Minors Investing in Overseas Properties: A Trend Driven by Regulatory Changes and Wealth Preservation

In a surprising twist, Indian minors are now joining their parents in the pursuit of overseas property investments, leveraging the Liberalised Remittance Scheme (LRS) to channel funds abroad. This trend has emerged in the wake of increased scrutiny on overseas investments and stringent penalties under the Black Money Act for non-disclosure. High net worth individuals (HNIs) are now seeking expert advice to navigate the complexities of these cross-border transactions.

Unlocking Global Opportunities: Minors Embrace Overseas Property Ownership

Navigating the Liberalised Remittance Scheme (LRS)

The LRS, a regulatory framework established by the Reserve Bank of India (RBI), allows individuals to remit up to $250,000 per financial year for various purposes, including the acquisition of property overseas. However, a recent amendment effective August 24, 2022, has introduced a new requirement – unused funds must be repatriated to India if not invested within 180 days. This change has posed a challenge for those seeking to accumulate funds for a more substantial property purchase, such as a $1 million flat in Dubai.To overcome this obstacle, Indian families are increasingly involving their minor children in the investment process. By remitting funds under the LRS using gifts from parents, minors can help facilitate the outright purchase of overseas properties. This strategy not only circumvents the 180-day investment timeline but also allows for a more comprehensive ownership structure.

Minors as Co-Owners: Navigating the Legal and Tax Implications

When a couple and their two minor children jointly purchase a property in Dubai, for instance, the experts advise that the title should be held in the names of all four individuals, including the minors. This approach is facilitated by the fact that minors can own property in Dubai through a guardian or trustee, with no regulatory impact from India's perspective.However, the tax implications of this arrangement can be complex. Every Indian tax resident with overseas assets must disclose these assets, including property, in their income tax return (ITR) under Schedule FA (foreign assets). Additionally, any foreign income, such as rental income, must be reported in Schedule FSI (foreign source income).If the correct disclosures are not made in the ITR, a penalty of up to Rs 10 lakh can be imposed under the Black Money Act. This penalty was upheld in a recent tax tribunal case, where a parent had reported their minor children's overseas income (interest from a fund) as their own, but failed to disclose the children's assets in Schedule FA.

Practical Considerations: Guardianship and Tax Compliance

To address the complexities surrounding minors' overseas assets, tax experts advise that the guardian managing the minor's assets in a foreign country, such as the UAE, should disclose the foreign asset in their own tax return. This approach is considered the most practical solution, as the tax filing platform currently does not allow minors to file their own returns unless they have earned income through their own efforts.Furthermore, the issue of registering a minor's tax account on the income tax portal can pose additional challenges. The guardian, typically a parent, must register through the minor's account, but this registration is often not permitted unless proof of the minor's income from their own efforts or skills is provided.

Navigating the Evolving Regulatory Landscape

The increased scrutiny on overseas investments and the stringent penalties under the Black Money Act have prompted high net worth individuals (HNIs) to seek expert guidance. Tax professionals and legal advisors are playing a crucial role in helping families navigate the complex web of regulations and ensure compliance with the ever-changing rules.As the trend of minors investing in overseas properties continues to gain momentum, it is essential for Indian families to stay informed and work closely with their advisors to ensure they are adhering to the regulatory requirements and minimizing their exposure to potential penalties.