Purchasing immovable property outside India involves consideration from multiple angles as follows:
- Tax and Estate Duty Considerations – India as well of local country
- FEMA considerations
- Financial Planning Considerations
In this post, I am only discussing the FEMA law on such transactions and whether it is allowed or not.
In subsequent posts, I will be covering the other angles and post a link here. Please note that following acronyms have been used in this post:
- RII: Resident in India
- ROI: Resident Outside India
Image Credit: www.wsj.com
Applicable FEMA regulations
- Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations, 2015 Link
- FOREIGN EXCHANGE MANAGEMENT (CURRENT ACCOUNT TRANSACTIONS) RULES, 2000
- FOREIGN EXCHANGE MANAGEMENT (PERMISSIBLE CAPITAL ACCOUNT TRANSACTIONS) REGULATIONS, 2000
- FOREIGN EXCHANGE MANAGEMENT (BORROWING AND LENDING IN RUPEES) REGULATIONS, 2000
- FOREIGN EXCHANGE MANAGEMENT (BORROWING AND LENDING IN FOREIGN EXCHANGE) REGULATIONS, 2000
- FEM (Realisation, repatriation and surrender of foreign exchange) regulations 2015 Link
- Master Direction – Acquisition and Transfer of Immovable Property under Foreign Exchange Management Act, 1999 Link
- Master Direction on Liberalised Remittance Scheme Link
- Master Direction on BORROWING AND LENDING transaction in Indian rupees by person resident in India and non resident indians/person of indian origin
Basic principle regarding immovable property outside India
According to FEMA regulation, it says –
Save as otherwise provided in the Act or in these regulations, no person resident in India shall acquire or transfer any immovable property situated outside India without general or special permission of the Reserve Bank.
So, what does this section mean?
RBI wants to restrict purchase/sale of immovable property outside India by residents of India – in such a case, RBI approval is required. There are no such restrictions for persons resident OUTSIDE INDIA.
Various situations relating to immovable property outside India
ROI | Purchase | Loan from Bank in USA
No restriction on purchase as well as loan in foreign exchange. Restriction applies only to a RII. So, ROI based in USA can well take a loan from Citibank USA and purchase property in USA.
However, a tricky situation can arise where the ROI returns to India for permanent settlement – though he can definitely hold the USA property, what about EMI to Citibank USA – can he do that?
Though this is a permitted capital account transaction as per FEM (Permissible Capital Account Transaction Rules), 2000, the FEM (Borrowing and Lending in Foreign Exchange) Regulations do not expressly allow a RII to borrow from a bank other than an AD bank in India. In such a situation, a better option will be to seek a RBI clarification.
Also Read: Capital and Current Account Transaction as per FEMA
ROI | Transfer
Transfer of property outside India by ROI does not qualify as a “capital account transaction” – so there is practically no restriction for him in doing so.
Also, the FEM (Realisation, repatriation and surrender of foreign exchange) Regulations 2015 does not apply to ROI, so no problem there as well.
So, practically, an ROI based in UAE can buy property in UK, sell it and either credit funds in UAE or even use it to buy another property in USA – no FEMA restriction. Also, there is no tax liability for capital gain of such ROI in India if he was also an ROI as per Income Tax Act.
RII | Purchase | Self Funded
Resident can purchase immovable property outside India – he can remit funds only upto the Liberalised Remittance Scheme (LRS) of USD 2,50,000 per financial year (Read more on LRS in this post Link)
RII | Purchase | Loan from a Bank in India
Per-se, the FOREIGN EXCHANGE MANAGEMENT (BORROWING AND LENDING IN RUPEES) REGULATIONS, 2000 does not prohibit RII to take a loan from a bank in India. However, there is a separate provision in the Master Direction on Liberalised Remittance Scheme which says that AD bank in India cannot extend credit facilities under the LRS scheme.
While one can argue that loan for property acquisition does not equate with receipt of a credit facility under LRS, I strongly feel that this is not an intention of RBI to allow and Indian banks to fund resident’s property purchases outside India.
RII | Purchase | Loan from a Bank in USA
A resident is not allowed to take a loan out of India for purchase of immovable property out of India – while this is not expressly mentioned in the Act, it is not expressly allowed also, so a conservative view says it is not allowed. The intention around may be that RBI does not want residents to make low cost borrowings (given the low interest rates around the world) and create liabilities outside India
RII | Purchase | Loan from an Indian AD Bank in foreign currency
Reg. 4(1)(i) of FOREIGN EXCHANGE MANAGEMENT (BORROWING AND LENDING IN FOREIGN EXCHANGE) REGULATIONS, 2000 allows a branch of an AD bank outside India to grant loans in normal course of banking business outside India. It is silent on whether it is allowed/not allowed for RII and hence if the AD bank actually gives out a loan, it can be safely presumed that it is allowed under FEMA as AD bank is required to comply with FEMA as well.
RII | Purchase | Loan from ROI in FC
Yes, you can borrow from ROI in FC but it can be only from close relative AND it cannot exceed USD 2,50,000 (there is no mention of whether this is a lifetime or a yearly limit, as in case of LRS hence better to seek clarification from RBI). There are conditions like loan should be free of interest, min. maturity period is 1 year and received by way of inward remittance from NRE/FCNR.
