Owning property abroad has its own benefits, but keep in mind the location, time of the investment and frequency of your visit there
If you are looking to invest in property, conventional wisdom would suggest that you buy one where you can look after it. It would also suggest that your acquisition should be where its value would appreciate and you can sell it easily. In short, if you are buying property as an investment, it would make sense to buy appreciating property where you can check on it from time to time.
If, however, you cannot find such suitable property near where you live, would it make sense for you to look at property outside the country? Looking solely at the comparative prices in Indian cities and in those abroad, if you can afford to own a house in India, you can in a few other places—Bangkok, Singapore and Dubai—as well. Should you, then, include those options in your set of possibilities as well?
What are the pros and cons of buying property abroad? What does property abroad do for diversification of your portfolio and mitigation of the risk that it carries? And what exactly are the implications for your taxes? It is, today, worthwhile to check these out when Indian property prices are high and not rising as fast as they were.
WHY INVEST ABROAD?
Just as in the case of investing in any other financial instrument, diversification in real estate investment by buying in different countries can also make sense for you. It can reduce the investment and country risk—typically, if a country’s economy is slow, it affects property price appreciation across locations—and increase your return.
Anshuman Magazine, chairman and managing director, CBRE South Asia, says: “Apart from the benefit of diversification, you can actually get options to invest in mature market with low valuation compared to India, such as Europe, Australia and so on.” Outside the main central districts and, in some cases, even in prime centre of the city locations, the property values are lower compared to Mumbai or Delhi and quality is also better, he elaborates.
Moreover, if you are looking for regular returns, rental yields are higher in mature economies. “In mature market, rental yield is between 4 per cent and 5 per cent on residential property compared to 1-2 per cent per annum in Indian cities,” says Magazine. For a quick look at some mature markets you can invest in (see Destinations To Consider).
Compared to India, the other advantage of investing abroad is the availability of funds at a lower cost. Rohit Kumar, head of research, DTZ, India, says: “In the current scenario, when interest rates at home are very high, it is quite a lucrative option for buyers with surplus money to buy real estate abroad. This way they can take advantage of the considerably lower rate of interests of local banks in those countries.” However, before you decide to invest in real estate in other countries, you must be aware of the limitations and rules pertaining to investing abroad, particularly in the country you intend to buy the property in.
THE INVESTMENT LIMIT
The current limit prescribed by the Reserve Bank of India for Indian individuals investing abroad continues to be $200,000 per annum. At current rupee-dollar exchange rates, that would be about Rs.1.2 crore a year. This ceiling is not for investment in real estate alone, but applies to any kind of investment in a foreign country. “The limit applies to individual buyers; so the investible amount doubles in the case of couples,” says Anuj Puri, chairman & country head, Jones Lang LaSalle India. Hence, in case you invest along with your spouse or children, you can actually invest a larger amount and, thus, can widen the scope of the property you buy. “The Indian government may consider relaxing the ceiling further if it perceives increased interest by Indians in investing in foreign properties,” says Puri.
Besides investing individually or jointly along with family members, there are some other ways as well of investing in property in a foreign country. Says Puri: “Indians often have the option of entering into joint ventures (JV) with local operators in foreign countries such as Mauritius, Bhutan and Sri Lanka; the UAE also offers such a facility in some quarters. Entering a JV with a foreign entity on its home turf can lead to vastly increased investment scope (beyond the $200,000 ceiling) and generate higher profits.”
THE LEGAL FRAMEWORK
When it comes to investing in another country, you must take into consideration the legal procedures that need to be followed in both in the home as well as in the foreign country. Rakesh Nangia, managing partner, Nangia & Associates, a Delhi-based chartered accountancy firm, says: “From an Indian standpoint, an individual has to submit a self declaration form under the Liberalised Remittance Scheme (LRS) guidelines covering basic details of the proposed transactions in the prescribed format, Form A2 and such other supporting documents which the authorised dealer (AD) may require.” An AD is a designated bank branch through which all the remittances under the LRS guidelines have to be made.
Says Nitin Mittal, manager, Perfect Accounting and Shared Services, a Delhi-based chartered accountancy firm: “The applicants should have maintained the account with the bank for at least a year prior to making the remittance; if the applicant seeking to make the remittance is a new customer, ADs should carry out due diligence on the opening, operation and maintenance of the account.”
Further, the AD should obtain a bank statement for the previous year from the applicant to satisfy themselves about the source of funds. If such a statement is not available, copies of the latest income tax assessment order or return can be used instead. Adds Mittal: “The applicant has to furnish an application-cum-declaration in the specified format regarding the purpose of the remittance and declare that the funds belong to him and will not be used for the purposes prohibited or regulated under the LRS guidelines.”
It is also advised to carefully understand the legal procedures and regulations of the destination country where immovable property is situated to ensure that the proposed investment adheres to the laws of the overseas country.
Says Nangia: “The LRS facility is not available for making remittances directly or indirectly to Bhutan, Nepal, Mauritius and Pakistan; For other countries, no specific permission is mandated under the extant LRS guidelines.”
Further, the country-specific laws where investment is to be made could also require prior permission from local regulators before investing in that country.
THE TAX IMPLICATIONS
The taxability of any person is determined on the basis of his or her residential status. Says Nangia: “An Indian resident individual is taxed on his worldwide income, which would include income from any immovable property situated abroad, either by way of rental income or any capital gains arising on alienation of such property.”
Under Indian laws, taxes for rental income from and capital gains on foreign property are calculated differently. Usually under the clauses of double-taxation avoidance agreements (DTAA) the owner can take the credit in India of taxes paid abroad. However, the income from property can also be taxed in the country where it located and this will be governed by the local laws of that country. “So, it is advisable to understand the taxation aspect of investing in overseas property well in advance,” advises Nangia.
For the sake of diversification of one’s real estate portfolio, one can look at investing in property abroad should resources permit. But with the prospect of greater incomes, comes greater complexity. If you can handle it, look at the foreign property alternative.