Money sent by NRI children to parents: Tax-free gift or taxable income?
Q:
To understand the tax treatment of such remittances, we reached out to Dinkar Sharma, Company Secretary and Partner, Jotwani Associates, who explained how the Income-tax Act and FEMA view such transactions.
Ans: It is common for the Non-Resident Indians (NRIs) to financially support their dependent parents who are residing in India. Such support may be a regular or one-time remittance from abroad. When an NRI son transfers money to his parents in India, the transaction is treated as a Gift provided it is not linked to services, repayment obligations, or commercial arrangements.
The Income-tax Act, 1961 provides a specific exemption for gifts received from “relatives”. Parents and children are within the definition of relatives as per Section 56(2)(x). Therefore,
i) Any amount of money received by parents from their son who is fully exempt from income tax, irrespective of the value of the Gift.
ii) The exemption applies equally whether the son is a resident or an NRI.
iii) While the gifted amount itself is tax-free, however, any income generated from such gifted money, like bank interest, return on investments, or rental income from assets purchased etc. is taxable in the hands of the parents at the applicable rates.
From a disclosure standpoint, although the Gift is exempt, it is advisable to report it under the “Exempt Income” or “Schedule EI” in the income-tax return for transparency.
FEMA rules on NRI remittances to parents
Foreign Exchange (FEMA) Perspective : Under FEMA, the inward remittances from an NRI to resident family members are permitted and such funds may be transferred from either the NRI’s overseas bank account, or NRE / NRO account maintained in India.
Such transfers are treated as legitimate family remittances, and no special approval from the Reserve Bank of India is required, provided the funds originate from lawful sources. However, the Bank may seek clarification or documentation to establish the nature of the transaction. However, this is generally the case when amount involved is huge.
Is a gift deed required? What documents should be kept?
Gift Deed and Documentation : There is no need to execute a gift deed while gifting money from abroad to parents in India. However, from a practical point of view, a simple written gift deed or declaration is recommended. Supporting documents such as bank remittance advice, transaction statements, and proof of NRI status may further strengthen the record.
Does the NRI son face any tax consequences?
From the point of view of son remitting money to his parents from abroad, following points are to be noted :
a) Exemption from Clubbing: Unlike gifts to a spouse, income generated from money gifted to parents is not clubbed back to the son. It is taxed only in the parents’ hands in India.
b) Other implications may be imposed depending upon the country of residence of the son, as for example, US has recently proposed a tax of 1% on such remittances.
The bottom line
Conclusion: When an NRI son transfers money to his parents in India, it’s generally tax-free for the parents as a gift from a relative, with no upper limit, provided it’s sent through proper banking channels and documented, while the NRI sender isn’t taxed on the remittance; however, any income generated by the parents from investing this gifted money is taxable in their hands, and one must maintain records for compliance.
Disclaimer: The views, facts and suggestions mentioned above are those of the expert. They do not reflect the views of financialexpress.com.
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