The trend of Indians purchasing property abroad has grown significantly in recent years, with popular locations like Dubai, London, and California becoming hot spots for investment. A new pattern has emerged where wealthy Indians are buying property overseas in the names of their minor children. They are doing this by taking advantage of a government rule under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI).
Let’s explore how this works, the legal aspects involved, and the complexities around tax filings.
What Is the Liberalised Remittance Scheme (LRS)?
The LRS allows Indian residents to send up to $250,000 abroad each year for various purposes, including buying property. However, there are restrictions. According to the recent amendment made on 24 August 2022, the money sent abroad under LRS must be used or invested within 180 days. If the funds are not used, they must be brought back to India within the same time period. This new rule has caused individuals to rethink their foreign investments, as the previous rule allowed them to hold the funds abroad without any time restrictions.
How Are People Taking Advantage of the LRS?
Given the tighter regulations, many Indians are now using a different approach to buy property abroad by sending money in the name of their minor children. As per LRS, parents can send money abroad in the name of minors by gifting the amount to their children. In India, gifts received from parents are tax-free, which is an additional benefit. By using the minor’s name, high net worth individuals (HNIs) can continue their foreign property investments without violating the 180-day restriction.
For example, if a couple has two minor children, the couple can transfer money in all four of their names to buy property abroad, such as in Dubai. In this case, the property is legally owned by the parents and minors collectively. This method allows the family to make significant overseas investments while staying within the limits of the LRS.
Legalities and Tax Implications of Owning Property Abroad in Minors’ Names
While it may seem like an easy way to invest, there are still tax and legal complications when it comes to owning property in the name of minors. According to Dubai real estate regulations, minors can own property either directly or through a trustee, typically the parent. However, under Indian law, any property owned abroad must be disclosed in the parent’s Income Tax Return (ITR). If not disclosed, the owner may face a fine of up to ₹10 lakh under the Black Money Act.
Anil Harish, a legal expert, explains that while the LRS permits such transactions, the challenge arises in how foreign property ownership is handled in ITR filings.
Complications in Filing Income Tax Returns (ITR)
One of the major hurdles with this approach is the tax filing process. When a minor co-owns property abroad, the income generated (such as rental income) from that property is clubbed with the parent’s income under Indian tax laws. This means the parents must include the child’s income while filing their own ITR. However, according to tax consultant Rutvik Sanghvi, things get complicated because the law does not allow for clubbing the property itself for tax disclosure, only the income.
Another issue is that minors, under regular circumstances, do not need to file a return unless they earn money from their work (e.g., as a child actor). If the minor earns rental income from the foreign property, it needs to be declared, but since tax filing platforms do not support minors unless they have independent earnings, the process becomes complex.
Parents, as legal guardians, must file returns on behalf of their children. However, before they can do so, they must first register the minor on the income tax portal and certify the minor’s independent income. This creates a significant paperwork challenge and adds to the overall complexity of the tax filing process.
Why HNIs Need Expert Advice
Given the complications with tax filings, legal disclosures, and regulations under the Black Money Act, HNIs often seek expert legal and tax advice before making such investments. Even though buying property in the name of a minor may offer some advantages under the LRS, the complexity of compliance with Indian tax laws makes this process less straightforward than it initially appears.
Overall, while the idea of buying property abroad in the name of minors sounds appealing, the legal and financial responsibilities are far more complicated than they seem.
