When are gifts received by NRIs subject to tax, TDS in India?

What would be the taxability of the gifts received in India by a Non-Resident Indian (NRI) for income tax purposes? Read on to find out. Further, when does TDS applicability come into play for NRIs.

Ayush relocated with his wife from India to Germany a couple of years ago to take up a job there. They recently visited India to introduce their new-born child to family and friends. Not surprisingly, their new bundle of joy got plenty of gifts from friends and family such as jewellery from paternal grandparents, government bonds in the name of the child from the maternal grandparents, cash gifts from friends. The cash so received was deposited in Ayush's bank accounts both in India and abroad etc.

What would be the taxability of such gifts in India given that Ayush qualifies as a Non-Resident Indian (NRI) for income tax purposes? Read on to find out.

Taxability of gifts under the Indian income tax law

The Indian income tax laws relating to taxability of gifts are the same for Resident Indians and NRIs. However, if an NRI is involved in the gift transaction (giver/receiver) then additional tax laws may apply.

Under the Indian income tax law, any sum of money or any property which is received without consideration or for inadequate consideration (more than the prescribed limit of Rs 50,000) is taxable in the hands of the recipient under the head "income from other sources". Such income is taxable at applicable tax rates in the year of receipt. Property would include immovable property, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art and bullion. Other items like motor cars or electronic appliances are not included within the scope of 'property' for this purpose but expensive watches with diamonds or gold are included.

The scheme of taxability of gifts can be tabulated as follows:

The tax rules were temporarily relaxed for the period 12 November 2020 until 30 June 2021 for computation of taxable value of 'gift' of immovable property for inadequate consideration. As per the relaxed rule, the variance of 10% was increased to 20% if the immovable property was a residential unit which is held as stock-in-trade by the seller and the transfer is by way of first time allotment to the buyer and the consideration for transfer does not exceed Rs 2 crore.

Furthermore, if the date of agreement for acquisition of immovable property and date of registration is not the same, the stamp duty value on date of agreement can be reckoned provided some part of the consideration has been paid through banking or digital channel on or before the date of agreement.

When gifts received are not taxable as per Indian income tax law

There are multiple exceptions to the above scheme of taxation. Gifts from specified persons or on specified occasions are not taxable. For example, gifts received from a "relative" or on marriage or by way of inheritance or under a will is not taxable. Also, receipt by a trust from an individual for the exclusive benefit of relatives of the individual is also exempt. Apart from spouse, the term "relative" includes: brother or sister, brother or sister of the spouse, brother or sister of either of the parents, any lineal ascendant or descendant, any lineal ascendant or descendant of the spouse, spouse of any of the persons referred to above.

It may be noted not all life events are covered for exemption. For instance, while gifts received on marriage are not taxable, gifts received on other occasions like birthdays or anniversaries are not exempted (unless received from specified relatives). Also, there is no reciprocity on the definition of 'relative'. For instance, gift received from father's brother (uncle) is not taxable, but gift received from brother's son (nephew) is taxable.

Taxation of gifts received by NRIs

At the outset, let us clarify that the Indian income tax laws regarding gifts, as discussed below, apply to all non-residents (NRs) which includes Non-resident Indians (NRIs) as a subset.

NRIs are taxable on gifts received in India or accruing or arising in India or deemed to accrue or arise in India. There was an ambiguity on taxability of gifts received outside India by NRIs. Accordingly, Finance Act, 2019 (No. 2), introduced provisions to clarify this. As per the new provisions any sum of money received on or after July 5, 2019, without consideration outside India by a NRI from a "Resident" will be considered as deemed to accrue or arise in India and taxable in India unless it is covered under the situations where gifts are not taxable in India as mentioned above.

The taxability of gift of sum of money where the giver/recipient is an NRI can be summarised as follows:

Thus, as a Non-Resident, gifts received by Ayush from his "relatives" (as defined above) will not be taxable in India. This is because in this case the relatives fall in the specified relatives category and the gifts will not be taxable as per Indian income tax law. Also, gifts received outside India from foreign friends will not be taxable in India as Ayush is a Non-Resident.

However, gift of money received in India from his friends or non "relatives" (relatives not in the specified category of relatives) in India will be taxable in India. In addition, due to the amended provision, gift of sum of money received by Ayush directly into his bank outside India from his friends or non "relatives" in India will also be taxable in India (exception if aggregate value is not more than the prescribed limit of Rs 50,000).

Benefit under the applicable tax treaty

Income which is taxable as "income from other sources" is likely to be covered under the "Other Income" clause of applicable tax treaties. Few tax treaties such as those with countries such as UAE, Sweden, Germany, Hungary, Switzerland give exclusive right of taxation of other income (except specific incomes like lottery, horse race, gambling, etc) to the country of residence. In such cases, exemption from income-tax may be claimed under the applicable tax treaty. However, there are some tax treaties such as those with Canada, US, UK, France which give the right of taxation to India if it arises in India. The language of the applicable tax treaty should be thoroughly examined before claiming any benefit under the tax treaty.

Thus, for gifts taxable in India, Ayush may evaluate benefit under the "Other income" clause of India -Germany tax treaty. He will also need to get a tax residency certificate from German Tax Authorities to substantiate his residential status under the India-Germany tax treaty.

Impact of new rules to determine residential status:

One of the important conditions to claim benefit under a tax treaty is that the individual should qualify as "Resident" of the other country (i.e., not India) as per the applicable tax treaty. If an individual qualifies as a "Resident" of both the countries covered under the tax treaty (as per their respective domestic tax laws), the 'Tie Breaker Rules' should be applied (in the order in which they are provided in the tax treaty) to determine the residential status of the individual in favour of one country.

Effective financial year (FY) 2020-21, two new conditions have been added to determine residential status in India, i.e., the deemed residency rule and the 120-day rule. These new conditions impact the residential status in India for an individual who is an Indian citizen or a person of Indian origin (PIO). As a result the Indian citizen or PIO, who would have otherwise qualified as "Non-Resident" of India, would now qualify as "Resident but Not Ordinarily Resident" (RNOR) of India.

Prior to introduction of these new rules, an individual (Indian citizen) who would qualify as Non-Resident in India and "Resident" of Germany could have claimed non-taxability of gifts received from India. But if such individual now qualifies as RNOR of India under the new rules, the tie breaker rules of the India-Germany tax treaty will come into operation as the individual will now qualify as "Resident" of both India and Germany. After applying the tie breaker rules, if he qualifies as "Resident" of Germany, gifts received from India will not be taxable in India. But if he qualifies as "Resident" of India, he will be liable to tax on gifts received from India.

TDS on gifts given

In case of gifts given by "Resident" to another "Resident", there is no withholding tax obligation on the gift giver. However, in case of gift given by a "Resident" to a "Non-Resident" or "Non-resident" to a "Non-resident", withholding tax (Tax deduction at source) obligations will be applicable if the gift is taxable in India (assuming no benefit can be claimed under the tax treaty).

In such a case, the gift giver will be required to comply with procedural withholding tax obligations such as obtaining Tax Deduction Account Number (TAN), deduct withholding tax, file withholding tax returns and issue withholding tax certificate to the gift recipient.