Tokenized Real Estate in India: Navigating Regulatory and Structural Gaps (Part II)

[Bhavishya and Yash are students at Dr Ram Manohar Lohiya National Law University. The following post is in continuation of another post available here.]

International approaches towards tokenization usually fall into two categories: the sui generis model (which creates unique, dedicated laws for digital assets) and the integrated/pilot model, which incorporates digital assets into existing securities frameworks with precise mandates. India’s approach contrasts with these proactive models as it relies on the legacy statutes, such as the CIS framework or small and medium real estate investment trusts.

The Sui Generis Model (Switzerland and Germany)

The sui generis model countries, such as Switzerland and Germany, have high efficiency and institutional trust while recognizing the legal status of digital securities. Switzerland is considered to be an advanced jurisdiction for tokenization transactions, as it has a Digital Ledger Technology Act (DLT Act) passed in 2021, which is a dedicated law for digital ledger technology. At present, this act integrates crypto assets, which provides legal certainty for securities transfer and enables settlement finality outside traditional depository institutions.

Similarly, Germany enacted the Electronic Securities Act (eWpG) in 2021. This statute removes the requirement of any physical document during the issuance of electronic securities, thereby recognizing blockchain registries as legally valid security registers that are not present in India. It legally removes the requirement of a physical copy, directly addressing the barrier of paper-based deed registration and the stamp duty issue that plagues India.

The Integrated and Government-Led Models (Singapore and UAE)

Singapore has strict regulatory oversight. The Monetary Authority of Singapore (MAS) categorizes real estate tokens as security tokens under the Securities and Futures Act if they represent an investment with an expectation of profit. Through this, it gives them rigorous compliance as issuers have to have MAS approval through licensing, registration, and disclosure standards, and conduct thorough KYC checks. This framework attracts global investors who look for high regulatory assurance and defined legal recourse and protection.

In the UAE, especially Dubai, the Dubai Land Department collaborated with the Virtual Assets Regulatory Authority to launch a Real Estate Tokenization Project pilot to enable fractional ownership, such as real estate tokens. It establishes a secure, regulatory-backed framework from the outset and strengthens Dubai’s vision to become a global hub for virtual assets.

Way Forward

RETs are still not considered as securities. RETs are recognized as securities in the USA by applying the Howey test. Bringing them under regulatory ambit will institutionalize and ensure investors’ interests. Such a framework is essential to attract foreign tokenized investment in India's real estate market. RETs, being decentralized, open vast avenues for their misuse. Hence, there is a need to recognize such tokens as securities under Securities Contracts (Regulation) Act 1956. This will allow Securities and Exchange Bank of India to regulate the marketplaces and prevent them from becoming shadow securities, and ensure investors’ confidence. Apart from security law, there is a need to harmonize real estate laws.

Cross-border RET transactions pose a new challenge for our foreign exchange norms. As the frontiers of tokenized assets are increasing, it may bring foreign investors capitalizing on the growth of Indian real estate. However, transfer and acquisition of immovable property by foreign nationals is subject to foreign exchange laws and, in several circumstances, requires prior approval of the RBI. Domestic buyers are also subject to state-specific regulations for the purchase of immovable property. Further, the land conflicts in India may discourage foreign investors in this arena, because disputed properties could cause title transfer delays and expose investors to legal and financial liability. The uncertain nature of RET raises doubts under the current taxation regime as well.

Taxing the returns of the investors will depend upon the nature of the tokens, i.e., whether they qualify as a virtual digital asset (VDA) under Section 47A of the Income Tax Act 1961 or not. If they qualify as a VDA, then the income from transfers related to RET will be taxable @30% plus surcharge and cess and loss, if any, will not be allowed to be carried forward to any succeeding assessment year. If it is not considered a VDA, then capital gain tax will be applicable to the income received from such a transfer. However, the application of taxation laws depends upon the nature of such RET, which is not clear in the Indian jurisprudence.

Conclusion

The ambition of large-scale adoption of RET in India is currently obstructed by a dual challenge, which is, firstly, a regulatory vacuum with no statutory and legislative framework forcing the fractional ownership tokens into ill-suited regimes like the CIS, and secondly, the foundational weakness of India’s presumptive land titling system. What it does is that even digital records are legally vulnerable to physical title challenges. This type of approach goes in conflict with the present international jurisdictions like Germany, with its eWpG, and Switzerland, with its DLT Act, which have successfully eliminated the concept of paper certificates and mobilized the previously illiquid assets.

The pressing need is the suspension of any reliance on the supplementary frameworks, and India should have its own legislation to govern tokenism and digital assets, per se. This dedicated statute must resolve the legal classification of tokenized RWAs, formally recognize smart contracts, and establish precise mechanisms for the digital collection of stamp duty and property transfer taxes to mitigate any discomfort for the government. This legislative overhaul will help India bring institutional capital and investor confidence and secure its competitive position in the future of digital finance.