FEMA Implications on NRI Gift Transactions: A Scenario-wise Analysis

Lot of times NRIs wish to make a gift to their relatives or friends or a reverse way, a resident wants to send money overseas to NRI relatives. It is here that very few people know that such transactions are regulated under FEMA.

Under FEMA, RBI has delegated compliance responsibility to the Authorised Dealer Banks to approve the transaction or not. In practical situation, many a times, there is a difference of opinion between banks too – one bank may be ready to allow your transaction while other bank is not.

Note that this article is for gift transactions. If you need clarity on loan transactions, check my article – FEMA Implications on NRI Loan Transactions: A Scenario-wise Analysis

Please note: This is my own interpretation of FEMA & there can be different interpretations as well so in your interest, please discuss with your bank and then proceed.

Please note that all though this post, I have used following acronyms:

• ROI = Person Resident Outside India,
• RI = Person Resident in India,
• AL = for Asset Liability
• ITD: Income Tax Department

If you are not clear on your residential status as per FEMA, please first read this post: NRI Definition: FEMA Act VS Income Tax Act

Applicable FEMA regulations on Gift Transactions under FEMA

Following FEMA regulations apply here. All these are available at RBI website Link

1. FOREIGN EXCHANGE MANAGEMENT (CURRENT ACCOUNT TRANSACTIONS) RULES, 2000
2. FOREIGN EXCHANGE MANAGEMENT (PERMISSIBLE CAPITAL ACCOUNT TRANSACTIONS) REGULATIONS, 2000
3. FOREIGN EXCHANGE MANAGEMENT (BORROWING AND LENDING IN RUPEES) REGULATIONS, 2000
4. FOREIGN EXCHANGE MANAGEMENT (BORROWING AND LENDING IN FOREIGN EXCHANGE) REGULATIONS, 2000
5. FEM (deposit) regulations, 2016
6. FOREIGN EXCHANGE MANAGEMENT (remittance of assets) REGULATIONS, 2016-10-20 16
7. Master direction on liberalised remittance scheme
8. Master direction on other remittance facilities
9. Master direction on deposits and accounts
10. Master Direction on BORROWING AND LENDING transaction in Indian rupees by person resident in India and non resident indians/person of indian origin

Various scenarios on NRI Gift transactions and allowability under FEMA

Nowlet us discuss one by one various scenarios and applicability of FEMA provisions to those transactions. If I have missed any scenario, please let me know, I will incorporate it.

Scenario 1 – Mr. A (ROI) wants to give a gift to Mr. B (RI) in INR by transferring Rs. 1 lac from his NRE account in India to resident account of Mr. B.

1. In this case, the AL position of Mr. A in India changes with this transaction hence it is a capital account transaction for Mr. A. For Mr. B, there is no change in AL position outside India and hence it is a current account transaction for Mr. B
2. The transaction is permissible vide clause (e) of Schedule II of FEM (Permissible Capital Account Transactions) Regulations, 2000 (note: in my view, though the term mentioned is “deposits”, a harmonious construction of scheme of FEMA will also mean gift)
3. The transaction is not prohibited vide FEM (Current Account Transactions) Regulations, 2000

Points to note:

1. As per FEM (Deposit) Regulations, Mr. A can use any account (NRE/FCNR/NRO) to make payment to a resident account of Mr. B
2. Regulations do not expressly prohibit gift from a PIO or even a foreign national.
3. There is no condition that gift has to be from an ROI who is close relative.  However, please bear in mind that if donee’s case is selected in IT scrutiny, the ITD may look at a gift from stranger (even a friend) very suspiciously & the onus of establishing the genuineness of the transaction will be on donee, not on the ITD. Read more on that here – Gift by NRI to Resident: Be aware of Section 68 of Income Tax Act

Scenario #2: Mr. A (ROI) wants to give a gift to Mr. B (RI) by transferring USD 10,000 from his Citibank USA checking account to Mr. B’s checking account in same bank.

1. In this transaction, the AL position of Mr. B changes outside India & hence it is a capital account transaction for Mr. B.
2. The transaction is not permissible as per Schedule I of FEM (Permissible Capital Account Transactions) Regulations, 2000

Points to note:

Here, it needs to be understood that RBI does not allow overseas account to account transfer between ROI and RI even for a gift: Mr. A need to transfer the funds to Mr. B’s Indian account & then Mr. B can re-transfer it out of India as per LRS limits of USD 250000. So, as per my understanding, RBI wants you to take a long cut and will not allow you to take this short cut.

