The gifting of assets between a person resident in India and a person resident outside India is regulated by the Foreign Exchange Management Act, 1999 ("FEMA" or the "Act") and the rules and regulations issued by the Reserve Bank of India ("RBI").
To determine whether a gift of money or assets between a resident and non-resident is allowed, and if so, what conditions apply, it is necessary to understand the nature of the gift transaction. Under FEMA, giving money as a gift is considered a current account transaction, but there are limits on the amount that can be exchanged to manage forex reserves and control excessive gifting. Conversely, giving immovable property and shares or securities as a gift is considered a capital account transaction since it affects the cross-border assets held by a resident and non-resident. This article aims to provide clarity on the subject of the exchange of gifts of immovable property whether situated in or outside India, between Persons Resident in India (PRI) and Persons Residents outside India (PROI). It is intended to highlight the set of situations that are permissible and no approvals are required from any statutory authorities.
A. Relevant Terminologies
I. Persons Resident in India
Sec 2(v) of the Act provides an extensive definition of person resident in India.
It generally refers to a person who has stayed in India for a period of 182 days in the previous financial year. However, there are exceptions to this provision falling under which a person shall qualify as a PROI.
II. Persons Residents outside India
Sec 2 (w) of the Act defines a person resident outside India as a person who is not resident in India. There are branches of a Person resident outside India .
- Non-Resident Indian ("NRI") has been defined under Rules 2(aj) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 as an individual who is citizen of India. Hence, all PROIs who hold Indian Citizenship will qualify as NRIs.
- Overseas Citizen of India ("OCI") has been defined under Rules 2(ak) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 as an individual resident outside India who is registered as an Overseas Citizen of India Cardholder under section 7A of the Citizenship Act, 1955.
- PIO Person of Indian Origin ("PIO"), in general, means a PROI who is citizen of some other country (i.e. not an Indian Citizen), if (a) he/she held at any time Indian Passport or (b) he/she or either of his/her parents or his/her grandparents was a Citizen of India or (c) the person is spouse of an Indian citizen or person referred in (a) or (b).
B. Gift of Immovable Property Based in India
Provisions of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2018 and RBI Master Circular No.02/2007-08 dated July 2, 2007, titled as 'Master Circular on Foreign Investment in India' shall be applicable for the gift of immovable property where the subject property being transferred is based in India. The various situations for gifting of such immovable property between Persons Resident in and outside India are enumerated as under-
I. Person Resident in India gifts any immovable property to a person resident outside India
In accordance with Rule 24 (b) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and Rule 3 (b) of the Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2018, immovable property in India other than agricultural land, farmhouse, plantation etc. can be transferred by way of gift to a Person Resident outside India.
The person entitled to such gift, i.e., the donee must be a relative of the person resident in India.
FEMA Act is silent on the definition of relative. Under FEMA, 'relative' is construed as that is given under Section 2(77) of Companies Act, 2013 i.e. father, mother, brother, sister, son, daughter, son's wife and daughter's husband.
No approvals from RBI are required provided the subject property be commercial or residential. Agricultural land/plantation property/farmhouse in India cannot be acquired by a person resident outside India by way of gift.
Exception: Rule 9 of the Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2018 prohibits any person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong or Macau or Democratic People's Republic of Korea to acquire or transfer immovable property in India without prior approval of RBI. This prohibition is not applicable to an OCI Cardholder.
II. Person Resident outside India gifts any immovable property to a person resident of India
According to Rule 24 (d) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, an NRI or PIO may transfer any immovable property including agricultural land, plantation property, or farmhouse in India by way of gift to a person resident in India. However, a foreign national of non-Indian origin needs prior approval of the Reserve Bank.
Therefore, NRI and PIO need not take prior approval, howbeit, a foreign national of non-Indian origin needs prior approval of the Reserve Bank for gifting any immovable property to a person resident of India when the said Property is based in India.
III. Person Resident in India gifts any immovable property to a person resident outside India and the said Property is acquired from funds earned in India.
The law is silent on the aspect of the jurisdiction from where the funds have been earned. Accordingly, no permission is required from any authority in the above case of transfer of immovable property by Person Resident in India to a Person Resident outside India and the said Property is based in India.
C. Gift of Immovable Property Based out of India
The provisions relating to gift of immovable property based outside India are covered under Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations, 2015. The various situations for gift of immovable property between Persons Resident in and outside India, when the subject property is based out of India are enumerated as under-
I. Person Resident in India gifts any immovable property to a person resident outside India
As a resident individual is permitted to acquire an immovable property outside India under Liberalised Remittance Scheme (LRS).
II. Person Resident outside India gifts any immovable property to a person resident of India
As per Regulation 5 (1) (a) of the Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations, 2000, a person resident in India may acquire immovable property outside India by way of gift from the following persons:
- A person who has acquired, own or hold such immovable property when he was resident outside India. [as per Regulation 5 (1) (a) (part 1)]
- A person who in turn has inherited it from a person resident outside India. [as per Regulation 5 (2)]
Therefore, no permission from any authority is required if Person Resident outside India gifts any immoveable property to person resident of India and the said Property is based out of India, is he had acquired or held or inherited it as per the above provision.
III. Person Resident in India gifts any immovable property to a person resident outside India and the said Property is acquired from funds earned outside India.
The law is silent on the aspect of the jurisdiction from where the funds have been earned.
However, it is provided that as per Regulation 5 (2) of the Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations, 2000, a person resident in India may acquire immovable property outside India by way of gift from a person who in turn has inherited it from a person resident outside India.
Accordingly, it is concluded that no permission is required from any authority in the above case of transfer of immovable property by Person Resident in India to person resident outside India and the said Property is based out of India.
It is important to note that any violation of FEMA regulations could result in penalties and legal consequences, so it is advisable to seek professional guidance and follow the prescribed procedures while gifting immovable property located outside India.
D. Tax implications on gift
Gifts within specified limits are not taxable. Similarly, gifts received from relatives are not taxable. For the taxability aspect, the definition of relatives under the Income Tax Act, 1961 shall follow. 'Relative' as per Section 56 (2) (VII) of the Income Tax Act, 1961 means the following: -
(i) In the case of an individual—
- spouse of the individual;
- brother or sister of the individual;
- brother or sister of the spouse of the individual;
- brother or sister of either of the parents of the individual;
- any lineal ascendant or descendant of the individual;
- any lineal ascendant or descendant of the spouse of the individual; spouse of the persons referred above;
(ii) In case of a Hindu undivided family, any member thereof.
In case, the Immovable property for which the Stamp Duty Value ("stamp duty value" means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property;) of Property ≥INR 50,000, it is subject to taxation. The entire stamp duty value shall be the quantum taxable in the hands of the recipient.
E. Closing Thoughts
It is important to consider the tax implications of gifting in both India and foreign country. If there is any uncertainty about how the law applies in a particular situation, it is possible to seek approval from the RBI before proceeding with the transaction. Failing to comply with the regulations could result in the compounding of offenses and penalties under both the Foreign Exchange Management Act and the Income Tax Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
