The trend of Indian investors purchasing properties abroad has picked up in recent years, with cities like Dubai, London, and California becoming top destinations. Interestingly, many are now buying these properties in the names of their minor children, a move that offers both financial and tax advantages.
This strategy has become more prominent after changes to the Liberalized Remittance Scheme (LRS) of the Reserve Bank of India (RBI) came into effect. Under the LRS, Indian citizens can remit up to $2,50,000 (around ₹2.10 crore) annually for travel, education, and property purchases abroad. However, updated rules introduced in August 2022 have forced investors to tweak their strategies.
What Changed in the Rules?
Earlier, Indian investors could transfer funds abroad and keep them in overseas accounts until enough was accumulated to buy property. But with the new rule requiring that the remitted amount be used or returned within 180 days, investors needed to find alternative ways to make foreign investments.
This is where the strategy of buying properties in the names of minor children has emerged. By doing so, parents can still take advantage of the LRS limits and sidestep some of the restrictions.
Why Properties Are Being Bought in Minors’ Names
There are several financial benefits to buying property in children’s names:
- Tax-Free Gifts from Parents: In India, gifts from parents to their children are not taxable. This allows parents to send money abroad for property investment under the LRS without incurring any tax.
- Joint Ownership Flexibility: If a couple and their two minor children jointly buy property, all four names are listed in the documents. This ensures legal ownership while maximizing the remittance allowance under LRS.
- Trusteeship and Management: Dubai-based real estate experts point out that properties bought in children’s names can be legally managed by parents or trustees, ensuring proper control over the asset.
Legal Obligations and Risks
However, buying property abroad in children’s names isn’t entirely free from scrutiny. Investors need to disclose foreign assets in their Income Tax Returns (ITR). Non-disclosure could attract penalties of up to ₹10 lakh under the Black Money Act.
Additionally, if the property generates rental income, that income must be added to the parents’ taxable income in India. However, if a trustee or another beneficiary is named for the property, filing ITR might not be required in certain cases.
Navigating Loopholes in the System
Experts believe this trend is an attempt by Indian investors to navigate around RBI’s restrictions on foreign investments. While the current rules leave some room for creative financial planning, there is speculation that the government may tighten these regulations further to prevent misuse.
For now, investors are leveraging every possible gap in the policy to continue building wealth overseas. How long this strategy will work remains to be seen, as the government is actively reviewing foreign investment rules to curb loopholes.
