9% Yields vs. 100% Penalty: Navigating FEMA Rules in Overseas Property Investments
Festive season pitches from overseas developers, especially in Dubai, are dangling '1% a month' instalments and headline rental yields near 9%. For Indian residents, the real fine print isn’t in the brochure; it’s in India’s foreign-exchange law. Here’s what’s clean, what’s not, and how to stay compliant.
Developers and brokers are courting Indian buyers with expos, low entry costs, and post-handover plans. The sales logic is compelling: pay a small fraction now, cover the rest over easy monthly instalments, and let rent solve the math. For resident Indians, however, the structure matters as much as the sticker price. India’s foreign exchange framework allows buying property abroad, but not by creating a foreign currency repayment obligation.
The clean route: own funds under LRS Resident individuals may purchase immovable property outside India by remitting their own money under the Liberalised Remittance Scheme (LRS). The annual cap is USD 250,000 per person per financial year (April-March), and family members who are residents can each use their limits to pool resources. Transactions must flow through banking channels with the required LRS documentation and declarations. In simple terms, you can buy, but you fund it with your own remittances, no foreign currency debt attached.
Why installment plans can become a FEMA problem Many glossy ‘1% a month’ or post-handover schedules effectively bind the buyer to make future payments abroad in foreign currency. That looks like external borrowing or a deferred foreign exchange commitment, neither of which is generally permitted for resident individuals buying property for personal investment. If the structure creates an obligation beyond what you have already remitted under LRS, you are stepping outside the safe zone.
Common red flags to watch for Not every marketing plan is unlawful by design, but several are non-compliant for a resident Indian buyer. Watch for these danger signs: - Post-handover or long-tenor installments that commit you to future foreign-currency payments. - Developer EMIs, seller financing, or mortgages from foreign lenders extended to you as a resident individual. - Booking amounts or stage payments are attempted via international credit cards instead of LRS remittances. - Any request to sign undertakings that imply future foreign-exchange obligations beyond your current year LRS capacity.
What stays within the lines (clean & compliant) - Remitting your own funds under LRS (up to USD 250,000 per resident per financial year). - Pooling LRS limits within the family where each member separately complies. - Paying only what you have already remitted, no promises to pay later in foreign currency. - Maintaining a clear audit trail: bank remittances, deal documents, and property records in order.
A five-point checklist before you sign 1. Term sheet math: Can you complete the purchase using only current and planned LRS remittances, without any foreign currency credit? 2. Funding horizon: Map the property price to available family LRS limits across years; avoid structures that front-load a legal obligation you cannot meet via LRS. 3. Bank comfort: Obtain a written view from your authorised dealer (AD) bank on the payment schedule and supporting documents. 4. Payment mode: Use only banking channel remittances under LRS, no cards, no offshore loans, no seller financing. 5. Local diligence: Escrow, title, maintenance charges, and tenancy norms in the destination market still matter; verify them.
Penalties aren’t theoretical Violations of the foreign exchange rules can attract heavy monetary penalties and enforcement action. The cost of ‘fixing it later’ can overwhelm any advertised rental yield. Compliance by design—LRS only funding, clear documentation, and bank-vetted structures—is the smarter way to invest abroad.
If a payment plan creates a future foreign exchange obligation, you may be buying a FEMA headache, not a home.
