As globalization expands, Indian investors are increasingly interested in overseas real estate. This edition of VAS United provides a comprehensive overview of government guidelines for Indians investing in foreign real estate, ensuring compliance and informed decision-making.
Guidelines for Individual Real Estate Investors
1. Liberalized Remittance Scheme (LRS)
Under the LRS, Indian residents can remit up to USD 250,000 per financial year for permissible capital and current account transactions, including real estate investments. This limit applies to all remittances made in a financial year, regardless of the number of transactions.
2. Permissible Investments
Individuals can purchase residential and commercial properties abroad. The income generated from these investments, such as rental income or capital gains, can be retained abroad or repatriated to India as per their discretion.
3. Tax Implications
Income earned from overseas real estate investments is taxable in India. Investors can benefit from the Double Taxation Avoidance Agreement (DTAA) if taxes have been paid in the country where the property is located. This agreement helps avoid double taxation on the same income.
4. Exceptions to LRS Cap
For specific purposes like medical treatment and education, remittances exceeding USD 250,000 are allowed with appropriate documentation and without prior RBI approval. However, this exception does not extend to real estate investments.
5. Foreign Exchange Management Act (FEMA) Provisions
FEMA governs the ownership of immovable property outside India by resident Indians. Generally, residents need special permission from the RBI to own property abroad, except in specific cases such as inheritance or acquisition before July 8, 1947. Additionally, residents can acquire property abroad using funds from their Resident Foreign Currency (RFC) account.
6. Clubbing of Remittances
Clubbing of remittances among family members is permissible. A family of four can pool and remit up to USD 1 million per financial year, provided all members are co-owners of the investment, or the amount is remitted to a joint overseas bank account.
7. Sequential Remittances
To overcome the LRS cap, investors can remit at the end of one financial year and again at the beginning of the next, allowing investments of up to USD 500,000 in a short period.
Guidelines for Corporate Real Estate Investors
1. Overseas Direct Investment (ODI)
• Indian companies can invest in real estate abroad through the ODI framework. Investments can be made via the automatic route up to a specified limit, beyond which RBI approval is necessary. This includes the acquisition of real estate for business operations or setting up subsidiaries to manage real estate assets.
• The revised guidelines emphasize the need for the investing entity to engage in bona fide business activities and comply with sector-specific regulations.
2. Regulatory Compliance
Companies must adhere to the Foreign Exchange Management (Overseas Investment) Rules, 2022. These rules mandate due diligence to ensure the investment is genuine and in compliance with all relevant regulations, including those pertaining to real estate.
3. Special Economic Zones and IFSC
Investment managers can establish entities in Special Economic Zones (SEZs) or the International Financial Services Centre (IFSC) in GIFT City, facilitating overseas real estate investments under favorable regulatory conditions. These investments must meet certain criteria, such as maintaining net worth thresholds and adhering to prudential norms.
4. Industry Limits and Renewals
The Securities and Exchange Board of India (SEBI) renews industry limits for Alternative Investment Funds (AIFs) upon exits, allowing continuous investments in foreign real estate. This enables Indian investors to diversify their portfolios with global real estate assets while ensuring regulatory compliance.
5. Taxation and Compliance for Corporate Investments
Corporate investments in overseas real estate must comply with the same tax regulations as individual investors. Indian companies must report their global income and may need to pay taxes in both India and the foreign country. Companies should ensure proper documentation and legal advice to navigate these requirements.
Conclusion
The regulatory framework governing overseas real estate investments by Indians is designed to support global financial integration while ensuring economic stability and compliance. By following these guidelines, individual and corporate investors can successfully navigate the complexities of investing in international real estate markets.
The Liberalized Remittance Scheme (LRS) allows resident individuals to remit up to $250,000 per financial year for various capital account transactions, including investments in real estate abroad. However, this amount is seldom adequate for the large amount of investment that resident Indian HNIs seek to make in international real estate (IRE).
To overcome the constraints posed by the monetary limits per financial year, investors can adopt strategies such as clubbing remittances among family members or making sequential remittances at the end of one financial year and the beginning of the next. Additionally, the Overseas Direct Investment (ODI) route offers a tax-efficient structure for larger investments, allowing Indian entities to invest up to four times their net worth without the LRS limit.
However, legal advice is crucial to ensure compliance with the Foreign Exchange Management (Overseas Investment) Rules, 2022, which emphasize "bona fide business activities." Non-compliance can lead to regulatory scrutiny and penalties.
Indian investors must also be cautious of deals involving instalment payments, as these can be construed as implicit borrowing, which is not permitted under FEMA. Understanding the nuances of these regulations is essential for making informed and compliant overseas real estate investments.
For detailed guidelines and further reading, refer to EY's overview on revised overseas investment guidelines and HSBC's detailed article on ODI regulations.
If you are still confused, write to us at info@vasunited.com
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