Gifting to India: FEMA Rules, LRS, and Tax Implications for NRIs

(INDIA) Indian banks and tax advisers reported a seasonal surge in cross‑border transfers this quarter as non‑resident Indians sent money and property to family back home. Officials warned that even a heartfelt Gift can trigger penalties if it falls foul of FEMA rules or tax limits.

The reminder comes as global mobility picks up and people in the United States 🇺🇸 and elsewhere support parents, fund education, and help with home purchases in India. Under the Income Tax Act, gifts are legal, but the line between a simple remittance and a reportable transaction can be thin—especially when large sums, property, or overseas‑origin assets are involved.

Key tax threshold and what counts as a Gift

• The central tax trigger is the ₹50,000 threshold for gifts received in a financial year.
• If a person in India receives more than ₹50,000 in total gifts and the donor is not a specified relative, the entire amount becomes taxable as income.
• The exemption applies to close family: parents, spouse, children, grandchildren, and siblings. Gifts from those relatives remain tax‑free.
• The rule covers:
  • Cash and bank transfers
  • Non‑cash assets (jewelry, shares, bonds, artwork)
  • Property — which must be properly documented and registered

Exchange control and outward remittances

• The Foreign Exchange Management Act (FEMA) and the RBI’s Liberalised Remittance Scheme (LRS) cap outward remittances by resident individuals at USD 250,000 per financial year for allowed purposes (gifts, family support, education, property transactions).
• Each transfer must go through an Authorized Dealer bank with a clear declaration of purpose.
• Purpose codes are important, not optional. Examples:
  • S1301 — gifts
  • S1107 — family maintenance
• The RBI stresses using formal channels and accurate coding. See the Reserve Bank of India LRS FAQ for details: https://rbi.org.in/Scripts/FAQView.aspx?Id=115

Risks of informal routes and prohibited uses

• Using friends, couriers, or hawala instead of authorized banks can trigger a FEMA breach and penalties that officials say may run up to 300% of the transaction value in severe cases.
• Banks flag remittances tied to prohibited purposes, such as:
  • Speculative trading, betting, or gambling
  • Crypto trades routed through Indian or foreign accounts
  • Unapproved cross‑border loans
  • Benami deals (assets held in someone else’s name to conceal the real owner)
• Restrictions also apply to purchases of agricultural land or plantation property by non‑residents, which often complicate transfers tied to inherited or rural property.

Gifts of immovable property — mandatory steps

• A registered Gift Deed is mandatory for immovable property; stamp duty applies at state rates.
• If the recipient later sells the property, capital gains tax is computed with reference to the original purchase price, not the market value at the time of the gift.
  • This often surprises families who thought a gift would reset the cost base.
• If the recipient is not a “relative” as defined by tax law, authorities may treat the stamp duty value as taxable income in the year of transfer.
• Keep bank receipts, registration records, and identity documents to reduce scrutiny.

FEMA compliance form and bank procedures

• Banks remind senders to complete the standard FEMA declaration at transfer time: Form A2.
  • The form captures purpose, amount, and basic recipient/donor details.
  • Many banks accept it digitally, but it remains a core compliance requirement.
  • RBI reference for Form A2: https://rbi.org.in/Scripts/BS_ViewForms.aspx?Id=26
• Bank compliance teams use the declared purpose and supporting documents to decide if a transfer fits LRS and AML rules.

U.S. reporting obligations for large foreign gifts

• U.S. citizens and Green Card holders who receive foreign gifts greater than $100,000 in a year must report them to the IRS using Form 3520.
  • The gift itself is generally not taxed in the U.S., but failure to report can lead to steep fines.
  • IRS Form 3520 information: https://www.irs.gov/forms-pubs/about-form-3520
• Holders of foreign financial accounts may also have FBAR obligations with FinCEN.
  • FinCEN FBAR resource: https://www.fincen.gov/report-foreign-bank-and-financial-accounts
• Students on F‑1 visas and professionals on H‑1B visas sending funds home for family support or tuition generally face no U.S. tax on the transfer itself, but careful recordkeeping is advised.

Who counts as a relative (for gift exemption)

• The tax‑law definition includes:
  • Parents and grandparents
  • Spouse
  • Children and grandchildren
  • Siblings of the donor or of the donor’s spouse
• Gifts to cousins, in‑laws, or friends that push the annual total over ₹50,000 become taxable for the recipient.
• Important: When the annual total exceeds the cap for non‑relatives, tax applies to the full amount, not just the excess.

Common compliance pitfalls and red flags

• Mis‑coding purpose as “miscellaneous” or “others” instead of the true purpose (family support or gift) can trigger queries.
• Banks commonly request:
  • Declaration of relationship
  • Gift note or deed
  • Invoice for education fees
• Frequent flags (per VisaVerge.com analysis):
  • Inconsistent purpose codes
  • Transfers that mix permitted and restricted uses
  • Funds routed through third parties
• Clear records reduce bank reviews and the appearance of layered or benami deals.

Crypto, loans, and benami risks

• Routing funds intended to buy cryptocurrencies through Indian accounts can be stopped by banks citing RBI virtual asset guidance.
• Unapproved loans (money sent expecting repayment without RBI permission) can be treated as breaches.
• Titling assets in another person’s name to “simplify” matters can trigger benami rules and investigations.

Practical advice for students, early career professionals, and families

• Regularity and clear purpose statements build a predictable profile and ease transfers.
  • Example: Label family support transfers as S1107 and avoid mentioning crypto/securities.
  • A gift coded S1301 should not be followed by circular outbound transfers from the recipient.
• For property gifts, always obtain a registered Gift Deed and pay applicable stamp duty.
  • Registration supports future sales, loan applications, and tax assessments.
• If the recipient later sells the gifted property, capital gains can be reduced by indexation and certain expenses, but the gift does not reset the cost base to current market value.

Penalties, recordkeeping, and the bottom line

• Simple errors can be costly:
  • Failure to file U.S. Form 3520 can lead to penalties starting at $10,000.
  • Domestic use of unrecorded channels can trigger issues under the Prevention of Money Laundering framework.
  • FEMA penalties for severe breaches may reach 300% of the transaction value.
• Banks advise:
  • Stick to authorized channels
  • Double‑check the purpose code
  • Save all receipts and supporting documents

The law does not try to block family care. It asks that people label the transfer correctly, keep proof, and avoid prohibited paths.

For those planning a large Gift, the safest path is:
1. Use an Authorized Dealer bank and complete Form A2.
2. Choose the correct purpose code for the remittance.
3. For property, secure a registered Gift Deed and pay applicable stamp duty.
4. Keep a thorough paper trail (bank receipts, registration, ID, declarations).

Families who plan ahead, choose a qualifying relative where possible, and maintain records usually see funds arrive without fuss—and keep the focus on what the gift was meant to be.