Tax treatment of cash transfer (gift/loan) by NRI to parents (and potential return gift in future)

Tax queries 981 views 5 replies

Venkat

Newbie

43 Points Joined January 2023

I am an NRI with some cash balance maintained in my Savings Accounts (NRE and NRO accounts) in India. The source of funds is remittance from my salary income received outside India. I have paid tax on this salary income abroad (via TDS in that country). Interest received on the funds in NRO account is also taxed in India via TDS.

Now, I am facing two problems:

1. My NRO and NRE accounts become inactive/dormant from time to time as I don't have regular transactions in India.

2. As an NRI, the minimum term of FDs is 1 year. I don't want to lock up the funds for so long, so I am currently leaving this cash in my savings account, which is giving me very little interest

I am considering transferring these funds to my parents (either father or mother, or partially to both) and they can then make payments for any of my ad hoc expenses that arise in India. They can also keep the funds in FDs for shorter duration and at higher interest rate as senior citizens.

What are the tax implications in this sort of transfer?

1. Will my father/mother have to pay tax on the amount that I transfer to them?

2. Should I transfer this as a gift or as a loan (maybe interest-free) so they have proof of origin of the funds? If yes, does this need to be done via gift deed or a loan agreement on stamp paper?

3. If my father/mother return the money to me at a later date, will I need to pay tax on this as I will be the recipient of funds?

4. Considering tax implications for me (e.g. if parents return the money in the future), is it preferable to document my transfer to parents as a gift or is it better to do it as a loan to my parents (so that any future transfer from them to me will be clearly seen as a return of this amount)?

5. Is there any limit to the amount of cash that can be transferred like this?

Thank you for your guidance on this.

Replies (5)

shivam bhatia

231 Points Joined August 2017

It can be transferred as a gift and there will be no tax implications on it. And I think there is no limit.
But individual have to mention the amount in ITR in the exempt income column.
No tax implications on returning the money but mention it in exempt income.

sabyasachi mukherjee

27930 Points Joined May 2017

Sec 56 (2) exceptions

Venkat

Newbie

43 Points Joined January 2023

Originally posted by : sabyasachi mukherjee
	Sec 56 (2) exceptions

Thank you for your responses. Such transfer (and potential return) appears to be exempt under Sec 56(2) (x) exemptions.

If transferring as a gift, should I do a gift deed to document the transfer on stamp paper? Does this gift deed need to be registered?

Also, just in case the regulations change in the future and any return of this money from my parents to me would attract tax in the future, can I do it as a loan to them now, so if and when they return the cash, it can be clearly seen as a return of loan and not as a fresh taxable income in my hands at that point?

CA Raj Doshi

Practising CA

8944 Points Joined December 2013

1. No if we show it as a loan

2. If it's a loan, no need of any document.

3. No tax as it is return of loan. Any additional amount returned back to you could be treated as gift from parent to child - tax free

4. Definitely loan

5. No such threshold. But ideally you should upto 10 lakh FDs per PAN

Final advice, instead of interest free loan, you can keep very low interest rate so there is good defence even in litigation in case. E.g loan advanced at 2% p.a but further invested in FDs at 7% p.a

Regards
CA. Raj Doshi
R C D & Co.
Chartered Accountants

Venkat

Newbie

43 Points Joined January 2023

Originally posted by : CA Raj Doshi
	1. No if we show it as a loan2. If it's a loan, no need of any document. 3. No tax as it is return of loan. Any additional amount returned back to you could be treated as gift from parent to child - tax free 4. Definitely loan5. No such threshold. But ideally you should upto 10 lakh FDs per PAN Final advice, instead of interest free loan, you can keep very low interest rate so there is good defence even in litigation in case. E.g loan advanced at 2% p.a but further invested in FDs at 7% p.aRegardsCA. Raj DoshiR C D & Co.Chartered Accountants

Thank you sir - appreciate your clear guidance.

One query about the loan agreement/document - you have mentioned above that "if it's a loan, no need of any document" but wouldn't it be advisable to document this on a Rs 100 or Rs 200 stamp paper in order to have defence in case of any litigation/queries from authorities?

Also, while searching online for this, I came across this comment from an article:

"Our exchange control laws also restrict loans between Indian residents and non-resident Indians (NRIs). A resident can accept a rupee loan only from a non-resident Indian or a person of Indian origin, and not any other non-resident, and that too, for a period not exceeding three years, and with interest restricted to a rate of 2% over the bank rate.

A resident can give a rupee loan to an NRI relative, but with various restrictions—it has to be interest-free, for a minimum amount of one year and the amount of loan cannot exceed certain limit, among other restrictions."

Source: MINT article "opinion-taking-a-loan-from-a-relative-is-not-that-simple" dated 25/03/2019 (unable to link here due to some forum restrictions on URL)

Hope this MINT article information is accurate.

Now, since:

- I am an NRI

- the loan under consideration is a rupee loan

- I'm not planning to charge more than a small token interest (that too for defence against litigation as you have advised)

It appears that the only other restriction I should take care of is the 3 year term.