The New Benami Act – Considerations for NRIs and Foreign Investors

In Prime Minister Modi’s war against ‘black money’ the Indian government is attempting to tighten up a real estate strategy for tax evasion: Benami properties. 

Benami means ‘anonymous’ or ‘without name’ in Hindi. A Benami property refers to property bought in the name of a secondary person so as to conceal the identity of the real buyer. Individuals generally purchase Benami properties in the name of relatives to conceal the extent of their wealth from the government. Real estate developers, on the other hand, buy Benami properties to sidestep stringent land ceilings – using proxy companies to make the actual purchase.

The new Benami Transaction (Prohibition) Amendment Act, 2016 ups the maximum punishment for owning Benami properties from the former three years of jail time to the current five years of jail time and a fine. The new Act further allows authorities to permanently confiscate Benami properties without compensation to the former owner.

The federal government of India has reported that 140 cases have already been filed where Benami assets are worth more than US$31 million (Rs 200 crore).

How has the Benami law changed?

The biggest change between the new Benami Act and its 1988 predecessor is that the Indian government now has a mechanism to actually enforce Benami laws. Confusing definitions and provisions and convoluted procedures rendered the Benami Transaction (Prohibition) Act, 1988 useless in the operational sense.

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The 2016 Benami Act creates four entities who have the authority and directive to investigate and deal with Benami properties: initiating officer; approving authority; administrator; and adjudicating authority. Initiating officers investigate and serve notice to suspected Benamidars (individuals potentially holding Benami properties).

The Act defines a Benami property as:

• A transaction carried out under a fictitious name;
• Where the person in whose name the property is registered denies any knowledge of ownership or;
• Where the person paying for a transaction or property-related arrangement is either not traceable or found to be fictitious.

This definition can, however, expand to include relatives or associates who have properties under their name, which they did not pay for. This definitional looseness could negatively effect genuine property owners. Furthermore, the Benami Act, 2016 does not limit Benami properties to immovable property. 

Implications of the Benami Act, 2016

The culminated effect of the amended Benami Act, alongside demonetisation, the GST overhaul, and the Real Estate (Regulation and Development) Act, 2016 will redefine the future of the Indian real estate sector. While the new Benami Act is meant to promote transparency in the real estate sector, the act may also target foreign investors and non-resident Indians (NRIs) buying under relatives’ or associates’ names.

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Sahil Aggarwal, Dezan Shira and Associates’ International Business Advisory Manager, explains that “there is a thin line of difference as to whether a transaction will be deemed to be a Benami transaction or not.” Aggarwal gives the example of an NRI purchasing equity shares in his mother’s names but out of his own funds, which would constitute a Benami transaction. But, if said NRI is a joint holder of the shares, then the Act would not consider it a Benami transaction.

Aggarwal encourages NRIs investing in India to be careful and seek professional assistance before executing deals since “penalties are draconian” and include fines, prosecution, and confiscation of property.

Maintain caution when purchasing property in India

The Benami Act, 2016 has the power to strengthen anti-tax avoidance measures in India as well as to professionalize India’s real estate sector – notorious for its lack of transparency. Yet, the Act also has significant potential for punishing genuine property buyers unaware of the regulatory changes. NRIs and property owners in rural areas are particularly at risk because of a relative lack of clear titles.

New property buyers should consult legal professionals before purchasing joint property or property under the name of relatives.

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