Using credit card to buy property abroad? Here’s why you may attract ED scrutiny

If you are planning to make overseas property-related payments through international credit cards, you may want to review the applicable foreign exchange rules first. Such transactions can attract scrutiny under the Foreign Exchange Management Act, 1999 (FEMA), and in certain cases may come within the radar of the Enforcement Directorate (ED).

Where an Indian resident uses an International credit card to pay a token amount or booking deposit for overseas property, the concern is not just the payment method but the nature of the transaction. Under FEMA, buying foreign immovable property is a capital account transaction and such payments are expected to go through authorised banking channels with proper reporting under the Liberalised Remittance Scheme (LRS), said Nishant Shanker, a tax strategy expert and former senior manager of tax at EY.

Can you make other high-value transactions using international credit cards?

The position differs, however, in the case of personal consumption expenditure abroad, which includes electronics, luxury goods, clothing, hotel stays, and travel-related expenses. They are generally treated as permissible current account transactions and may ordinarily be paid through international credit cards, said Bhargav Baisoya, a legal Associate at Jotwani Associates.

Additionally, there is no absolute statutory cap on legitimate foreign credit card spending for permissible purposes. However, high-value overseas transactions are extensively reported through banking and tax systems. Large foreign spends may also attract Tax Collected at Source (TCS) under the Income Tax framework and are increasingly visible to regulators through automated reporting mechanisms, he added.

Can buying gold using credit invite scrutiny?

Transaction resembling investment or asset acquisition, on the other hand, such as the purchase of gold bullion or investment-grade precious metals, the regulatory position becomes significantly stricter and may attract FEMA, customs, and tax scrutiny,” Baisoya said.

Are Indian residents allowed to purchase property abroad?

Yes, Indian law does permit resident individuals to acquire property abroad within the RBI’s prescribed limits. However, a legally permissible purchase can still result in FEMA penalties if the remittance mechanism itself violates regulatory procedure, Baisoya noted.

“If even a booking amount or token advance is paid through an impermissible route, such as an international credit card, authorities may still treat it as a FEMA contravention independent of the legality of the overall transaction,” he added.

What is the penalty if you breach this law?

Baisoya also warned that under Section 13 of FEMA, penalties can extend up to three times the amount involved in the contravention. This may apply if an individual uses credit cards or other non-permitted routes to carry out overseas transactions.

Further, if the foreign property is not properly disclosed in Indian income tax filings, exposure may also arise under the Black Money Act, which contains stringent provisions relating to undisclosed foreign assets, he said. “In cross-border transactions, the legality of the asset does not cure non-compliance in the mode of remittance.”

What documents should individuals maintain in foreign property-related payments?

According to the experts, the most effective protection against FEMA or tax scrutiny is maintaining a complete and transparent compliance trail from the very beginning of the transaction.

• Source of funds documentation
• Bank/card statements connected with overseas property acquisition
• LRS related declarations and reporting records,
• Purchase agreements / booking documents.
• Correspondence with overseas sellers or intermediaries
• Foreign asset disclosures in ITRs, failing which can make the assessee liable under the Black Moneys Act evidence of regulatory compliance for outward remittance.
• Individuals should also preserve Form A2 declarations, remittance records, SWIFT confirmations, bank advice, and documents reflecting the applicable RBI purpose code.

Baisoya also said that in foreign exchange matters, documentation and transparency are often the strongest legal defence. Hence, one should not violate any of the above mentioned rules and documentation requirements.