Frequent fairs hosted by Dubai builders, countless insta ads dangling easy payment plans, and cold calls by brokers can be a regulatory minefield for the wealthy as well as the wannabe dreaming to own a property in the Gulf’s most happening and cosmopolitan city.
Many resident Indians, unwittingly walking into deals that require a down-payment of just 15 to 20% of the property value, with the balance to be paid in instalments over 4 to 8 years, are oblivious that they may be either violating foreign exchange laws or treading a grey area in the rule book.
The rule is simple: an individual can remit $250,000 to buy a home overseas, or a family can pool in a larger amount, with each member chipping in $250,000 (the yearly limit), to acquire a bigger property outright. But transactions that entail payments in ‘instalments’ spread over years, for purchasing either a ‘ready-to-move-in’ apartment or a property under construction may come under question – simply because hidden in the deal is an element of ‘leverage’ which regulations prohibit.
“The UAE property ads can be a pitfall, and some of the individuals in India falling for them may be on the wrong side of the Foreign Exchange Management Act (FEMA). Under FEMA, a resident can enter into a financial transaction in respect of a transaction involving an asset outside India only with general or specific permission of the Reserve Bank of India (RBI). The transaction involving purchase of immovable property on deferred payment basis is not permitted without prior approval of RBI as it creates obligation in foreign exchange,” said Siddharth Banwat, partner at the CA firm S Banwat & Associates LLP.Many professionals, it appears, are preferring a less aggressive view of the law in the current environment.
A resident individual cannot purchase a property abroad with borrowed money — irrespective of whether the financier is a local bank or an offshore lender. In deals offering ‘instalments’, where the property is acquired at the end of the payment period, is an implicit borrowing arrangement. Financing is not freely allowed outside India for resident Indians and such an instalment plan, which masks the quantum of interest charged by the developers, can be construed as financing and therefore a potential non-compliance of FEMA, said Mitil Chokshi, senior partner, Chokshi & Chokshi, a tax, advisory, and forensics firm.
However, a FEMA consultant (who refused to be named) said that instalments for under-construction projects should not pose a problem but buyers should vet the language in the contracts with the builders.
As per a report released this year, Indians were among the largest property buyers in Dubai in 2023, beating British investors in at least two quarters. Between 2020 and 2023, Indians are estimated to have invested around $2billion in the UAE property market.
“Most buyers, entering into such transactions, are ignorant of the FEMA implications, which one can’t figure out from the advertisement,” said Banwat.
In several UAE localities, particularly in the newly developed areas, property rates, often cheaper than Mumbai, come across as an attractive investment proposition. “There are recent promotions by UAE developers, targeting the affluent and upper middle-class in India, with an instalment plan of 1% every month after initial downpayment of 20%,” said Harshal Bhuta, Partner at the CA firm P.R. Bhuta & Co.
“Investment in property above a certain value also entitles the owner to apply for a Golden Visa in UAE. But potential buyers must understand the Indian forex regulations. Instalment plans boil down to implicit financing schemes and may be against FEMA. Indeed, some plans allow enhanced flexible payment terms with payments permitted even beyond the possession date,” said Bhuta.
The Golden Visa rule, which was relaxed recently, allows an applicant to borrow the entire amount for property acquisition.
However, a more conservative interpretation of regulations may be in vogue in India with the authorities averse to large outflows by individuals. This is evident from banks having recently started questioning the source of money when individuals transfer abroad (under the RBI’s Liberalised Remittance Scheme allowing overseas remittance up to $250,000 a year.)
“Even otherwise, except for one instance in 2013, RBI has not given any clarification on whether purchase of an immovable property on instalment basis is permitted. Even though purchase of an immovable property is a permitted capital account transaction, a strict reading of the law provides that such purchase on an instalment basis may amount to undertaking a contingent liability outside India and thus would be prohibited,” said Bhuta.
Amid the 2013 taper tantrum and pressure on the rupee, RBI had put curbs on LRS and lowered the remittance cap to $75,000. Later, it was restored to $250,000. Even though today the amount is unchanged at $250,000, a string of dos and don’ts introduced in mid-2022 have made overseas investments tougher for individuals.
