Parents funding NRI child’s home abroad? Know LRS limit, TCS, tax rules | Personal Finance
For Indian parents helping an NRI or OCI child buy a home overseas, a major constraint is how to send money. The transfer has to fit within the Reserve Bank of India’s Liberalised Remittance Scheme (LRS), with FEMA rules determining what parents can remit and how the transaction should be structured.
A resident individual can remit up to $250,000 in a financial year, from April 1 to March 31, under the LRS. If both parents are resident Indians and eligible to remit, their individual limits can potentially be used, taking the combined amount to $500,000 in a year. However, this is not an additional property-purchase limit: Any other LRS remittances made during the same financial year reduce the amount available for the property.
“Resident Indian parents who want to help an NRI (Non-Resident Indian) or OCI (Overseas Citizenship of India) child buy property abroad must do so within the Foreign Exchange Management Act (FEMA) and RBI guidelines,” says Shaishavi Kadakia, partner, Cyril Amarchand Mangaldas. The LRS limit is personal to each resident individual and cannot be pooled from non-individual entities such as companies, LLPs, trusts or partnership firms, she adds.
Can both parents pool their LRS limits?
Yes, subject to the applicable FEMA conditions and the ownership structure.
If both parents are resident individuals, each can use their own $250,000 LRS limit. The parents could therefore contribute up to $500,000 in a financial year, provided neither has already exhausted part of their limit through other LRS transactions.
The child’s own contribution can come separately from overseas resources. In a co-ownership arrangement, the parents’ remittances and the child’s contribution should be clearly documented.
“Funding a child’s overseas home is often treated as a family matter, but in law it is a regulated capital account transaction, and the paper trail matters as much as the money,” says Manu Kumar Jha, associate, PSL Advocates & Solicitors.
Importantly, an unused LRS limit does not carry forward to the next financial year. So, if a parent remits $150,000 during one year, the remaining $100,000 cannot simply be added to the following year’s limit.
Gift or loan: Decide before sending money
Parents should decide whether the money is a gift or a loan before making the transfer. The documentation and tax consequences can differ depending on the structure.
If the money is genuinely a gift, the parent should maintain evidence of the relationship, a gift deed or declaration, source of funds and bank remittance records.
A genuine gift from a parent is generally not taxable in the child’s hands under Indian income-tax rules because parents fall within the specified-relative category. However, the country where the child lives or where the property is located may have separate gift, inheritance, estate or reporting rules.
“If the contribution is intended as a gift, proper documentation of the gift, relationship and source of funds is important. The loan should also be backed by a clear loan agreement,” says Shashank Agarwal, founder, Legum Solis.
A loan, meanwhile, creates an obligation to repay. The agreement should specify the loan amount, tenure, interest, repayment schedule and other relevant terms.
B. Shravanth Shanker, managing partner, B. Shanker Advocates LLP, says the transaction “cannot be viewed purely as a family arrangement” because FEMA, RBI remittance rules and tax implications need to be considered together.
How should the money be remitted?
The transfer should be routed through an Authorised Dealer (AD) bank. The bank will require the prescribed declarations and documentation, and PAN is mandatory for LRS remittances.
Parents should keep a complete trail showing where the money came from and where it went. This can include bank statements, income-tax records, Form A2, remittance certificates, the gift or loan agreement and property-purchase documents.
Madhura Samant, managing partner, Elarra Law Offices, says families should decide the gift-or-loan structure upfront and ensure that the required declarations are made through an authorised bank.
Don’t overlook TCS and foreign tax
TCS is another cashflow issue parents need to account for. The bank collects TCS on applicable LRS remittances above the prescribed threshold. The amount collected can generally be claimed as tax credit in the parent’s Indian income-tax return, subject to the applicable rules.
There are also costs that do not appear in the property’s advertised price. These can include foreign-exchange conversion spreads, bank charges, taxes and registration costs in the destination country and any local reporting requirements.
What if the parent is a co-owner?
This is where documentation becomes particularly important.
Parmeet Singh, advocate, Delhi High Court, says any direct or beneficial interest that a resident parent has in an overseas property can create additional Indian tax and disclosure obligations.
If the parent is a co-owner, the overseas immovable property may have to be disclosed in the parent’s income-tax return under Schedule FA, subject to the applicable reporting requirements. Similarly, where a parent lends money and earns interest, that income has to be considered for Indian tax reporting.
Singh warns that inconsistencies between bank records, property documents and tax returns can create problems under India’s foreign-asset disclosure framework.
“Any non-disclosure of a foreign asset, inaccurate disclosure of beneficial ownership, unexplained source of investment, failure to report foreign income or inconsistent statements between bank, property and tax records can attract the provisions of the Black Money Act,” he says.
Settle the ownership, gift-or-loan arrangement and source of funds before the first remittance. As Shashank Agarwal puts it, the remittance, documentation and ownership structure should be planned together rather than treated as a simple overseas money transfer.
