Indian parents looking to help an NRI or OCI child buy property overseas must consider foreign exchange regulations and tax implications before transferring funds.
Such transactions are governed by the Foreign Exchange Management Act (FEMA) and the Reserve Bank of India's (RBI) Liberalised Remittance Scheme (LRS). Families must also decide whether the contribution will be treated as a gift or a loan and account for taxes, documentation and foreign exchange costs.
Here's what parents need to know before transferring money for an overseas property purchase.
How much can parents remit under LRS?
An Indian resident can remit up to $2,50,000 per financial year under LRS for permitted current account transactions, capital account transactions, or a combination of both, according to experts cited by The Economic Times. The RBI allows resident individuals to use the LRS for permitted transactions, including the acquisition of immovable property abroad, subject to applicable rules.
LRS is available to resident individuals and not entities such as companies, partnership firms, HUFs or trusts, Sadia Khan, Partner, Private Client Practice, Shardul Amarchand Mangaldas & Co, told ET.
Where both parents are eligible resident individuals, each can have a separate LRS limit of $2,50,000 per financial year, subject to applicable rules. Parents can explore a joint purchase structure using their respective LRS limits, while the NRI or OCI child's contribution can come independently from overseas resources, subject to FEMA conditions, ET reported.
What if parents need to send more than $5,00,000?
The $2,50,000 LRS limit applies per individual and per financial year, which runs from 1 April to 31 March. A set of two eligible parents can therefore have a combined limit of $5,00,000 in a financial year, subject to the applicable rules.
Shabnam Shaikh, Partner, Khaitan & Co, told ET that unused LRS limits cannot be carried forward to the next financial year. She added that any remittance exceeding the limit can be made only in the following financial year.
Gift or loan: What should parents choose?
The structure should reflect the actual intention of the transaction.
If parents do not expect repayment, the contribution can generally be documented as a gift. If repayment is intended, it should be structured as a loan.
Sudhakar Sethuraman, Partner, Deloitte India, told ET that gifts received by an individual from a parent are exempt from Indian income tax for the child, regardless of the amount.
Parents should maintain documents establishing the source and nature of the funds. These may include a gift deed, proof of the parent-child relationship, Form A2, LRS declarations, bank remittance records, source-of-funds documents and property purchase records, according to ET.
For loans, Sethuraman said that a comprehensive agreement should specify the “tenure, interest, repayment schedule, governing law, etc.” Loans to an NRI relative are also subject to applicable FEMA provisions and should be reviewed separately before implementation, he added.
How should parents transfer the money?
The remittance should be made through an Authorised Dealer (AD) bank in accordance with RBI rules.
Khan told ET that the resident remitter must designate an AD branch and submit Form A2, with PAN mandatory for LRS remittances.
The bank may also conduct FEMA and KYC checks and request bank statements, income-tax records and other documents to establish the source of funds.
Khan added that RBI permits resident individuals to make rupee gifts to NRI/PIO relatives through a crossed cheque or electronic transfer into an NRO account, within the applicable LRS limit.
However, she said this route is not advisable for acquiring overseas property, given the applicable NRO repatriation requirements.
What about TCS and other costs?
Although gifts from parents to children are exempt from Indian tax, remittances under LRS may trigger Tax Collected at Source (TCS).
Shaikh told ET that banks must collect TCS on LRS remittances exceeding ₹10 lakh in a financial year, at rates of 5% or 20%, depending on the purpose. The amount is adjusted against the parents' total Indian tax liability at the end of the financial year, she added.
Families should also account for foreign exchange costs, including exchange-rate spreads, currency conversion margins and receiving-bank charges.
Sethuraman told ET that these costs include "exchange-rate spreads charged by banks, currency conversion margins, receiving bank charges, etc."
The NRI or OCI child may also have reporting and disclosure obligations in the country where the property is located, depending on local tax and foreign-exchange laws, ET reported.