The first edition of the International Real Estate Expo (IREX) 2015 is scheduled to be held on 4-6 December in New Delhi. Real estate investment opportunities in India and abroad will be showcased. Earlier this year, the outward remittance limit under the Liberalised Remittance Scheme for Indian individuals was raised from $125,000 to $250,000 by the Reserve Bank of India. This brought more properties abroad within the reach of Indian investors, and many are making the most of this opportunity. Also, with remittance limit applicable individually, buying properties jointly with family member widens the net of options available to Indian investors.
According to various reports, Indians are among the top foreign investors. Dubai Land Department’s statistics show that Indian investors topped among nationalities investing there with 4,089 transactions of a total value of 13 billion dirhams in 2015 (about Rs.23,500 crore at Rs.18.15 to 1 dirham). In October last year, the US National Association of Realtors published a report which stated that buyers from India bought residential properties worth an estimated $5.8 billion during the one-year period ending March 2014. This was about 6% more than in 2013. The report also stated that the average spend was $459,028 (about Rs.2.81 crore then).
Given the poor sales in the sector in India, some affluent investors are looking to diversify their portfolio and get better returns by investing globally. While this may work from investment point of view, one must also consider the tax implication before deciding to invest abroad.
Should you invest?
The first question to answer is whether to invest in real estate in India, or abroad. “The real estate market in India is underperforming so it’s important to diversify the portfolio in countries that have a stable real estate market. Doing so also leads to currency risk diversification,” said Ashwin Chadha, president and founder, North India Sotheby’s International Realty, an arm of Sotheby’s International Realty, a subsidiary of Sotheby’s Auction House, which deals in luxury real estate globally.
However, some others feel that from an investment point of view, the Indian market is still more lucrative. “The current signals strongly favour investment into Indian real estate. So, we are not going to see an exuberant flight of capital to foreign shores,” said Anuj Puri, chairman and country head, JLL India. “The right question to ask is not ‘which foreign cities compare with Indian cities for real estate investment’, but ‘does investing in foreign markets provide a good rationale to Indians who have ample opportunity to grow their investments in their own country’. Indians investing in Indian property enjoy various benefits that they would not be able to avail in other countries,” added Puri.
However, Indians are buying properties abroad also for reasons other than investment. “The broad profile of Indians who are looking at buying properties abroad would include business owners, professional property investors, mid- to top- level company management and high net worth individuals. A very large component of buyers also comprises of people whose children study in those countries,” said Puri. According to data by the Reserve Bank of India, Indians sent $144.3 million for education abroad in August 2015, compared with $24.3 million the same month the previous year. The substantial increase in remittance for higher studies may also be one of the drivers of immovable properties being bought.
“The UK, the US, Singapore and some parts in Dubai are good investing options currently,” said Chadha.
According to Puri, “Singapore, Malaysia, Dubai, New York and various cities in the UK—predominantly London—are the preferred destinations for Indian property buyers.”
An investor must realise that real estate markets in developed countries are different from the Indian market. “The key to successful investment in all these markets is high risk appetite coupled with a sufficiently long investment horizon. Many Indian investors have been able to meet these criteria,” said Puri.
Whether the purpose is self-use or investment, one must be aware of the various tax and remittance rules. “There are no tax implications for the investor at the time of investment,” said Suraj Nangia, partner, Nangia & Co., a chartered accountancy firm. “However, tax complexities may arise in the foreign country in which the property is situated. These may include obtaining tax registrations, filing tax returns, payment of property taxes, and others,” he added.
Also, if you are earning rental income, “it could also be subject to withholding taxes while making payments. However, these may vary depending on country the investment is made in,” said Nangia.
In such cases, since the investor and the property are in two separate countries, the investor has to abide by the tax laws of both. “Under the Indian tax laws, a resident or an ordinarily resident of India is taxed on her worldwide income. This includes capital gains, rental income and income from other sources,” said Nangia.
This means that any rental income or capital gain from a property investment abroad will be treated similar to any income from a property within India. For instance, rental income will be considered under the income tax head “income from house property”, and one can claim standard deduction of 30% on the rental income.
Similarly, short-term capital gains will be taxed as per the income slab rate of the investor and long-term capital gains will be taxed at 20% with indexation.
Just the way there is a limit on how much money an individual can send abroad from India, there are likely to be similar rules in the country where the property is located. This plays a role when you are exiting a property abroad. “Depending upon the foreign exchange regulations in the overseas country, there could also be limitations on repatriation of sale proceeds at the time of exiting the investment,” said Nangia.
However, “capital gains from sale of property abroad can be reinvested in a residential property in India to save on long-term capital gains tax. It has not been specified that the property being sold has to be located in India,” said Amit Maheshwari, managing director, Ashok Maheshwary & Associates, a chartered accountancy.
Moreover, if India has a Double Taxation Avoidance Agreement with the other country, “you avoid paying taxes twice on the same income,” said Maheshwari.
Also, remember that irrespective of property type, size and location, and whether it is earning any income or not, you need to disclose the ownership and other related transaction details while filing tax returns in India. With the introduction of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, it is mandatory for a resident to disclose foreign assets, failing which a penalty of as high as Rs.10 lakh may be levied by the income tax department. Besides that, “books of investments, bank accounts’ statements, documents of payments and property papers need to be maintained for 16 years from the assessment years, in case of foreign assets,” said Sudhir Kaushik, founder of an online tax filing portal.
Mint Money take
Investing in an overseas real estate market is not for everyone. It may provide good returns and diversification to your portfolio, but managing it can be difficult. Ideally, you should invest only in those destinations that you are familiar with.
Also, keep in mind that you can only remit through a designated bank branch of authorized dealer banks. And once you remit $250,000 in a financial year, you will not be able to remit any more, even if the previous investment proceeds of the year have been brought back.