How Much Tax Do You Have To Pay If Your NRI Relative Transfers Foreign Funds To You?

Money sent by non-resident Indians (NRIs) for different purposes is treated differently in taxation than that of other citizens. For common citizens, if any money is received and the aggregate value is above Rs. 50,000, the income is taxable for the recipient. However, as per the provisions of the Income Tax Act, if the recipient is a relative of the sender, as defined in the law, the same amount is not taxable in India.

The income tax act defines a ‘relative’ for an individual as spouse, brother or sister, brother or sister of spouse, brother or sister of either parent, lineal ascendant or descendant, lineal ascendant or descendant of spouse, or spouse of any of the above-mentioned relatives. For the purposes of gifting to any of the individuals, the money or asset will not be taxable in India.

Accordingly, if the money is transferred by any such relative to you from an overseas bank account to your Indian account, the amount will not be taxable for you. Such a transfer will be considered a gift from the relative. However, any income arising out of the money or assets transferred to you is clubbed under Indian tax laws and taxed in the hands of the relative who gifted the money.

In this case, if you are investing the gifted amount in Indian assets and earn a return on those investments, then the amount earned will be clubbed and taxed in the hands of your NRI relative at applicable rates. Since the relative is an NRI, only income sourced and received in Indian shall be taxable under Indian tax laws. Any income generated from investments in India will be taxable for NRIs. Also, note that Purpose Codes and KYC are vital. For gifts, the code P1301 (Personal gifts and donations) is commonly used to ensure transparency with the Reserve Bank of India (RBI).

However, if you reinvest the subsequent income from these investments, then the tax burden falls on you instead of your NRI relative. While bank transfers are exempt, Section 269ST of the Income Tax Act prohibits receiving Rs 2 lakh or more in cash from a single person in a day or for a single transaction. Violating this can lead to a penalty equal to the amount received.

The money sent by NRIs to relatives as a ‘gift’ does not have an upper limit in the eyes of the Foreign Exchange and Management Act. However, NRIs transferring money must comply with KYC norms, purpose code declaration on whether the asset is given as a gift or a loan, and use authorised channels to transfer the amount, such as dealer banks, to maintain transparency. The taxability and reporting requirements should be checked when one receives such an amount.

Additionally, foreign exchange regulations must be adhered to in such transactions. You should also go through tax agreements and laws applicable to different countries, and consider any double taxation that arises before such a transaction.