In the modern-day world,people are fascinated with investing in capital assets. Bounded by fluctuating markets and unpredictable economies, everyone desires foreseeable cash flow and better returns with tax benefits. Their best bet comes in the form of real estate and immovable property.
As Louis Glickman once said, “The best investment on Earth is earth.”
However, the sluggish real estate market in India has piqued people’s interest in acquiring international assets. Acquiring overseas property seems more attractive than acquiring one in the domestic market.
Why Indian Residents are investing in properties overseas?
- Infrastructure lacks quality.
- High pricing of the property in the metro cities.
- Bad rental returns.
- Too many government policies and obligations.
An average investor can acquire a full furnished condominium in Malaysia at a far lesser amount as compared to India. But the question remains as to “How to go about it without defaulting the required compliances?
ACQUISITION OF IMMOVABLE PROPERTIES UNDER FEMA GUIDELINES.
To formulate “orderly development and maintenance” of the Indian Forex market FEMA has been introduced so that it can facilitate external trade and payments without affecting the country’s inflow outflow structure. Think of it as the commandments or rules as per which all foreign assets within India need to be managed. FEMA defines the dealings, formalities, and procedures that govern all foreign transactions done from India.
Person Eligible to Acquire or Transfer Immovable Property:
As per the provisions of section 6(4) of Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) regulations, a person resident in India can hold, 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.
Who is a person resident in India?
|During the preceding financial year||As per FEMA guidelines|
|An Individual||Resides in India for more than 182 days||Is a resident of India|
|An Individual||Resides in India for more than 182 days||Is not a resident of India||When a person has
1)stayed or gone outside India for employment or vocation and the intention to remain outside is for an uncertain period.
2)come or stays in India for a purpose other than employment or vocation and intend to stay in India for an uncertain period.
Modes To Acquire and Transfer Immovable property
- A resident can acquire immovable property outside India by way of gift or inheritance by way of:
- From a person u/s 6(4) of FEMA
- One who has acquired the immovable property before July 8, 1947.
- One who acquired such property by the foreign exchange provisions in force at the time of such acquisition.
- A resident can purchase immovable property outside India out of foreign exchange held in his/her Resident Foreign Currency (RFC) account.
- A resident can acquire immovable property outside India jointly with a relative who is a person resident outside India, provided there is no outflow of funds from India.
- A company incorporated in India having overseas offices, may acquire immovable property outside India for its business or residential purposes for its employees, by the directions issued by the Reserve Bank of India from time to time.
Prohibition of a resident acquiring property outside India is not applicable if:
- Immovable property acquired by a person resident in India on or before 8th July 1947 and continued to be held with the permission of the RBI
- Immovable property held by a person resident in India who is a national of a foreign State,
- If such immovable property is acquired on a lease not exceeding five years.
Acquisition under Liberalised Remittance Scheme
A resident Indian can send remittances under Liberalised Remittance Scheme for purchasing immovable property outside India.
WHAT IS LIBERALISED REMITTANCE SCHEME (LRS)
This scheme was introduced on 4th February 2004 with reporting instructions issued by the RBI in its Master Direction dated 1.1.2016.
It was introduced as a measure to facilitate resident individuals to remit funds abroad for the current or capital transactions which are permitted.
Limit under LRS
|For resident individuals including minors||Permitted current or capital transactions or both.||Up to US$ 2,50,000 per financial year.||
Prohibition: A resident cannot gift to another resident in foreign currency for the credit of the latter’s foreign currency account held abroad under LRS.
AD bank should not extend any kind of credit facility to resident individuals to remit capital account transactions under LRS.
Note: However, an investor who has remitted funds LRS can retain, and reinvest the income earned on the investments.
|Clubbing Remittance of family members||Allowed for capital account transactions such as opening a bank account, investment, and purchase of property only if, such family member is a co-owner or co-partners of such capital account transactions.
(Ownership to be in the same ratio as remittance funds).
|Up to US$ 2,50,000 per financial year for each individual.|
|A company having an overseas office for conducting normal business activities of an Indian Entity.||May acquire immovable property outside India for business or residential purposes of its staff.||Total remittances should not exceed
1.) HIGHER OF:
a.15% of the average annual sales/income or turnover of the Indian Entity during the last two financial years
b. up to 25% of the net worth
2.) 10% of the average sales/income or turnover during the last two financial years.
Note: The limit of $2,50,000 per Financial Year under LRS is cumulatively available for both capital and current account transactions and is not separately available for current and capital account transactions.
Are there any Penal consequences if the FEMA guidelines are not complied with?
If any person contravenes the provisions of FEMA, such person shall be liable fora penalty:-
|Where the amount is quantifiable||
Penalty up to thrice the sum involved in such contravention.
|Where the amount is not quantifiable||
Penalty up to 2 lakh rupees.
|For continuing contravention||
Penalty may extend to 5000 rupees for each day such contravention continues.
Despite permissible regulations for investing in an immovable property outside, there is a certain amount of legal and tax structuring to ensure that the investment in the foreign property is efficient. The article vividly states all the necessary explorations to consider while resorting to overseas investments.
Know more about FEMA compliances and the remittances here.