Can NRIs Gift Money to Relatives in India?

Leaving the country of your birth for a future abroad is undoubtedly a great achievement; however, often your emotions and finances are still tied to India. A lot of Non-Resident Indians (NRIs) keep on sending money to India to their parents for household expenses, siblings education, or to be part of family ceremonies like weddings. Even though the emotional aspect of these gifts is priceless, the Indian tax system and legal framework have laid down certain rules which you must follow. Finding out whether these gifts are taxable and the maximum amount which you can legally send are some of the things that you should do in order to avoid legal or financial troubles in the future.

In brief, it is indeed possible for NRIs to give money to their relatives in India. Nevertheless, the process is regulated through two principal sets of legislation, namely, the Income Tax Act 1961 and the Foreign Exchange Management Act (FEMA). At My Startup Solutions, we understand and thus help NRIs get through these complicated situations smoothly. You can always contact us if you want us to help you out with your NRI situation.

Who is a "Relative" in India?

The term "relative" has a very definite meaning as per Section 56(2)(x) of the Income Tax Act. It is not any person with whom you have a relationship that the law recognizes, rather it has a very short list of persons. In terms of taxes, a relative is anyone who is your spouse, your brothers and sisters (and their spouses), the brothers and sisters of your spouse, the brothers and sisters of either of your parents, any of your direct ancestors or descendants and the spouses of those ancestors or descendants.

Gifts received from these certain persons are absolutely exempt from tax in India for the recipient regardless of how large they are. To give a mother as an example, if the mother is sent 20 lakhs by her son who is an NRI, she will not have to pay any tax on the gift. On the other hand, the tax treatment will be totally different if the same NRI gifts money to a friend or a distant cousin who is not on his "relative" list.

The 50,000 Rule for Non-Relatives

However, when the gift value goes beyond a certain limit, there will be tax consequences if gift money is given to someone who does not fall under a "specified relative" according to the law, such as a friend or a cousin. In India, all the gifts to an individual from the persons who are non-relatives and which are more than 50,000 in a single financial year will be includable in the total income of the individual and hence become taxable.

It is not a situation where only the extra amount is taxable. When you give a friend 51,000, the friend has to pay tax on the whole amount of 51,000 and not just on the extra 1,000. The extra amount thus added is taxed at the slab rates of the income tax applicable to the level of that person's income. Hence, you must take care of the annual limits in order to be safe and compliant.

FEMA Guidelines for NRI Gifting

FEMA is concerned with the transfer of money while the Income Tax Act is concerned with the payment of tax. NRIs are permitted under FEMA regulations to send money to India through legal banking channels. Besides this, you can also transfer money from your NRE (Non-Resident External), or your NRO (Non-Resident Ordinary) accounts, or make a direct remittance from your foreign bank account to the recipient's bank account in India.

There is no predetermined limit (upper limit) to the amount of money an NRI can gift a resident Indian, provided the gift is for genuine reasons such as family maintenance or support. However, for outward gifts (where the resident Indian is the donor and the NRI is the donee), the Liberalised Remittance Scheme (LRS) limit of USD 250,000 per financial year will apply. Transparency is the key factor when it comes to inward gifts into India. You should, therefore, ensure that the money is sent only through bank transfers and not by cash in order to maintain a proper record of transactions.

Why is a Gift Deed Necessary?

Even though giving gifts to relatives is tax-free, it is highly advisable to have a "Gift Deed". It is the legal paper that documents the handing over of money or assets from the donor (the one who is giving) to the donee (the one who is receiving). Such a gift deed can be very helpful if the Income Tax Department questions at some point, the source of the funds or the nature of the transaction.

A simple gift deed will have to state the identity and address of both parties, their relationship, the amount gifted, and also a declaration that the gift is being made freely and voluntarily without any 'consideration' (meaning the receiver is not expected to give anything back). This gift deed can be your safeguard against the unnecessary stress of tax audits for huge amounts or transfers of property.

Special Exemptions for Weddings

Indian culture considers marriage a very special event, and the tax laws mirror this value. Hence, gifts received by a person on the occasion of his/her wedding are completely exempt from tax, no matter from whom the gifts are received. The gift does not attract tax even if it is given by a relative, friend, or a stranger. NRIs can use this facility to financially support their loved ones in the wedding ceremonies lavishly without worrying about the 50,000 limit.

Common Mistakes to Avoid

One of the biggest mistakes NRIs make is giving huge amounts of money in cash as gifts. Even though gifting cash is not against the law, the Indian government can impose heavy fines on cash dealings exceeding 2 lakhs. The best and safest method is to resort to cheques or bank transfers. Another major mistake is the failure to keep the records as evidence of the money's source. When at all the recipient is questioned, he should be able to justify that the money is from an NRI relative's legitimate foreign earnings.

In addition to this, if the recipient invests the gifted money (e.g., in a Fixed Deposit), then he will be obliged to pay tax on the interest thus earned. The gift itself is free, but the 'income from the gift' is not. Knowing this difference will help you in making better financial plans for your family at home.

How My Startup Solutions Can Help?

Handling international taxation and FEMA compliance procedures can be quite complicated more so when you are in a different time zone. At My Startup Solutions, we are the link that makes your transfers smooth and easy. Our services for NRIs include:

• Helping to prepare legally enforceable Gift Deeds which protect the donor as well as the donee.
• It becomes a point of need to ascertain the taxes so as to save the recipients from a whole series of legal notices from the government of India.
• Making sure that the Foreign Exchange Management Act (FEMA) and the Reserve Bank of India (RBI) rules are complied with in the case of large money transfers.
• Helping NRIs and their Indian relatives in filing Income Tax Returns (ITR).

Conclusion

Sending money as a gift to your dear ones in India is a kind way to maintain your relationship, yet it's very important to be in compliance with the laws of Income Tax and FEMA. Gifting to the specified relatives is tax-free; however, the proper documentation such as a gift deed will help you avoid legal issues later on. My Startup Solutions is here to make it easy for you.

Give us a call at +91-7081220800 if you want expert advice on tax planning and hassle-free remittances, and make your family's financial security the priority today.