Gifts and Inheritances received by NRIs - FEMA and Tax Issues

January 16,2018
Rate this story:
Ketan Dalal (Managing Partner, Katalyst Advisors LLP)

As per the International Migration Report 2017, published on 18 December 2017 by the United Nations (Department of Economic and Social Affairs), India is said to have the largest number of persons born in the country now living outside its borders – a staggering 17 million[1] in 2017. With such a large diaspora, and assets held or inherited by them in India having appreciated in value significantly over the years, and need for funds abroad, several issues arise; these issues are often a combination of tax (India and overseas) and FEMA issues.

The assets in India could take the form of (i) liquid funds, (ii) immovable property, (iii) shares and securities, (iv) interest in LLP, and (v) other assets such as paintings/ sculptures/ artefacts/ jewellery/ bullion etc. These assets could have either been held by them or inherited by them or received by them as a gift. The regulations interconnected with these situations are the focus of this article.

Provisions under the Income-tax Act, 1961 (“ITA”)

It is nearly two decades since the Gift Tax Act in India was repealed, thereby withdrawing tax on either donor or donee in case of a gift. However, as an anti-avoidance measure, specific provisions in the ITA were introduced in 2004 which indirectly have resulted in deemed gift provisions having been brought into the statue book. These provisions have been amended and the scope thereof has been widened to a great extent over the years. In fact, whilst the original intent was to tax as income non-genuine gifts, the way the provisions have been enlarged in scope year after year is a classic example of outlier legislation, causing a lot of difficulty in genuine cases, some of which is relevant is the context of this article.

The provisions concerning the gift transfers, which were introduced by way of only one section i.e. section 56(2)(v) of the ITA, now span across six sections – section 56(2)(x) being relevant for the period from 1 April 2017 onwards. As per section 56(2)(x) of the ITA, any person receiving (i) a sum of money, (ii) an immovable property or (iii) any other “specified property” from any other person without consideration or for a consideration less than the fair market value of such property (stamp duty value in case of immovable property) is liable to tax on such receipt, on the quantum of the gift. Other specified property has been defined[2] to mean eight items in addition to immovable property viz. shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art or bullion.

However, certain receipts have been specifically exempted from these provisions. In case of individuals, receipt of either cash or immovable property or other specified property under the following circumstances is not to be subject to tax in the hands of the recipient:

  1. receipt from relatives;
  2. receipt on the occasion of marriage;
  3. receipt under a will;
  4. receipt by way of inheritance;
  5. receipt in contemplation of death of the donor; or
  6. receipt by a trust created solely for the benefit of the relative.

For the purposes of this section, the term “relatives” has been defined[3] to mean spouse, brother, sister, any lineal ascendant or descendant of the individual; brother/ sister of the spouse; brother/ sister of either of the parents of the individual; any lineal ascendant or descendant of the spouse; and spouse of such specified relatives.

Additionally, in case of persons other than individuals, such as companies, receipt of money or property without consideration or for a consideration lower than the stamp duty value/ fair market value should not be subject to tax if such receipt is pursuant to a transaction not regarded as transfer under section 47 of the ITA viz. amalgamation, demerger, etc.

Therefore, receipt of cash or other assets such as immovable property, shares and securities by Non-Resident Indians (“NRIs”) from their Resident relatives are tax neutral. It is also important to note that the definition of “property” does not include interest in LLP and therefore, a transfer of such interest, even from a non-relative, would not attract any tax implications.

While analysis of the ITA aids in comprehending tax implications arising out of transactions, FEMA regulations play a role in determining whether a particular transaction is permissible, in the context of NRIs. FEMA regulations, governing the gifts, are discussed below. Inheritance of monetary as well as non-monetary assets by NRIs is, of course, permitted but there are restrictions on repatriation of such money/ sale proceeds of non-monetary asset inherited.

