But the reality is that this transaction sits inside a specific regulatory framework: India’s Foreign Exchange Management Act (FEMA) and the Reserve Bank of India’s (RBI) Liberalised Remittance Scheme (LRS), and getting the structure wrong can create tax and compliance headaches for both parent and child.
Here’s what families need to know about how much parents can send, whether the money should be structured as a gift or a loan, how the remittance should be routed, and what hidden costs to budget for.
Can Indian parents directly fund their NRI/OCI child’s overseas property?
Indian resident parents can legally fund the purchase of an overseas property by their NRI/OCI child, subject to compliance with FEMA and the RBI LRS.
“Under LRS, a resident individual may remit up to USD 250,000 per financial year for permissible current account transactions, capital account transactions, or a combination of both,” says Sudhakar Sethuraman, Partner, Deloitte India.
“The LRS is available to resident individuals and not to entities such as companies, partnership firms, HUFs, or trusts,” says Sadia Khan, Partner, Private Client Practice, Shardul Amarchand Mangaldas & Co.
Therefore, where both parents are eligible resident individuals, each may have a separate LRS limit of USD 250,000 per financial year, subject to the applicable rules.
The parents may also explore a joint purchase structure in which resident parents use their respective LRS limits to jointly acquire the overseas property with their NRI/OCI child, subject to the applicable FEMA conditions and the child’s independent contribution, if any.
“In other words, the Indian resident parents are capable of clubbing their LRS limits [up to USD 500,000 (United States Dollars Five Hundred Thousand)] to purchase a foreign property as co-owners along with their NRI/OCI child, where the child shall contribute independently from their own overseas resources,” says Shabnam Shaikh, Partner, Khaitan & Co.
This means that the parents’ contributions would be subject to their individual LRS limits, while the NRI/OCI child’s contribution would come independently from their overseas resources.
What if parents need to send more than USD 500,000?
The LRS limit of USD 250,000 (United States Dollars Two Hundred and Fifty Thousand) applies to each individual for each financial year (i.e., from 1st April to 31st March).
“Accordingly, in any given financial year, a set of parents will each have an LRS limit of USD 250,000. Any unused or absolutely utilised LRS limit in a financial year cannot be carried forward to the subsequent financial year. So, any remittance over and above the limit can only be undertaken in the next financial year,” says Shaikh.
Gift or loan: What should parents choose?
The choice between a gift and a loan should be driven by the parties’ intention and the underlying facts. Where there is no expectation of repayment, the contribution is commonly documented as a gift.
Conversely, where repayment is intended, the arrangement should be structured and documented as a loan.
“From an Indian income-tax perspective, a gift received by an individual from a parent falls within the exemption available for gifts received from specified relatives and is therefore not taxable in the hands of the child in India, irrespective of the amount gifted,” says Sethuraman.
However, if the contribution is intended as a gift, parents should maintain documents that establish the nature and source of the transaction.
According to Sethuraman, these would generally include:
- Gift deed or written gift declaration;
- Evidence of the parent-child relationship;
- Form A2, LRS declarations, bank remittance records etc.
- Source-of-funds documentation demonstrating the parent’s financial capacity;
- Overseas property purchase records; and
- A clear audit trail showing the flow and utilisation of funds.
Maintaining this documentation can help establish the source and nature of the funds if the transaction is subsequently examined by a bank, tax authority or other regulator.
Where the contribution is structured as a loan, additional regulatory and practical considerations arise.
“A loan creates a legally enforceable obligation to repay and should therefore be supported by a comprehensive loan agreement setting out the terms of the arrangement like tenure, interest, repayment schedule, governing law, etc,” explains Sethuraman.
Loans by a resident individual to an NRI relative are subject to the applicable FEMA provisions governing financial transactions with non-residents and should be reviewed separately to confirm compliance before implementation. The arrangement should reflect genuine lender-borrower intent and be capable of enforcement.
It is also important to note that while a gift from parent to child is generally not taxable in India, the tax treatment in the country where the NRI or OCI child resides and where the property is located should be separately examined, as certain jurisdictions may impose gift reporting, gift tax, inheritance tax, estate tax or similar disclosure obligations.
How should parents remit the money for overseas property purchase?
If the Indian resident parents are sending money overseas under LRS, the remittance should be made through an Authorised Dealer (AD) bank in accordance with the applicable RBI rules.
“The resident individual remitter is required to designate an AD branch through which the remittance is made and furnish Form A2, with PAN being mandatory for LRS remittances,” says Khan.
The AD bank is also required to undertake the necessary FEMA and KYC checks and may seek bank statements, income-tax records and other documents to establish the source of funds, she adds.
The bank may seek such declarations and information as it considers necessary to ensure that the transaction does not involve a contravention or evasion of FEMA.
“It may not be out of context to note that RBI also provides an additional facility to resident individuals to make a rupee gift to an NRI/PIO who is a relative of the resident individual by way of crossed cheque /electronic transfer, where the amount should be credited to the Non-Resident (Ordinary) Rupee Account (NRO) a/c of the NRI / PIO within the overall limit of USD 250,000 per FY as permitted under the LRS for a resident individual,” says Khan
If the funds are subsequently to be remitted overseas from the NRO account, the applicable NRO repatriation conditions and limits would need to be complied with. That said, since the intention of such remittance in the present case is acquisition of property overseas by the NRI/ OCI children of the remitters, the said route is not advisable, she adds.
What other costs should parents and their NRI/OCI child consider?
Gifts from a parent to their child (irrespective of the residency of the child) are Indian tax-exempt.
“However, remittances under LRS require the Authorised Dealer (i.e., the bank remitting the funds) to collect ‘Tax Collected at Source’ (TCS) if the remittance exceeds INR 1 million in a financial year, at the rate of 20% or 5% depending upon the purpose. This TCS is adjusted against the Indian resident parents’ total tax liability at the end of the financial year,” says Shaikh.
Families should also budget for foreign exchange-related costs, which are often overlooked.
“These include exchange-rate spreads charged by banks, currency conversion margins, receiving bank charges, etc.,” says Sethuraman.
The NRI/OCI may also have reporting and disclosure obligations in the country where the property is acquired, including disclosures relating to the receipt of gifted funds, ownership of real estate, and foreign-source funding, depending on local laws and regulations.
