Receiving money from your NRI relative? How to use it and its taxation
India is one of the top countries with the largest diaspora residing in nations like the UAE, the US, and Saudi Arabia. We all have that one friend or a relative living abroad who regularly sends money back to India for family maintenance, investments, medical care, education, and more.
Such inward remittance is governed by the rules of FEMA (Foreign Exchange Management Act). In this blog we tell you if there are any restrictions on the usage of such money, and explains the taxation of such amounts in the hands of the recipients.
The following questions have been answered by Aditya Chopra, Managing Partner, Victoriam Legalis – Advocates & Solicitors.
Are there any restrictions on the usage of inward remittances?
When family members abroad send money to India, it falls under the category of inward remittance. According to the Foreign Exchange Management Act (FEMA) and as per the Reserve Bank of India (RBI), these remittances are subject to certain guidelines to ensure legitimate and smooth transfers.
There are generally no restrictions on how the funds received through inward remittance can be used, allowing recipients considerable flexibility. The funds can be utilized for various purposes, such as personal expenses, including household needs, education, and medical bills; investments in property, stock markets, or other financial instruments; and savings in bank accounts.
The main channels for inward remittances in India are the Rupee Drawing Arrangement (RDA) and the Money Transfer Service Scheme (MTSS).
Rupee Drawing Arrangement (RDA) is a channel to receive cross-border remittances from overseas jurisdictions. Under the RDA, there is no limit on the amount of inward remittances for personal purposes, and the funds must be directly credited to the beneficiary’s bank account. However, for trade-related transactions, there is an upper cap of Rs 15 lakhs.
On the other hand, under the MTSS, each inward remittance is limited to $2500, and a beneficiary can receive a maximum of 30 remittances per calendar year. These transactions generally happen through agents in India. Only remittances towards family maintenance and remittances favouring foreign tourists visiting India are allowed under MTSS. Direct donations/contributions to charitable institutions/trusts, trade related remittances, remittance towards purchase of property, investments or credit to NRE Accounts are not allowed through this route.
How is the money received through an inward remittance taxed?
The taxation of inward remittances received in India is determined as per the Income Tax Act, 1961. Generally, personal gifts received from specified relatives are exempt from tax under Section 56(2)(x) of the Act, making such remittances non-taxable in the hands of the receiver.
If the funds are received as a loan or for investment purposes, they may not be directly taxable, but any income generated from these funds, such as interest or capital gains, will be subject to tax.
However, if the remittance is considered as income, such as salary or professional fees, it will be taxed according to the applicable income tax slabs for the recipient. For instance, if an individual receives a salary from an employer abroad, it is taxable as per their income tax bracket in India. Additionally, the Double Taxation Avoidance Agreement (DTAA) between India and the country of origin can provide relief by ensuring that income is not taxed twice. For example, if income earned abroad is taxed there, the DTAA can help avoid its taxation again in India, thus preventing double taxation.
To ensure compliance and proper tax treatment of inward remittances, it is advisable to maintain thorough documentation and consult a tax professional.
