M N Sethi is a Non-Resident Indian with relatives in India. Owing to a flourishing business, he is interested in gifting a house in India to his nephew. However, he is not sure about the taxation on such a transaction owing to his NRI status.
Let's take this as an example to learn more about taxes associated with such a transaction with regard to NRIs.
No special permission is required for an Indian citizen residing outside India to acquire (by purchase or gift) any immovable property in India other than agricultural land, plantation property or a farmhouse.
Therefore, Sethi can buy a house in India as easily as any resident Indian.
Also, for an NRI, there is no permission required to transfer (whether by sale or gift) immovable property in India. One important factor to keep an eye out for is the gift tax and income tax.
Under the Gift Tax Act, 1958, gift tax was payable by the donor up to September 30, 1998. The Gift Tax Act has been repealed with effect from October 1, 1998 and therefore the Gift Tax is not chargeable for the gifts made on or after 1st October, 1998. However, a new provision was inserted in the Income Tax Act 1961 under section 56 (2) which provides that if the gift is received by an Individual or Hindu Undivided Family (HUF) from any relatives or blood relatives or at the time of marriage or as inheritance or in contemplation of death and the aggregate of gifts received exceeds Rs 50,000 in a year, the gift will be taxable as 'income from other source'.
The Explanation to Section 56(2)(vi) provides that the expression "relative" means:
- 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; and
- Spouse of the person referred to in clauses (ii) to (vi)
There is no restriction on gifts by NRIs to resident Indians in foreign exchange or Indian Rupees or in the form of assets -- in this example, the house. All sorts of gifts from relatives (as defines under Income Tax Act) are tax free.
All that is required is an offer by the donor and acceptance thereof by the receiver in black and white. To safeguard against any hassles, the receiver should request the donor for a gift and then the donor should remit the amount to the receiver.
Alternatively, the donor can offer the gift. In either case, it is necessary for the receiver to accept the gift in writing (maybe through a thank you note).
Also, the provisions relating to taxation of gifts from non-relatives and non-specified persons in excess of Rs 50,000 would be liable to income tax only when the gift is a sum of money, whether in cash, by way of cheque or a bank draft.
Thus, gifts in kind such as a gift of shares, gift of land, gift of house, gift of units or mutual funds, jewellery, etc. would not be liable to any income tax at all.
Therefore, Mr. Sethi or his nephew would not pay any 'gift tax' or income tax for such a transaction.