Managing taxation in India can be complex for NRIs. Apart from income tax, several indirect tax provisions, regulatory laws, and compliance requirements impact NRIs, especially when dealing with gifts, investments, property transactions, foreign assets, and cross-border fund transfers. This blog provides a comprehensive overview of critical tax and regulatory frameworks affecting NRIs in India, including Gift Tax provisions under the Income Tax Act, Security Transaction Tax, the Benami Transactions Act, the Prevention of Money Laundering Act, the Black Money Act, and the Foreign Contribution Regulation Act. Understanding these laws is essential for effective tax planning, compliance, and risk mitigation.
Gift Tax
Transfer of any asset without consideration or with inadequate consideration is called a gift. The Gift Tax Act has been abolished but tax on gifts has been introduced indirectly in the Income Tax Act. Currently, there is no tax for the gift giver, but any gift of over Rs. 50,000 is treated as income under the head ‘Income from Other sources’ and charged to income tax as regular income for the gift receiver. If the gift amount is up to Rs. 50,000, the gift is exempt from tax. However, if the gift is more than Rs. 50,000, the entire amount is included as income. For the gift of assets, movable assets are valued at their fair market value and immovable assets are valued at their stamp duty value.
Gifts that are exempt and not taxable
The following gifts are exempt and not taxable:
- Gift from a close relative
- Gift on occasion of own marriage
- Gift under a will or as inheritance
- Gift from any local authority
- Gift from any foundation, trust, education or medical institutions
- Gift from any charitable trust or institution
Clubbing provisions will apply for gifts to a spouse, minor child and daughter-in-law.
From July 5, 2019, the taxability of any gift to a non-resident would be determined by origin (India) and not destination (resident country of NRI). And, any taxable gift of money or property to NRI would be deemed to accrue or arise in India and would become taxable in India. From April 1, 2023, any gift to Not Ordinary Resident would also be deemed to accrue in India and taxed if more than Rs. 50,000 during the year. However, the gift from the close relatives would continue to be exempt from income tax in India.
It is important to have the gift properly documented on a paper that includes the name, address, PAN of the donor and donee, relationship, etc. Also, the gift should be out of love and affection towards the donee. It should also include an offer by the donor and acceptance by the donee with their signatures. It is advisable to prepare and register the gift deed for any gift of immovable property, pay the stamp duty and get the property transferred in the name of the donee. An NRI should also consider the gift tax laws and compliance procedures in their country of residence before giving or accepting a gift from residents, whether relative or not.
Security Transaction Tax (STT)
STT is a tax on any buy or sell transaction in securities through a recognized stock exchange. STT is applicable to any buy or sell transaction of shares, derivatives (futures and options) or equity-oriented mutual fund units. STT does not apply to any debt instruments, debt mutual fund units or any off-market transactions.
Purpose of STT
In India, shares and derivative instruments are traded on the stock exchange, but investors may not disclose the capital gain on these transactions in their return of income and thereby avoid paying income tax. This results in a loss of revenue to the government and also increases the supply of unaccounted money in the economy. STT addresses both these issues and helps better regulate the financial markets. Not only did the government introduce STT, the government kept the rates of STT very low and gave tax incentives to genuine investors. On a security subject to STT, short term capital gain is taxed at the rate of 20% instead of a slab rate. Please see Income Tax-Capital gain for more details.
STT rates and applicability
STT rates vary by securities and are applicable on equity transactions, equity mutual funds, and derivatives. STT is deducted at source by the broker or asset management company and is adjusted in the price of the security at the time of buy or sell transaction. The total cost of purchase would increase and net sale consideration would decrease by STT amount. However, STT is not deductible in calculation of capital gain. Finance Act (No. 2) 2019 restricted application of STT only to the difference between settlement and strike prices in case of exercise of option.
Benami Transactions Act and Property Risks for NRIs
A Benami transaction is a transaction where the legal owner and payer of a property transaction are two different persons. The Benami Transactions Amendment Act, 2016 is an amendment of the older Benami Transactions Act 1988 and is effective from November 1, 2016.