Here, it is important to note the tax angle: the immovable property would need to be disclosed in Schedule FA tax return of resident (in compliance with Black Money Act) as will be the rental income – in such a case, the IT department can ask about the source of funding – hence, you need to be especially careful about ensuring that there is proper documentation w.r.t. loan agreement, and the loan funds should be genuine and tax paid funds.
RII | Purchase | Loan from ROI in INR
As per Reg. 4 of FOREIGN EXCHANGE MANAGEMENT (BORROWING AND LENDING IN RUPEES) REGULATIONS, 2000, while a RII can borrow from an NRI/PIO close relative, one o the condition is that amount borrowed will not be repatriated outside India. In view of this, in my opinion, this option is not available for an RII.
RII | Acquisition via Inheritance/ Gift from RII
Yes, Reg. 5(2) of Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations, 2015 expressly allows an RII to acquire immovable property from another RII however there is one condition: the seller RII must have acquired this property in compliance with FEMA.
Now, what happens if the seller RII purchased it in contravention of FEMA? In that case, if seller had made a will, will FEMA override the provisions of Hindu Succession Act and stop inheritee to receive a valid title to the property?
In my view, it should not. A proper application should be made to RBI to remove the difficulty in such a case and in case donor is alive, he can undergo the compounding process first, pay the compounding fee, come clean and then make the gift of immovable property to donee.
RII | Acquisition via Inheritance/ Gift from ROI
FEMA Act Section 6(4) expressly allows a RII to hold/transfer any immovable property if such property was acquired as inheritance/gift from a person who was ROI at that point in time
The question arises is: what happens if an ROI based out of UAE dies and leaves behind his property in UK to a RII – in this case, can the donee acquire it or will he need to seek a prior permission from RBI?
It may be also noted here that in some cases, when a person sought to apply to the RBI, for properties situated in India and owned by citizens of countries like Pakistan or Iran, the RBI has questioned on the relevant prior approvals under a separate Act known as Enemy Property Act so one has to be mindful of that as well.
RII | Acquired when status = ROI
FEMA Act Section 6(4) expressly allows a RII to hold/transfer any immovable property when such property was acquired when status was ROI.
RII | Transfer
Transfer of immovable property outside India has been specifically listed as a permitted capital account transaction under FOREIGN EXCHANGE MANAGEMENT (PERMISSIBLE CAPITAL ACCOUNT TRANSACTIONS) REGULATIONS, 2000 however is there is no express provision regarding it in the Rules or Master Circular but I don’t think that will make any difference.
So, an RII can freely transfer immovable property held in accordance with FEMA regulations to a person who can acquire it in compliance with these regulations
The issue arises w.r.t. realisation of proceeds. Section 8 of FEMA lays down a very basic principle w.r.t. accrual of any income/asset outside India by a RII – such RII have to realise and repatriate it to India at the earliest. Note that such a restriction DOES NOT APPLY to a person resident out of India.
The detailed rules on this point are given in the FEM (Realisation, repatriation and surrender of foreign exchange) Regulations, 2015 which
- sell it to an authorised person in India in exchange for rupees; or
- retain or hold it in account with an authorised dealer in India to the extent specified by the Reserve Bank; or
- use it for discharge of a debt or liability denominated in foreign exchange to the extent and in the manner specified by the Reserve Bank.
So, as we can see above, the proceeds have to either be retained in an AD bank in India or used to discharge any forex liability, that too basis an RBI permission.
Also, there is a time limit applicable for repatriation which is 7 days/90 days from receipt.
Another Important thing to note here is that the moment any amount is due to an RII w.r.t. any foreign receivable (in this case, property), in case of delay/inability of the seller to pay, the RII cannot happily write it off in his books – he has to seek a prior RBI approval for doing it.
Though this is very expressly mentioned in the Export related FEMA regulations, in my view, as a best practice, the same process can be followed for such cases here so as to avoid any tangle later on.
Other points relating to Immovable property outside India
#1: Joint ownership of property
A very good provision exists by way of Reg. 5 (1)(c) in FEM (Acquisition and transfer of immovable property outside India) Regulations, 2015 which says that an RII can be a joint owner in a property purchased outside India by ROI who is a “relative” provided there is no flow of money out of India.
Effectively, what this provision does is that it helps weed out succession issues in case of death of a ROI especially where an NRI says lives in UK while wife is back in India. If the NRI purchases property in UK, he can add wife as a joint owner in the property to avoid problem in passage of title.
However, a tricky issue is that in case of income from house property, will half share of rental income be shown in the wife’s return: I strongly think NO as what is relevant is whose funds have been deployed for purchase of property and in that case, being the property outside India, NRI would not need to disclose a single rupee regarding this income in the Indian tax returns.
#2: Certain properties exempted from these regulations
The Regulations expressly exclude following properties from the restrictions imposed regarding purchase of property outside India:
- “held” by a person who is a national of a foreign state
- acquired by a person resident in India on or before July 08, 1947 and continued to be held with RBI permission
Note that in the above 2 cases, exemption is on “property” and not a person. For example, Mr. A, an Italian national, is working in India and has a property back in Italy, then these regulations do not apply to the Italy property. If after becoming a resident of India as per FEMA, he plans to buy a property in say UK, the regulations will apply for example, he can only remit upto the LRS limit etc.
Copyright © CA Abhinav Gulechha. All Rights Reserved. No part of this article can be reproduced without prior written permission of the CA Abhinav Gulechha. The content of the article is for general information purposes only & does not constitute professional advice. For any feedback, please write to contact@abhinavgulechha.com