How NRIs overseas save more on taxes when sending money back home as gifts or investments

NRIs often send money to their relatives as a ‘gift’, as the amount is fully exempt from income tax for both sender and the recipient.

There’s a high probability that Indians living abroad for work may miss out on taxation and compliance of rules that apply when sending money back home, either to support their family or payment of loans and investment premiums.

Even if your relative’s income is below the taxable limit, it would be prudent to keep records and know the purpose code for each transaction. You can be summoned by the income tax department or even face penal action for failure to comply.

Treatment of gift to relatives by NRI overseas

When a resident of India having a valid passport leaves the country to work, they are considered as non-resident Indians (NRIs) provided their stay abroad has been for more than 182 days in a financial year.

All NRI transactions including their investments in India are governed by Foreign Exchange and Management Act (FEMA), which regulates and facilitates trade and payments to and from foreign countries.

NRIs often send money to their relatives as a ‘gift’, as the amount is fully exempt from income tax for both sender and the recipient. Under FEMA, relatives can be parents (including step-father and step-mother), spouse, son and daughter-in-law, daughter and son-in-law, siblings as well as step brother, step sister and their spouse.

Notably, money sent by NRIs to their relatives as ‘gift’ does not have an upper limit, but there is a mandatory KYC compliance, purpose code declaration (such as gift, or loan), and usage of authorized channels (like dealer banks, SWIFT) to ensure transparency.

Usually, financial institutions handling transactions are responsible for ensuring documentation, collecting donor identity information, and seamless transactions. However, the taxability and reporting requirement needs to be checked by such Indian recipients.

“If the transfer is made to a relative as defined in Section 56(2)(x), the amount is fully exempt from tax in the recipient’s hands, irrespective of value. The remitter has no income-tax liability on the transfer, but TCS under Section 206C(1G) applies at 20 percent if the total foreign remittance during the year exceeds Rs 10 lakh,” said Suresh Surana, a Mumbai-based chartered accountant in a written reply.

On the other hand, monetary support or gift by NRIs to a non-relative individual residing in India will be taxable if the amount exceeds Rs 50,000.

Also read | Job Switch or Move Abroad? Your NPS account rides with you

Treatment of money transferred by NRIs for investment

Other than gifts as monetary support to their relatives, NRIs can send money back home directly to financial institutions and insurance companies for the purpose of investments, or payment of loans and insurance premiums.

Financial experts recommend NRIs to open non-resident external (NRE) accounts, or foreign currency non-resident (FCNR) accounts to avail of benefits, such as tax exemptions on interest earned from investment like fixed deposits, seamless repatriation of funds upon return, to name a few. Indian banks facilitate NRIs to open an NRE account that automatically converts foreign currency into rupee when the transfer is made from abroad.

NRE accounts also facilitate NRIs to invest in real estate or buying land, or investing in stocks and mutual funds, among others. It is, however, important for NRIs to understand tax rules that apply while investing in various market-linked instruments.

The interest earned on NRE savings or fixed deposits is fully tax-free under Section 10(4)(ii) of the Income Tax Act. Whereas, tax deducted at source (TDS) will apply on redemption, depending on the investment type.