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Gifts amongst spouses in India are generally not subject to tax and, therefore, remain a very attractive tool for transferring wealth within the family. However, when such gifts involve foreign currency or foreign assets, they have a different layer of complexity compared to FEMA regulations and Indian tax laws. This blog will detail FEMA compliance and potential tax liabilities while keeping you abreast of what to consider when planning those spousal gifts in India.
The Foreign Exchange Management Act (FEMA) governs cross-border transactions and the flow of foreign exchange in India. Regarding spousal gifts, FEMA has specific provisions regulating such transfers, ensuring compliance with the law. Below is the detailed definition of FEMA and Spousal gifts:
FEMA is the keystone legislation that regulates foreign exchange transactions in India. It was enacted to facilitate external trade and payments and promote the orderly development of the foreign exchange market. This Act covers any cross-border transactions, including gifts, and non-compliance can lead to strict penalties.
For businesses and individuals engaging in cross-border transactions, obtaining FEMA registration is essential to ensure compliance with foreign exchange regulations to avoid penalties and streamline international financial activities.
When domestic residents give gifts to a spouse, it is relatively simple. The situation changes in the presence of foreign elements, whether foreign money or properties owned. FEMA governs such transactions to prevent money laundering, requiring documentation and reporting. Individuals engaged in cross-border gifting must study these rules beforehand.
Know about the FEMA regulations on spousal gifts:
In India, gifts between spouses are exempt from income tax under Section 56(2) of the Income Tax Act. However, any income generated from the gifted assets is clubbed with the income of the donor spouse for tax purposes:
If the gifted asset is a capital asset like property or shares, there is a tax liability on capital gains on its sale. The recipient of the asset will be liable to pay capital gains tax on its sale. Still, the cost of acquisition and holding period of the original owner, that is, the donor spouse, will be considered.
If the receiving spouse is paying tax on the income generated by the gift in another country, the receiving spouse may claim a foreign tax credit in India. This helps to avoid double taxation but requires extensive documentation and compliance under the laws of both countries.
Let’s understand about the investment strategies and compliance:
Below are some examples for a better understanding of FEMA regulations on spousal gifts:
A resident Indian transferred $100,000 to his non-resident wife under LRS. The transaction complies with FEMA, but the wife must repatriate the funds within 180 days. The husband is also responsible for reporting this gift in his tax return, ensuring the clubbing provisions are followed for any income generated.
A resident Indian husband gifts a property in the US to his wife. Since the property’s value exceeds LRS limits, they seek RBI approval. Upon selling the property, the wife is liable to pay capital gains tax in the US, with the cost of acquisition and holding period considered from the original purchase date.
A working wife gifts ₹20 lakhs to her non-working husband, who invests in mutual funds. The income from these investments is initially clubbed with the wife’s income. However, upon reinvesting the earnings, any future income is taxed in the husband’s hands, providing a strategic tax planning opportunity.
Gifting between spouses is a subject in India that entails a lot of planning and adherence to regulations set out in FEMA and tax laws, especially where foreign assets or currency are involved. You can always save on your taxes and smoothen your gift process with the help of professional advice from financial experts.
Do make complete and detailed documentation with proper transaction reporting so that you might not fall under the trap of any resultant legal consequences. Proper planning will guide you through a maze of compliances involved in spousal gifting with strategic maximization of benefits.
Ensure seamless compliance under FEMA regulations and optimize tax planning for spousal gifts. Visit our website www.enterslice.com today to manage cross-border transactions and safeguard your financial interests.
Generally, gifts between spouses in India do not attract income tax by Section 56(2) of the Income Tax Act. However, any income accruing to the gifted assets may be brought to tax under the clubbing norms.
FEMA is a regulatory framework dealing with foreign exchange transactions in India, including cross-border gifting. When gifts with foreign currency or assets are received, FEMA calls for particular rules and compliance, like LRS restrictions and reporting/documentation.
The LRS scheme allows resident Indians to remit up to $250,000 per financial year for permissible current and capital account transactions, including gifting. The excess over this limit is permissible with prior approval from the Reserve Bank of India.
All transactions under FEMA should be properly documented. This includes maintenance of bank statements, gift deeds, and necessary RBI approvals. Proper documentation assists in complying with and avoiding legal problems during tax assessments or audits.
Income from assets transferred to a spouse is brought to tax by the spouse who transfers the asset under clubbing provisions. Thus, for instance, income in the shape of interest on money gifted by a husband to his wife will be clubbed with the husband's income.
Yes, if the extent of the income earned by the assets so gifted is reinvested in the assets, the subsequent income would be taxable in the hands of the recipient spouse and not the donor spouse. In such cases, strategic tax planning can go a long way in optimizing tax liabilities.
If the gifted asset is capital, the recipient spouse must pay capital gains tax upon its sale. The cost of acquisition and the holding period of the original owner (the donor spouse) are considered when calculating the capital gains tax.
There is no restriction on gifting foreign currency or assets to your non-resident spouse. However, transactions have to be done under FEMA regulations, complying with LRS limits and repatriation requirements backed by documentation and possible RBI approvals.
FEMA requires money received from foreign territories, such as gifts, to be brought back to India within six months of receipt. Breaching this condition may lead to numerous fines and legal complications.
Gifting immovable property to a spouse living outside India can be tedious and generally requires RBI approval, especially if the property values more than the guidelines provided under LRS or involves repatriation. Proper documentation and compliance with FEMA are crucial in such cases.
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