FEMA regulations

Sum of money

Under the Liberalised Remittance Scheme (“LRS”), resident individuals are permitted to remit overseas up to USD 250,000 per financial year. Such remittances are permitted to be used for conducting permissible current or capital account transactions and subsumes gift in foreign currency made to any NRI or Persons of Indian Origin (“PIO”); i.e. there is no requirement for the donor and the recipient to be related. Therefore, in a case where such a gift is received from a distant relative (in excess of INR 50,000), while the same would be permissible under FEMA, such receipt would become taxable in the hands of the NRI recipient under section 56(2)(x) of the ITA.

However, as per the FAQs on the LRS[4], a resident individual can also make a gift in Indian Rupees to his NRI/ PIO “close relatives” by way of a credit to their NRO account. However, all such money gifts, put together for the resident individual, should be within the LRS limit of USD 250,000 in any financial year.

Here, the term “relative” is to derive its meaning from the definition provided in the Companies Act, 2013 i.e. spouse, father, mother, son, son’s wife, daughter, daughter’s husband, brother and sister of the individual. Accordingly, FEMA brings in a restrictive meaning to the gifting transactions by covering gifts of sum of money within the LRS domain and referring to a definition of “relative” which is narrower than that of the ITA. Therefore, gift of a sum of Indian Rupees by an uncle or “relatives” of the spouse would be not be taxable, but would not be permitted as per the FEMA regulations.

In case of money already held by the NRI individual in India (by reason of his becoming an NRI after having been an Indian resident for a certain period) or where the NRI inherits liquid funds from a resident in India, the remittance of such funds out of his NRO account is limited to USD 1 million per financial year.

Immovable property

FEMA regulations applicable to transfer of immovable property[5] permit a PIO to acquire an immovable property in India by way of gift from a person resident in India provided the property is not agricultural land/ farm house/ plantation property.

However, as per the Regulations applicable to remittance of assets[6], the sale proceeds of any such asset could be remitted by the NRI/ PIO outside of India only to the extent of USD 1,000,000 per financial year, which is an overall limit on remittance of proceeds from the NRO account. This is also the case where the property has been received by the NRI/ PIO by way of inheritance/ legacy.

What is important in relation to gift of immovable property from a FEMA perspective is that there is no requirement for the donor and the recipient to be related and immovable property transferred without any consideration even by a resident non-relative would be permitted. However, under the ITA, where an NRI receives gift from a non-relative, such receipt would be taxable under the ITA[7] where the stamp duty value would be the basis for computing deemed income.

Let us consider a few practical examples to comprehend this. (1) If an NRI receives a gift from a cousin, who can make such a gift from a FEMA perspective, but the NRI will be taxed nonetheless under section 56(2)(x) of the ITA. (2) If the NRI inherits such a property, there will be no tax in India (currently, India does not have either Estate Duty or Inheritance Tax) and he can continue to hold it, but if he sells it, he can remit up to USD 1 million per financial year in the aggregate.

Shares and securities in an Indian company

Where a resident individual holds capital instruments (equity shares, debentures, preference shares and share warrants) in an Indian company, such capital instruments are permitted to be transferred to an NRI by way of a gift subject to a prior approval from the Reserve Bank of India and fulfilment of the following conditions[8]:

  • The NRI recipient is eligible to hold such a security under relevant Regulations;
  • The gift does not exceed 5% of the paid-up capital of the Indian company;
  • The applicable sectoral cap in the Indian company is not breached;
  • The donor and the recipient are ‘relatives’ within the meaning in section 2(77) of the Companies Act, 2013; and

The value of security to be transferred by the donor together with any security transferred to any person residing outside India as gift during the financial year does not exceed the rupee equivalent of USD 50,000.

As is evident from the conditions, gift of shares and securities are strictly regulated by the FEMA provisions – not only being restricted to a certain quantum but also requiring a prior approval from the Reserve Bank of India and the parties to the gift transaction are required to be “relatives”. However, as discussed above, there will be no tax implications if the shares and securities are received from a relative, but, if received from a non-relative, the fair market value[9] of such shares would be considered as the basis for computing the deemed tax liability in the hands of the NRI recipient.

