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Rediff News  All News  » Business » Money sent to parents in India is tax-free

Money sent to parents in India is tax-free

June 05, 2009 13:03 IST

A N Shanbhag, the highly respected investment guru, and his son Sandeep Shanbhag, answers your questions on NRI investment.

A new Rediff India Abroad feature:

Five years ago I lent Rs 15 lakh (Rs 1.5 million) -- not all at once -- to a friend. Now that he has some cash in hand after selling one of his properties he is planning to give it to me. He will be transferring this amount in bits and pieces into my NRO account.

I wish to buy a property and need to pay the builder. Can I use the money that I lent? Is this money coming into my NRO account taxable? What if I take it as and when he deposits the funds? Please clarify.

-- Rathi

A resident individual, partnership or proprietorship firm may borrow in rupees on non-repatriable basis from an NRI if:

  • The term of the loan does not exceed three years;
  • The loan is being utilised to meet the borrower's personal requirement or business needs, and not for re-lending; and
  • The rate of interest does not exceed 2% over bank rate.

If you have documentary evidence of a loan given to your friend consistent with the above norms, we do not see any problem.

However, if you do not have the necessary documents, the loan you have given to your friend will be considered a gift. Consequently, he cannot return the amount to you, treating it as repayment of loan.

If that is the case, the only recourse available is for your friend to give a gift to you.

A resident can give a gift to an NRI/ PIO up to $200,000 per financial year.

An NRI rented his shop in India (Jaipur) to a friend. For TDS purposes the payer is demanding PAN card from the payee (ie, the NRI). I have the following queries:

1. Can the NRI apply for a PAN card?

2. What consequences will the NRI face if the payer fails to deduct the TDS or, even after deducting, he is not depositing the same?

3. What will be the tax implications on the NRI? Can he file his return?

-- Rohit Bakliwal

Yes, NRIs can apply for a PAN (Permanent Account Number) card. If the payer fails to deduct TDS (tax deduction at source) or, after deducting, he has not deposited the same in the government's account, it is the payer's liability and not that of the payee NRI's.

As far as the NRI is concerned, his only obligation is the correct payment of taxes. If TDS has been applied, he needs to pay only the additional tax, if any, over and above the TDS.

If the total income before deductions of an NRI is above Rs 1.50 lakh (Rs 150,000), he has to mandatorily file an income tax return in India. This is irrespective of the fact whether TDS has been deducted or not.

May I request you to kindly give your views on:

Whether interest earned on RFC fixed deposits (foreign & Indian currency) in banks is taxable under the Indian Income Tax Act. Kindly let us know the provisions, ie section and sub-section under FEMA, which exempt interest earned by RFC deposits from income tax.

My humble understanding on the subject is that RFC deposits and FCNR are both governed by FEMA and therefore interest on these should also be free of Indian income tax.

If interest on RFC deposits is taxable, there is no advantage at all. There should not be any differentiation or discrimination between the two deposits as the source for both is earned outside India as an NRI.

-- K S Kumar

Tax incidence on any stream of income, including that from the RFC (Resident Foreign Currency) account, interest is decided by the Indian Income Tax Act. The Foreign Exchange Management Act does not involve itself with taxes, it has more to do with rules and regulations with respect to repatriation, remittance, investments, etc.

Regarding taxability of interest on RFC, note that the same is tax-free under Section 10(15)(fa) of the Income Tax Act.

I was working in India till May 5, 2008. After that I was deputed to Sweden on work permit visa and have not returned to India since then. Will I be considered a resident in India for Assessment Year 2009-10?

As per my understanding, I will be considered a non-resident in India as I was supposed to be present in India for 182 days or more to be considered as a resident. However, will I be covered by the clause person going abroad for employment purposes, even if I am going there on work permit or business visa?

-- Ankur Chhapolika

Your understanding is correct. Since for the year 2008-09 (AY 09-10) your stay in India will be less than 182 days, you would be considered an NRI.

Going abroad on a work permit or a business visa is itself considered as going abroad on employment. In other words, were you travelling on a tourist visa or any other visa that prohibits you from working, you would not be considered as going abroad on employment and hence not eligible for the NRI status based on the above rule.

I am an NRI (US residence) holding an NRE account in Mumbai. I am planning to transfer money from this NRE account into my mother's (who is an Indian resident) regular savings account, also in the same branch. I have the following questions:

1. I believe that this amount is tax-free without any limits. But can you please confirm this for me?

2. Since I will lose repatriability on this amount, is there any other legitimate way of sending money out of India to relatives abroad. For example, I have heard that one is legally allowed to send up to $25,000 per year abroad. Is this true? If so, how would that be reflected on my mother's IT return? Also, what are the tax implications for me?

-- Mohnish

1. Yes, the amount that you transfer to your parents is tax-free without any limit.

2. As per Master Circular, dated July 1, 2006, Indian residents are allowed to remit abroad up to $100,000 per annum for maintenance of close relatives. You will be a close relative of your parents as per the law and hence this should take care of your requirements.

Also, as per latest AP Dir Circular, the $25,000 limit that you refer to has been increased to US$200,000 per financial year and this includes gifts. Therefore, an Indian resident may send as much as $300,000 per annum abroad out of which $100,000 is necessarily to close relatives.

You gifting a sum of money to your mother or vice versa is tax neutral as per current Indian tax laws.

A N Shanbhag & Sandeep Shanbhag