Buying property abroad with international credit cards may put you in regulatory crosshairs

Mumbai: Many Indians are trying to get out of a pickle after buying homes in Dubai with their international credit cards (ICCs). They clicked on payment links shared by overseas builders, and sometimes swiped the cards on visits to the UAE to make down payments and later pay off the balance in tranches.

It was quick and convenient-no dealing with the bank branch or filling up forms. Besides, they thought they would escape the high 20% tax-collected-at-source (TCS) in case banks manage to put in place a system to collect it.

Ill-advised and unwittingly, they used the ICC for which it is not meant to be: capital account transactions like purchase of immovable property and stocks. ICCs, like local cards, are intended to only facilitate current account transactions like buying books, downloading movies, booking hotels while at home or on a foreign tour.


There is no regulation that in as many words bans the use of ICC to buy properties abroad. But bankers and practitioners consider this a violation based on Reserve Bank of India (RBI) notifications.

Now, to get the income tax (I-T) office and the enforcement off their back, the property buyers are trying to fix the error. How? By entering into another arrangement with the builders: these investors are preparing to remit fresh funds to builders under the RBI's Liberalised Remittance Scheme (LRS) while cancelling the earlier credit card transaction on the grounds that it was a mistake. Once done, they would receive a refund from the builder. Otherwise, they would have to sell the property and bring back the money.

"Indian residents who have unintentionally paid money through credit card for purchase of property outside India need to approach RBI to regularise their mode of payment. RBI should take a lenient view as the money paid through credit card is a legitimate payment and only the mode of payment was wrong. The regulator should compound the contravention if applied for and need not ask to unwind the transaction or sell the property," said Rajesh Shah, partner at the CA firm Jayantilal Thakkar & Co.

Compounding involves a person paying a fine after accepting the violation. Some of the buyers are reluctant to approach the regulator, preferring to lie low after cancelling the earlier credit card transaction.

CARD USE-WHERE & WHAT
The LRS allows a resident individual to transfer $250,000 a year to buy assets abroad as well as shop online from India. Under the rules, when a person uses ICC from India to buy stuff online from foreign sellers, the spend is part of the LRS limit. Such current account expenses while travelling abroad are excluded from LRS. (Perhaps, those who wiped their cards for an apartment during a trip to the Emirates mistakenly believed the expense would not consume their LRS limit).

However, paying with the ICC for overseas property purchase is not considered within the regulations, irrespective of whether the card is used in India or abroad. It is understood that payments for such acquisitions must be through banking channels.

Indeed, the RBI master circular on LRS states, “The applicants should have maintained the bank account with the bank for a minimum period of one year prior to the remittances for capital account transactions.”

According to Moin Ladha, partner at the law firm Khaitan & Co, “Purchase of property overseas is permitted specifically under Foreign Exchange Management (Overseas Investment) Rules, 2022. These rules prescribe the mode and conditions permitting such acquisition, which include inheritance, gift, funds in a resident foreign currency account earned as an erstwhile NRI, and remittance under the LRS. Since general permission is not available to acquire a property by using an ICC, any such acquisitions need to be regularised (by a post facto approval or sale of the property) followed by compounding the interim non-compliance with RBI.”

But, irrespective of the fact whether RBI condones such transactions, a property purchase abroad would still be considered as a transaction under LRS for section 206C(1G)(a) of the I-T Act, and would accordingly be subject to a 20% TCS, said Ashish Karundia, founder of the CA firm Ashish Karundia & Co.