Tax Loophole: Indian Parents Buying Expensive Properties in Dubai, California in the Name of Minor Children
Whether it’s a house in California or luxurious bungalows Dubai’s Emirates Hills and Palm Jumeirah, Indians have their eyes on everything. (digihunt Hindi)
Previously, individuals would accumulate sufficient funds in foreign bank accounts to purchase high-value properties. However, the 180-day limit has complicated this process, leading people to explore new methods to avoid the complexities of foreign investing.
The trend of buying property abroad is rapidly gaining stock among Indians, with many now purchasing houses in the name of their minor children. Parents are adopting new methods to invest in high-value properties while staying within the Reserve Bank of India limits. There are many technical and legal details associated with the process, where accurate information and transparency becomes crucial. Any oversight can lead to significant fines or legal action.
Whether it’s a house in California or luxurious bungalows Dubai’s Emirates Hills and Palm Jumeirah, Indians have their eyes on everything. The UAE has emerged as a top destination for such investments. For acquiring these properties, parents are sending money abroad through minors under the Liberalised Remittance Scheme (LRS) of the RBI.
According to a Times of India report, due to increased scrutiny on foreign investments and stringent penalties under the Black Money Act, high net worth individuals are seeking experts’ advice.
What is LRS and how has buying a house abroad became more difficult?
Under the RBI’s Liberalised Remittance Scheme, an individual can remit no more than $250,000 (approximately Rs 2.08 crore) abroad in a financial year, including for property purchases. As per the amendment that came into effect from August 24, 2022, if the amount sent abroad is not invested within 180 days, it must be brought back to India.
Previously, individuals would accumulate sufficient funds in foreign bank accounts to purchase high-value properties. However, the 180-day limit has complicated this process, leading people to explore new methods to avoid the complexities of foreign investing.
Why use minors?
As a workaround the rules, minors are being used to accumulate sufficient funds for purchasing property. Gautam Nayak, tax partner, CNK & Associates, explains: “Minors can remit money abroad under LRS using gifts received from parents, and such gifts are not taxable in India.”
For example, if a couple and their two minor children remit money to buy property in Dubai, the property should be registered in the names of all four, including the minors. Dubai real estate experts note that minors can hold property through a guardian or trustee, with no legal implications from Indian regulations.
Experts also point out that every Indian taxpayer who owns foreign assets must declare them while filing income tax returns (ITR). If income is generated from these foreign assets, it must be reported in Schedule FSI (Income Received from Foreign Source). Failure to provide accurate details can result in a penalty of Rs 10 lakh under the Black Money Act.
Rutvik Sanghvi, partner at Rashmin Sanghvi & Associates, explains, “If a foreign property generates income, such as rental income, it will be clubbed with the parent’s income. The ‘beneficiary’ (the child) is not required to file tax returns if the income if linked to another individual.”
However, this matter is complex. If a minor is a co-owner of a property in Dubai, he is not just a beneficiary. Indian tax rules allow for the clubbing of income but not for the clubbing of property ownership.
Gautam Nayak elaborates, “The minor’s tax return must be filed by the parent acting as guardian, but this cannot be done without proof of income received in the minor’s account.”
