Receipt of Gifts and Inheritance by an NRI under FEMA

Ashish M. Shaji

13 Sep, 2022

Dealing with real estate matters in India could be a complex task, especially for an NRI under FEMA therefore having a good deal of knowledge about it can be handy. Receipt of gifts and inheritance by a Non-Resident Indian is regulated by Foreign Exchange Management Act and also by Income Tax Act 1961. In this article, we shall discuss regarding assets in which an NRI may have interest which he receives by gift or inheritance.

List of assets in India which an NRI may have interest that he receives via Gift or inheritance

A Non-Resident Indian can have interest in the following assets which he gets through gift or inheritance:

• Money or liquid funds;
• Immoveable properties;
• Jewellery, painting, or such other valuable goods;
• Shares in companies that are registered in India; and
• Interest in LLPs.

As stated above, any such receipt through gift or inheritance is regulated by FEMA and also by Income Tax Act, 1961^[1].

Let’s now discuss the implication of FEMA on such assets.

Receipt of Money or liquid funds as gifts by an NRI under FEMA

A Non-Resident Indian can receive money as gift from a resident Indian under the Liberalized Remittance Scheme within the limit of US Dollars 250000 in a financial year as provided therein.

The donor and the recipient don’t have to be close relatives necessarily. It is permitted under the FEMA provisions, but the gift would be taxable in the hands of the NRI recipient (in case exceeding INR 50000) under the Income Tax Act.

A resident individual may also gift money to a close relative vide a cheque or through net banking to his NRO account in India, subject to an overall limit of USD 250000 in a financial year. The NRI can take the money out that is already in his NRO account, subject to limitation of US Dollars 1 million per financial year.

Definition of relative in FEMA to mean definition according to the Companies Act, 2013 which includes spouse, father, mother, son, his wife, daughter, daughter’s husband, brother and sister of the individual.

Receipt of Immoveable Property as gifts or inheritance by an NRI under FEMA

A gift of immoveable property which is located in India is allowed to an NRI. Exceptions to the immoveable property to be received as gift by NRI are agricultural land/farm house/plantation property.

A gift of immoveable property is permitted even to the NRI who is not a relative, but in case of the Income Tax Act, if the gift is without a consideration and to someone who is not a relative, the receipt of gift is taxable in the hands of the recipient where the stamp duty shall be the basis on which deemed income is computed.

The NRI is permitted to take put the sale proceeds of such properties outside India from his NRO account within the permissible limit of USD 1000000 per financial year. It is also applicable where the property is received by the NRI or PIO through inheritance.

Receipt of Shares in companies that are registered in India as gifts or inheritance by an NRI under FEMA

A resident individual may gift the securities held in a company that is registered in India, such as equity shares, debentures, preference share, share warrants, etc. to a Non-Resident Indian subject to prior approval from the RBI (Reserve bank of India).

The following conditions should be fulfilled:

• The NRI recipient shall be eligible to hold such a security under the regulations that are relevant;
•  The gift should not exceed 5% of the paid-up capital of the Indian Company;
• The sectoral cap applicable in the Indian Company should not be breached;
•  The donor and the recipient should be relatives within the meaning in section 2(77) of the Companies Act, 2013; and
• The value of the security to be transferred by the donor together with a security transferred to any person residing outside of India as gift during the financial year should not exceed the rupee equivalent of USD 50000.

It may be noted that the gift of securities are regulated by the FEMA provisions, which puts a bar to a certain quantum, and prior approval is also required from the RBI, and the parties to the gift transaction should be relatives.

The gift of securities among the relatives are exempt from taxes, but in case it’s among the non-relatives then it shall be taxable where the fair market of such shares is the basis for computing deemed tax liability in the hands of NRI recipient.

A Non-Resident Indian can receive the securities on inheritance, and no such restrictions are there. However, the remittance of sale proceeds should be within the limit of USD 1 million.

Interest in LLP: NRI under FEMA

An NRI can contribute to the capital of a Limited Liability Partnership, but the LLPs should be engaged in sectors where 100% Foreign Direct Investment is permitted under the automatic route. 

There is no provision on transfer of an interest in LLP from resident Indian to an NRI under the FDI policy. Gift of an interest in LLP to NRI is prohibited unless permitted specifically.

Conclusion

Prior to receiving funds or assets in India, either through gift or inheritance, an NRI should check provisions under FEMA as well as under the Income tax Act in order to avoid any complication and non-compliance. In case of further query pertaining to receipt of gifts and inheritance by an NRI under FEMA, contact a professional.

Read our article:Acquisition of Immovable Property in India and outside India as per FEMA Guidelines by Foreigners/NRI and PIO