MUMBAI: Indians have been consistently among the top buyers of marquee properties overseas whether it’s in sunny California, tony parts of Dubai like Emirates Hills and Palm Jumeirah or mansions in London’s Mayfair. Now, even minors are investing in overseas properties along with their parents, with UAE being a favoured destination. To do this, minors are remitting money overseas under the RBI’s Liberalised Remittance Scheme (LRS).
In view of increased scrutiny on overseas investments, and stringent penalties under the Black Money Act for non-disclosure, high net worth individuals (HNIs) are turning to experts for advice.
LRS norms restrict individuals from remitting more than $250,000 per financial year for various purposes, including buying property. As per an amendment effective August 24, 2022, unused funds must be returned to India if not invested within 180 days.
Previously, individuals could accumulate funds in foreign bank accounts to pool enough for a property purchase, such as a $1 million flat in Dubai. The 180-day limit now makes this challenging, and some prefer avoiding the complexities of overseas equity investment.
Minors are thus used to ensure enough funds are remitted for an outright property purchase. Gautam Nayak, tax partner at CNK & Associates, notes, “Funds can be remitted abroad by a minor under LRS, using gifts from parents in India. Further, gifts from parents to children do not have any tax impact in India.”
If a couple and their two minor children remit money to buy property in Dubai, Anil Harish, advocate and partner at DM Harish & Co, advises that the property should be in all four names, including the minors. Dubai real estate experts confirm that minors can own property through a guardian or trustee, with no regulatory impact from India’s perspective. Harish also notes that every Indian tax resident with overseas assets must file an income-tax return (ITR) and disclose these assets, including property, in Schedule FA (foreign assets). Any foreign income must be reported in Schedule FSI (foreign source income).
If correct disclosure is not made in the ITR, a penalty of Rs 10 lakh is chargeable under the Black Money Act. A Mumbai tax tribunal’s decision has set a precedent in this regard.
“In case an overseas property is fetching income – say, rental income – it will be clubbed in the hands of the parent who has the higher income. A ‘beneficiary’ of an overseas asset where the income is clubbed with another individual does not have to file an I-T return. An exclusion is available under the fifth proviso to section 139(1),” said Rutvik Sanghvi, partner, Rashmin Sanghvi & Associates.
However, the issue can get quite complex. “If a minor is one of the co-owners of a Dubai property, he/she is not merely a beneficiary. While I-T laws provide for clubbing of income, they do not provide for clubbing of assets for disclosure purposes. The matter is compounded as the tax filing platform does not permit a minor to file a return, unless he/she has earned income through his own efforts (say, as a child actor),” added Sanghvi.
Nayak expands on this dilemma. “A minor’s tax return needs to be filed by a parent as a guardian, who has to register on the income-tax portal through the minor’s account. Such registration is not being allowed unless proof of the minor having income through minor’s efforts or skill is filed online. Only then is the guardian registered, and a minor can file a tax return.”
In the past, minors have, and continue to, receive tax notices based on information shared by foreign countries. I-T officials, with whom TOI spoke, referenced the case of one Nirmal Jain in which the tax tribunal upheld a penalty of Rs 10 lakh for each of three disputed years. Though Jain reported his minor children’s overseas income (interest from an overseas fund) as his own under the clubbing provisions of the I-T Act, he failed to disclose their assets in Schedule FA in his ITR.
While Jain had argued that no black money was involved in making the overseas investment, the appellate tribunal held that the penalty under the Black Money Act was for non-reporting of overseas assets and not for making investments from unaccounted money. Tax experts advise that the guardian managing the minor’s assets in UAE, for instance, should disclose the foreign asset in their tax return. Given the circumstances, I-T officials agree this is the most practical approach.