Buying Dubai property on loan? Beware of FEMA violations

Buying Dubai property on loan? Beware of FEMA violations

Wealthy individuals who are buying foreign properties on using financing schemes need to be mindful the violation of foreign exchange rules that could even lead to action from the Enforcement Directorate (ED), say legal experts.

This is significant since many big real estate companies, both Indian and foreign, are offering such deals to Indian residents. These deals require Indians to pay a small price upfront, which is sometimes as low as 1 percent of the property value, while the rest is covered either through a loan or through a deferred payment plan with monthly instalments.

Most wealthy individuals are using the Liberalised Remittance Scheme (LRS) to make such purchases. LRS permits purchase of foreign real estate if the payment doesn’t exceed the $250,000 cap applicable for foreign remittances. However, loans or deferred payment plans to buy such real estate are likely illegal and in violation of the Foreign Exchange Management Act (FEMA), say legal experts.

“Indian residents are allowed to buy property overseas, but only through permissible remittances under the LRS, and FEMA does not permit individuals to take loans abroad for purchasing foreign property. Indian buyers should be cautious with ‘easy-EMI’ pitches for foreign properties. If the payment model resembles offshore credit, it is almost certainly outside the FEMA framework,” said Ankita Singh, founder, Sarvaank Associates.

Until 2022, FEMA regulations had a clause which allowed wealthy Indians to set up specialized overseas entities for real estate purchases. However, when the government had notified new FEMA rules which went into effect from August 2022, this clause was omitted.

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Pavan Burugula

Assistant Editor|Moneycontrol

“The earlier regulations did not restrict setting up of companies outside India for the purposes of buying immovable properties abroad; and had a FAQ clarifying the same until few years ago. And then there were no restrictions on such companies outside India to borrow from a foreign bank or financial institution.  New regulations and FAQs do not have any such provisions,” said Hardeep Sachdeva, Senior Partner, AZB & Partners.

The penalties are also steep, including imprisonment, if an individual is caught violating LRS rules. While the Reserve Bank of India (RBI) administers FEMA rules, the violations also fall under the purview of ED.

“If immovable property outside India of the aggregate value exceeding Rs 1 crore is acquired by an Indian resident in contravention of the FEMA rules, such person will be liable to a penalty of 3X the sum of the contravention and confiscation of the value equivalent situated in India. Additionally, value equivalent situated within India may be seized and the Indian resident shall be punishable with a 5-year imprisonment and with fine,” said Akanksha Dua, partner, Obhan & Associates.

To be sure, ultra-wealthy individuals have a separate route to buy foreign properties called the Overseas Direct Investment (ODI) route. Most Indian billionaires have used this route to buy foreign properties. ODI is more liberal route with an investment cap of $1 billion per entity per year.

However, ODI can only be carried out by large business houses with global business links since if the company is buying a property--- as part of ODI--- it needs to meet the test of ‘bonafide businesses. In other words, the purchase should somehow be relevant to business purposes of the entity. Most industrialists do not face a challenge in fulfilling this requirement.

Some of the well-known Indian real estate companies are also offering such deals. These companies have set up overseas entities which are independent from domestic entities, and which pitch foreign properties, say real estate experts. Since such transactions are not legal in India, the overseas entity makes the pitch.

Indian lenders are also not allowed to lend for foreign properties, say real estate experts.

Harshit Kukkar, Associate Principal Partner, Square Yards, said, "Financing options available for Indian residents to buy overseas properties vary by country, but most developers offer flexible payment plans, including construction-linked schedules and post-handover plans.

"Some foreign banks and financial institutions may extend mortgages to non-residents, though eligibility norms can be stringent. Indian banks cannot fund the purchase of property located overseas, so buyers usually rely on foreign lenders or own remittances,” he said.