The UAE, particularly Dubai, has become a top choice for Indians investing in real estate abroad. With the growing trend of property acquisitions in the region, Indian tax authorities are tightening their oversight to track foreign asset ownership. As part of this vigilance, several compliance and tax considerations must be addressed by Indian buyers planning to invest in UAE properties.
Here’s a detailed guide to the tax obligations you should be aware of:
1. Foreign Asset Disclosure in Income Tax Returns (ITR)
Indian residents owning foreign assets, bank accounts, or earning income abroad are required to report these in their ITR using Schedule FA, found in ITR-2 or ITR-3 forms.
Even if your taxable income is below the basic exemption limit, or the asset is created using declared income, you must still disclose foreign assets in the FA/FSI schedule. Failure to do so can result in a penalty of ₹10 lakh under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
2. Tax on Rental Income
If you earn rental income from property in the UAE, it is taxable in India under the “Income from House Property” category. While you are allowed a standard deduction of 30%, any foreign tax paid on the income can be claimed as a credit against your Indian tax liability.
3. Source of Funds
The funds used for purchasing property in the UAE must come from income that has been disclosed in prior income tax filings. This ensures compliance with Indian tax regulations.
4. UAE Tax Exemptions
In the UAE, income from property held as a personal investment—whether through rental earnings or sale—is exempt from tax. Registration for corporate tax is not required in such cases. However, this exemption does not apply to properties held for business activities conducted under a UAE trade license.
5. Capital Gains Tax on Sale of Property
Indian residents must pay capital gains tax on the sale of UAE properties. Short-Term Capital Gains (STCG) tax applies at your slab rate if the property is held for less than 24 months. For properties held longer, Long-Term Capital Gains (LTCG) tax applies as follows:
- 12.5% without indexation: For properties bought on or after July 23, 2024.
- 20% with indexation: For properties bought before this date.
Additionally, reinvesting the proceeds in a residential property in India may qualify for exemptions under Section 54 of the Income Tax Act. A foreign tax credit can also be claimed for taxes paid in the UAE.
6. Tax Collected at Source (TCS)
A TCS of 20% is applicable on remittances exceeding ₹7 lakh under the LRS. While this amount can be claimed as credit when filing annual income tax returns, it blocks liquidity for up to a year.
7. Liberalised Remittance Scheme (LRS) Limits
Under the LRS, Indian residents can remit up to $250,000 (approximately ₹2.1 crore) per financial year to purchase property abroad. However, restrictions apply—using loans, external financing, or purchasing property with the sole intention of immediate resale is not permitted under the scheme.
8. Using Gifting to Double the LRS Limit
Gifting money to spouses is a common practice to increase the LRS limit. However, income derived from the gifted amount—such as rental earnings or profits from a future sale—will be clubbed with the giver’s income and taxed accordingly.
