report capital gains on the sale of overseas property. Relief may be claimed under the DTAA or Double Tax Avoidance Agreement—bilateral deals between India and the other country in question—if tax is paid abroad and if such DTAA exists.

“In case of NR/RNOR (non-resident/resident but not ordinarily resident) individuals, only Indian-sourced income is taxable. Foreign income (like rent/sale of foreign property) is not taxed in India,” said Dasgupta of AQUILAW.

The returns provided under the Income-tax Act provide for specific sections under which the details pertaining to foreign assets are to be disclosed. One must use Schedule FA (Foreign Assets) in ITR-2 or ITR-3 and report the following even if no income is generated out of the said asset(s):

• Address and description of the property.
• Ownership status (direct/beneficial).
• Acquisition date and cost.
• Income derived, if any (rental, capital gains).

Before buying property abroad, keep in mind that financial risks such as currency fluctuations, high transaction costs, limited loan access and potential liquidity issues can pose concerns.

Additionally, lack of familiarity with foreign legal systems increases the risk of fraud or misrepresentation. There’s also the possibility of double taxation if assets aren’t structured properly. To mitigate these risks, thorough due diligence, compliance with Indian and foreign laws, and consultation with legal and financial experts are essential.