A sum of money received without consideration, is deemed to accrue or arise in India
For non-residents, only the income which is received or accrued or which is deemed to have been received or accrued in India is taxable in India. A few years back, the Income Tax Act was amended and gifts in excess of Rs 50,000 received by a person became taxable in the hands of the recipient. This is applicable to gifts in the form of money, immovable property, shares and securities, bullion and few other types of assets. In the case of a non-resident, the gift of immovable property, shares and securities etc. became taxable since the gifted assets are in India. So, the gift transaction was completed in India and it satisfied the condition of income received in India.
Changed tax rules
However, gifts received by non-residents by way of remittance from India were not chargeable to tax in India since the gift transaction was complete only when the money was received by the non-resident in a foreign bank account outside India. So the income in the form of gift of money remitted from India was neither received in India by the non-resident nor accrued in India nor was it deemed to have been received or accrued in India. It was therefore not chargeable to tax in India in the hands of the non-resident.
Under the Liberalised Remittance Scheme (LRS) formulated under the Foreign Exchange Management Act (FEMA), a resident Indian can remit amount up to $250,000 a year for various purposes mentioned in the LRS. This includes remittance towards gift, donation, maintenance of close relatives etc. Under this scheme, a resident can remit to a non-resident by way of gift even if the non-resident was not a relative of the person remitting the money. Earlier, such a gift was not taxable in India in the hands of the non-resident.
With a view to plug this loophole, the law has been amended. It is now provided that the sum of money received without consideration, is deemed to accrue or arise in India. With this change in the law, gift received by a non-resident by way of remittance from India would be chargeable to tax in India.
However, a gift received by non-resident, if it is from certain specified relatives, is not treated as income and is not chargeable to tax in the hands of the non-resident. So if a father remits a large sum of money by way of gift to his son or daughter who has settled abroad, the gift will not be taxable in India in the hands of the non-resident daughter or son. Father falls under the list of relatives and a gift from the father is not treated as income in the hands of the recipient.
If the gift becomes taxable since it is from a person who is not a relative, there are other consequences as well. When a person makes a payment of any taxable income to a non-resident, the payer has to deduct or withhold tax at source from such payment. Since the gift would be taxed as income, the payer will have to obtain a Tax Deduction Account number (TAN), deduct tax, fill up forms showing the tax deduction while remitting the funds and file a return for the tax deducted. The non-resident recipient, on his part, will have to file income tax return in India, declaring his/her income.
While this is the position under the Income Tax Act, the income by way of gift may still escape taxation if India has an agreement (treaty) with the country in which the recipient of the gift is a resident and such an agreement does not grant India the right to tax `other income,’ i.e., income other than income specifically mentioned in various clauses of the treaty. Income by way of gift will generally fall outside the scope of such clauses, giving India the right to tax. In such a case, the provision of the tax treaty will prevail over the provision of the Income Tax Act and the amount will not be taxable in India. There are many countries with which India has signed treaties that do not give India the right to tax `other income.’
A change in the law that deems the receipt of money as accruing in India will also apply to receipts by non-resident entities who may not be individuals. A donation made to a non-resident charitable organisation or a donation to your college or university as an alumnus would come under the amended provision and will be income of the non-resident charitable organisation, college or university taxable in India. But if there is a treaty between India and the other country, the donation escapes taxation in India.(The author is a Chartered Accountant and views are personal)Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.