In relation to inheritance, there is no such restriction, of course, and no tax (similar to immovable property discussed above), but again, remittance of sale proceeds (post capital gains tax) will have to be within the USD 1 million limit as explained above. 

Interest in LLP

A specific schedule in the applicable Regulations[10] deals with investment in an LLP by a person resident outside India. It is important to note that while a person resident outside India is permitted to contribute to the capital of an LLP (engaged in sectors where 100% FDI is allowed under automatic route), there is no specific mention of transfer of an interest in LLP held by a resident to NRI. However, the schedule prescribes the pricing guidelines to be adhered to for every transfer of capital contribution from a resident to a person resident outside India.

Relying on the general principle that Capital Account transactions (i.e. where the assets in India are impacted) are prohibited, unless specifically permitted, since the Regulations do not specifically permit it, gift of an interest in LLP to an NRI is not permitted at all. However, under section 56(2)(x) of the ITA, the definition of “property” does not include interest in LLP and therefore, a transfer of such interest, even from a non-relative, would not attract any tax implications. As such, it appears that regardless of the non-taxability, there seems to be a prohibition on gift of interest in LLP to NRI under FEMA. Further, even as per section 42 of the Limited Liability Partnership Act, 2008 (“Partner’s Transferable Interest”), the right of a partner to a share in profit is transferable in accordance with the LLP agreement and therefore, if the LLP agreement were to provide for transfer of interest in LLP, it would be allowable under the LLP Act but restricted as per the FEMA regulations. In relation to inheritance, however, there is no such restriction, and similar to other assets discussed above, no tax implications but remittance of transfer proceeds (post capital gains tax) will have to be within the USD 1 million limit as explained above.

Summary

The table below can be a useful guide: 

Assets

Permissibility under FEMA

Liability under ITA

Gift from Relative

Gift from Non-Relative

Inherited/ held in own capacity

Gift from Relative

Gift from Non-Relative

Liquid Funds

Yes - in foreign currency as well as Indian Rupees; restricted to USD 250,000 per financial year

Yes - only in foreign currency; restricted to USD 250,000 per financial year

Yes - remittance restricted to USD 1 million per financial year

None

Taxable under section 56(2)(x) in the hands of recipient

Immovable Property

Yes - remittance of sale proceeds restricted to USD 1 million per financial year

Yes - remittance of sale proceeds restricted to USD 1 million per financial year

Yes - remittance of sale proceeds restricted to USD 1 million per financial year

None

Taxable under section 56(2)(x) in the hands of recipient and under section 50C in the hands of the donor

Shares and securities

Yes - several restrictive conditions applicable

No

Yes - remittance of sale proceeds restricted to USD 1 million per financial year

None

Taxable under section 56(2)(x) in the hands of recipient

Interest in LLP

No

No

Yes - remittance of transfer proceeds restricted to USD 1 million per financial year

None

None

Concluding Remarks

Keeping in view the host of laws applicable to transactions in India, it becomes imperative to analyse all the angles since what could be permissible from a FEMA perspective could result in substantial tax costs and transactions which are most tax efficient may not be permitted at all from a FEMA perspective.  


 [1] Does not include children of migrants born in the countries abroad

[2] Section 56(2)(x) makes reference to the meaning assigned to the term in section 56(2)(vii)

[3] Section 56(2)(x) makes reference to the meaning assigned to the term in section 56(2)(vii)

[4] Question no. 26

[5] Regulation 4(b) of Notification No. FEMA 21/2000

[6] Regulation 4(2) of Notification No. FEMA 13(R)/2016

[7] Section 56(2)(x) of the ITA

[8] Regulation 10(5) of Notification No. 20(R)/2017

[9] Rule 11UA of Income-tax Rules, 1962

[10] Schedule 6 to Notification No. FEMA 20(R)/2017

ad1
ad3
ad4