Buying property abroad? 7-point FEMA compliance checklist Indian investors must follow to avoid penalties

For many Indian investors, owning global real estate feels like a dream come true. However, earlier this month, the Directorate of Enforcement said it had conducted searches under the Foreign Exchange Management Act (FEMA), 1999, against high net-worth individuals who had acquired multiple properties in Dubai without any corresponding outward remittance through authorised banking channels. There was no documentary evidence of the source of funds. Since the foreign properties could not be seized directly, equivalent immovable properties in India were attached instead. Eight immovable properties, worth Rs.27.83 crore, were seized in India.

The release referred to “hawala channels”. “Hawala,” explains FEMA consultant Manoj Pahwa, “is an illegal money transfer outside the banking channel.” In simple terms, cash is handed over in India and delivered abroad without an official trail—a deliberate violation.

The truth is that not every overseas property problem begins with illegal cash. You may believe you were fully compliant because the money moved through banks, yet small missteps in structuring, reporting or documentation can trigger scrutiny, penalties, reassessment or even frozen funds.Here’s what you should beware of.

Loans, payment errors

Under the Liberalised Remittance Scheme (LRS), resident individuals may acquire overseas immovable properties up to an annual limit of USD 250,000 (approximately Rs.2.2 crore) without prior RBI approval. The permission comes with strict boundaries. You are not allowed to borrow from overseas banks to fund such purchases. “Even developer-provided EMI schemes can be interpreted as creating an overseas borrowing obligation,” says Pahwa. Some banks refuse to process remittances in such cases.

Take the case of 49-year-old Mumbaibased Mukul Reddy (name changed). Drawn by Dubai’s comparable property prices and higher rental yields, he agreed to buy a Rs.5 crore home. To close the deal quickly, he asked a relative in Dubai to pay on his behalf, planning to repay him later.

However, this arrangement was treated as overseas borrowing and deemed a FEMA violation, leading to a notice. The risk isn’t limited to one stage. At the time of booking, buyers often try to stretch limits. Sunita Mishra, Head of Content and Insights at Square Yards, says common mistakes include “booking in a relative’s name to bypass limits” or “misdeclaring the purpose of remittance to the bank”. These are shortcuts that can come back to bite you later. If the details reported to the bank do not match the actual transaction, it may trigger compliance queries.

Splitting payments among family members to stretch the LRS cap is another risky practice. “Inconsistency in your declared purpose of remittance and the actual transaction can lead to compliance inquiries from banks or reassessment by Indian tax authorities,” adds Mishra.

If you violate FEMA, be ready for penalties

Compliance checklist

Before booking an overseas property, make sure you tick these boxes
Remittance route
All payments are routed through authorised banking channels under LRS, with the correct purpose code.
Annual limit tracking
Total remittances across all bank accounts do not exceed the cap of USD 250,000 per financial year, per resident individual.
No overseas borrowing
You are not borrowing from overseas persons or institutions, directly or indirectly, to fund the purchase.
Proper documentation
You have sale agreement, remittance confirmations, declarations to the authorised dealer bank, and proof of source of funds.
Foreign compliance
You understand local tax obligations, rental reporting requirements and ownership disclosure rules in the destination country.
Indian tax reporting
Rental income and capital gains are reported in Indian income tax returns, and overseas property is disclosed under foreign asset disclosure equirements.
Repatriation planning
If income is not reinvested abroad, it is brought back to India within the prescribed timelines.

The LRS limit applies per individual, per financial year. Using multiple bank accounts does not increase the cap. In fact, failing to track cumulative remittances across banks can result in an unintended breach.

Even certain ‘formal’ methods may not qualify. For instance, using international credit or debit cards for property bookings or partial payments may be considered noncompliant, as property acquisition is treated as a capital account transaction.

Many enforcement cases stem from poor documentation. Without authorised remittance records or proof of foreign income, funding is questioned. Even when money moves through banks, missing agreements, wrong purpose codes, absent declarations or lost proof can resurface years later during repatriation.

Sameer Maniar, Executive Director at Deloitte India, advises ensuring proper sale agreements are in place and remittance declarations are made to authorised dealer banks. Mishra cites a case where a buyer used family remittances beyond permissible limits to book a Dubai property. When he later tried to repatriate funds, the transfer was frozen pending FEMA clarification.

Ignoring foreign compliance

Compliance risks continue after purchase. Overseas property brings ongoing obligations— local property taxes, vacancy levies, rental income reporting and beneficial ownership disclosures. In the UK, for instance, non-resident owners must meet tax filing and ownership transparency rules. “Failure to file returns or declare rental income can lead to fines, penalties or even freezing of sale proceeds,” says Mishra.Such lapses can also complicate Indian reporting, including foreign asset and global income disclosures.

The risk persists once the property starts generating income. Under FEMA regulations, rental income or sale proceeds may be retained abroad if reinvested. If not reinvested, they must be brought back within a specified period. Maniar explains, “Income not reinvested abroad is required to be repatriated to India within 180 days of receipt. Holding funds overseas beyond this period without reinvestment may be treated as a FEMA violation.”

There is also a common misunderstanding that FEMA compliance automatically means tax compliance. It does not. In taxation, the rule is straightforward, but often ignored. “Irrespective of whether the money is reinvested abroad or brought back, India taxes residents on their global income,” adds Maniar. Rental income and capital gains must be reported in Indian tax returns, and foreign assets must be disclosed.

Failure to disclose overseas property or income can trigger action under the Black Money Act, 2015. Undisclosed assets may be taxed at 30% with a penalty that is three times the tax (effectively, a 120% levy) and wilful non-disclosure can attract imprisonment of three to ten years. Often, these compliance gaps go unnoticed till you try to monetise the asset. At sale or repatriation, paperwork is scrutinised. Banks require the original remittance trail, sale documents and proof of tax compliance before releasing funds. A mismatch in capital gains, tax deductions, inherited documentation or commingled funds can delay or block transfers, pending clarification. Buying overseas property may be easy. Managing compliance is not. That is where many buyers stumble.