Gifting Rules for NRIs & Indians: FEMA Compliance Checklist for Gifting Property, Shares or Money Across Borders

Gifting Property, Shares, or Money Across Borders: FEMA Compliance Checklist for Indians & NRIs

Transferring money, property or shares between family members is a common tradition in Indian households. It may be a father gifting a house to his son settled in the USA, or a daughter sending the money to her parents in India, such gestures are the very essence of our culture.

However, when these transactions involve cross border they cease to be private matters and come under the purview of the Foreign Exchange Management Act (FEMA).

It is easy to become lost amongst the rules of the Reserve Bank of India (RBI) and the Income Tax Department. A single overlooked act of non compliance may result in a very heavy fine. At My Startup Solutions we are geared to help you understand these complicated legal and regulatory frameworks. If you are planning a gift from one country to another, you may consult our experts .

Understanding the FEMA Framework for Gifting

Getting to Know The FEMA Framework For Gift FEMA categorizes persons broadly into: Resident Indians and Non Resident Indians (NRIs/OCIs). Whether a gift is allowed or not depends on the identity of the donor and the donee. Normally, the RBI permits gifts between "relatives" as per the definition given under the Companies Act, but different types of asset, cash, shares, or property, come with their own sets of conditions.

1. Money Gift (Cash/Funds)- The easiest and the most common way of gifting is simply sending money. But the authorities have set limits on the maximum amount you can send.

• Resident Indian to NRI: Under the Liberalised Remittance Scheme (LRS), a resident Indian can gift up to a maximum of USD 250, 000 per financial year to an NRI relative. It is possible to send this amount to the NRO (Non Resident Ordinary) account of the NRI. One must keep in mind that the gift should be in Indian Rupees and if the NRI wants to convert the money to repatriate it, he/she should follow certain rules.

• NRI to Resident Indian: Under FEMA, NRIs Can send money to their resident Indian relatives without any limit in amount. Ideally, the remittances should come from their NRE (Non Resident External) or FCNR (Foreign Currency Non  Repatriable) accounts. There is leniency on this matter from the FEMA perspective, however, the Income Tax Act is still applicable. Hence it is always advisable to have a "Gift Deed" ready when dealing with tax authorities as evidence for the source of the gift.

2. Gifting Immovable Property- The issue of gifting a house or land is more complicated because Indian laws have certain restrictions on ownership of property of different types.

• Gift To An NRI: A resident Indian may gift residential/commercial property to his NRI/OCI relative. However, there is an absolute ban on the transfer of agricultural land, farmhouse or plantation property by gift to a person residing outside India. Such properties can only belong to resident Indians.

• Gift By An NRI: An NRI may gift a residential or commercial property in India to a resident Indian, an NRI or an OCI. In case the NRI owns agricultural land (which may be through inheritance), the same can only be gifted to a person residing in India. Agricultural land cannot be gifted to a non-resident by an NRI.

3. Gifting Shares and Securities- Handing over shares of an Indian company by way of gift is generally treated as a change in the control of a business and is therefore subjected to a higher level of scrutiny.

The 5% rule:

By deed of gift, a resident Indian may transfer to an NRI relative shares or convertible debentures of an Indian company, but the value of the share capital so transferred shall not exceed USD 50,000 in an accounting year. Further, the aggregate gift should not be 5% of the company's paid up capital.

Both the donor and the donee have to make sure that the transfer does not breach the sectoral caps (maximum foreign investment allowed in various sectors). Besides, it is quite common for the parties to overlook the mandatory step of reporting such transactions to the RBI via the FIRMS portal.

The Tax Angle: Who Pays?

According to Section 56(2)(x) of the Income Tax Act, gifts from "relatives" are normally tax free in India irrespective of the amount. Relatives mean father, mother, spouse, brother, sister, and lineal ascendants/descendants.

On the other hand, if you get a gift from someone who is not a relative and its value exceeds 50, 000, the whole amount will be treated as Income from Other Sources and taxed according to the slab rate. In the case of an NRI, a Double Taxation Avoidance Agreement (DTAA) between India and the country of his residence may apply. In that case, the NRI would be protected from being taxed twice on the same gift.

The Essential FEMA Compliance Checklist

The law requires total compliance through the completion of all items on the MyStartup Solutions checklist.

• Verify the Relationship: Donor and donee should be related as relatives under the Companies Act if they want to take advantage of tax exemptions and FEMA permissions.
• Implementing a Gift Deed : It is mandatory to have a Gift Deed that can be legally executed on stamp paper. The document needs to identify all individuals who participate in the asset transfer process together with a statement which confirms that the gift was given because of natural affection between the parties involved.
• Check LRS Limits: Make sure you are within the USD 250, 000 yearly LRS limit, if you are a resident Indian and gifting money or shares.
• Bank Reporting: Transfer of shares requires the Indian company to be notified and completion of RBIs necessary filings (such as Form FC, TRS, if relevant).
• Property Registration: In the case of property, the Gift Deed has to be registered at the local Sub Registrar office and the appropriate stamp duty be paid.
• Maintain Documentation: Bank statements showing the debit and credit of funds, PAN cards of both parties, etc., must be retained.

Why Expert Advice Matters?

Cross border transfers come under what can be referred to as a double compliance area. The laws of the country where money is sourced and the laws of the country where it is destined both have to be satisfied. India, for instance, may choose not to tax the gift from a father to a son but the recipient's country of residence (e.g. USA, UK) may require "Gift Tax" filings or foreign assets disclosure.

We relieve the stress of interpreting complex legal documents and regulations. We allow families to reroute their wealth transfers in such a manner that they remain on the right side of the law with minimal tax leakages.

How can My Startup Solution help?

Our professionals at MyStartup Solutions, take care of the entire gamut from preparing Gift Deeds to filing RBI declarations and offering tax consultancy for both Residents as well as NRIs. If you are unsure about the present limits or are struggling to get the correct documentation, please feel free to get in touch with us. A thorough planning today is an obstacle free tomorrow.

Call My Startup Solutions on +91-7081220800 for hassle free gifting.