What constitutes a Benami Transaction
As per the revised Act, a Benami transaction includes:
- A transaction where a property is transferred to one person for a consideration paid or provided by another person, subject to specified exceptions
- A transaction carried out in a fictitious name
- A transaction where the owner of the property is not aware of or denies knowledge of such ownership
- A transaction where the person providing the consideration is not traceable or is fictitious
Any transaction where possession of any immovable property is taken as a part performance of a contract is not a Benami transaction if the contract is registered and consideration as well as stamp duty have been paid.
Penalties under the Benami Act
Anyone found guilty of entering into a Benami transaction would be liable for both financial penalty and imprisonment:
- Financial Penalty of up to 25% of the fair market value of the property
- Rigorous imprisonment for minimum of 1 Year to maximum of 7 year.
If anyone gives incorrect information or explanation in response to any inquiry to any authority,
- Financial penalty up to 10% of the fair market value of the property, and
- Rigorous imprisonment of minimum 6 months to maximum of 5 years
Prevention of Money Laundering Act (PMLA)
The objectives of Prevention of Money Laundering Act, 2002 (PMLA) is to prevent money-laundering, prevent channelizing of money into illegal activities and economic crimes, penalize offenders and confiscate property involved in money laundering. The Enforcement Directorate is responsible for investigating the offenses of money laundering. The PMLA imposes obligations on banking companies, financial institutions, and intermediaries and persons carrying on a designated business or profession, to verify identity of clients, maintain records and furnish information to Financial Intelligence Unit – India (FIU-IND). NRIs/PIOs/OCIs should avoid cash transactions in India, especially in acquisition and transfer of immovable properties in India. They should use official banking channels for transferring money in and out of India and should not be involved in the hawala transactions.
Black Money Act and Foreign Asset Reporting
Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 deals with the problem of black money or undisclosed foreign assets and income and imposes tax and penalty on such income. It aims to bring back the income and assets held abroad back to India. An Ordinary Resident is required to report his/her foreign assets and income while filing income tax return in India. Any income or assets not reported in the income tax return may be claimed as Black Money.
The Black Money Act is mainly related to Indian residents as NRIs are not required to pay tax on foreign income in India or report foreign assets while tax return in India. However, Finance Act (No. 2) of 2019 expanded the scope of the Black Money Act to include non-residents with retrospective effect from 1st July, 2015. As a result, action can be taken against current NRIs, who were residents at the time of acquisition of the undisclosed properties or bank accounts before changing the status to non-resident.
The Act would also apply to ex-NRIs who have returned to India permanently after having earned income and have assets outside India. They would need to report the foreign assets and income in the income tax return when their residential status is changed to Ordinary Resident, even if they are a citizen of a foreign country.
Foreign Contribution Regulation Act (FCRA)
The Foreign Contribution (Regulation) Act (FCRA) regulates the acceptance and utilization of foreign contribution by individuals or associations or companies. The primary purpose of FCRA is to consolidate the law on foreign funds and to prohibit acceptance and utilization of foreign contribution or foreign hospitality for any activities detrimental to national interest. The Act defines foreign contribution as “donation, delivery or transfer made by any foreign source”, be it Indian or foreign, or any article valuing more than the stipulated value. The interest accrued on foreign contribution is also included.
FCRA makes it mandatory for all associations, groups and non-governmental organizations that intend to receive foreign donations to register under the Act. The registration is valid for five years and needs to be renewed before expiry. An annual return detailing the utilization of the foreign funds is required to be submitted. For non-compliance with FCRA rules, the organization may be penalized or registration can be canceled. It may also have to face prosecution under FCRA.
For any NRI/ PIO / OCI, making any contribution to any association in India, it is advisable to check the status of organization’s registration on the website before making the contribution.
Why professional NRI Tax services matter
Indian tax and regulatory laws governing NRIs are wide-ranging and interconnected. Gift taxation, investment taxes, property ownership rules, money laundering regulations, foreign asset reporting, and foreign contribution laws together create a complex compliance landscape. ExpertNRI provides specialized NRI tax services in India, helping ensure correct interpretation of laws, proper documentation, accurate reporting, and protection from penalties, prosecution, and long-term legal exposure. Structured planning and compliant execution are essential for safeguarding wealth, investments, and family transfers across borders.