Scenario #3: Mr. A (RI) wants to give a gift to Mr. B (ROI) by transferring INR 10,00,000 from his resident savings account in ICICI Bank to Mr. B’s checking account in Citibank USA.

1. In this case, there is no change in AL position of Mr. A as well as Mr. B hence it will be a current account transaction.
2. The transaction is not prohibited vide FEM (Current Account Transactions) Rules, 2000
3. As per Master Direction on Liberalised Remittance Scheme, Mr. A can give a gift of max. USD 2,50,000 in a financial year.  Bank may ask for certification in Form 15CB from a CA for this remittance to ensure that proper tax has been paid on these funds in India – read more about that here – Form 15CA/CB compliances by NRI: Procedure and Issues

Points to note:

1. There does not seem a prohibition to give a gift to a PIO or a foreign national.
2. It does not seem necessary that a close relative relationship exists between donor and donee. Hence, giftto an NRI friend will be allowed. However, as discussed above, ITA implications on non-relative gifts need to be kept in mind.

Scenario #4: Mr. A (RI) wants to give a gift to Mr. B (ROI) by transferring INR 10,00,000 from his resident account in ICICI Bank India to Mr. B’s NRO account in ICICI Bank India

1. In this case, there is a change in AL position of Mr. B in India hence it will be a capital account transaction for Mr. B.
2. The transaction is specifically allowed vide clause (e) of Schedule II of FEM (Permissible Capital Account Transactions) Regulations, 2000
3. As per Master Direction on Liberalised Remittance Scheme, Mr. A can give a gift of max. USD 2,50,000 in a financial year.  Bank may require Form 15CB certification from a CA – read more about that here – Form 15CA/CB compliances by NRI: Procedure and Issues

Points to note:

1. Even a foreign national/PIO can maintain an NRO account in India. Thus, a gift to even a foreign national/PIO (and not just NRI) should be allowed.
2. It does not seem necessary that a close relative relationship exists between donor and donee. Hence, gift to an NRI friend will be allowed. However, as discussed above, ITA implications on non-relative gifts need to be kept in mind. Read more on that here – – Gift by NRI to Resident: Be aware of Section 68 of Income Tax Act

Scenario #5: Mr. A (RI) wants to give a gift to Mr. B (ROI) by transferring USD 10,000 from his checking account in Citibank USA to Mr. B’s checking account in Citibank USA.

1. In this case, there is a change in AL position of Mr. A outside India hence it will be a capital account transaction for Mr. A.
2. The transaction is not specifically allowed vide Schedule I of FEM (Permissible Capital; Account Transactions) Regulations, 2000
3. As per Master Direction on Liberalised Remittance Scheme, Mr. A can give a gift of max. USD 2,50,000 in a financial year. 

Points to note:

In my view, since there is no explicit mention in Capital Account Regulations, an RI cannot do this transaction and if done, it will be a contravention of FEMA. I am not sure how many RIs will be aware that by doing this, they may end up on the wrong side of FEMA.  I strongly suggest that you should seek a prior approval/clarification from RBI before conducting such a transaction & don’t assume that everything is allowed.

Scenario #6: Mr. A (ROI) wants to give a gift to Mr. B (ROI) by transferring INR 10,00,000 from his NRE/NRO account in ICICI Bank India to Mr. B’s NRE/NRO account in ICICI Bank India.

1. In this case, the AL position of Mr. A as well as Mr. B in India changes with this transaction hence it is a capital account transaction.
2. The transaction is NOT expressly permissible under Schedule II of FEM (Permissible Capital Account Transactions) Regulations, 2000.
3. FEM (Deposit) Regulations though specifically allow a transfer to another ROIs’s NRE account as one of the permissible credits in NRE.

This is a grey area in FEMA. In my view, such a transaction is not allowed. If the Authorised Dealer bank has no problem with it, it is absolutely fine. If AD bank has an objection, if you still wish to go ahead, I will advise you to seek a specific prior approval of RBI. Another workaround that Mr. A can do an overseas to overseas bank account transfer to Mr. B which we’re going to discuss in the next scenario.

Scenario #7: Mr. A (ROI) wants to give a gift to Mr. B (ROI) by transferring USD 10,000 from his checking account in Citibank USA to Mr. B’s checking account in Citibank USA.

1. In this case, AL position of Mr. A as well as Mr. B in India does not change with this transaction hence it is a current account transaction.
2. The transaction is not specifically prohibited under FEM (Current Account Transactions) Rules, 2000.
3. There is no specific provision/restriction in FEMA rules for doing this transaction.

In my view, since both Mr. A and Mr. B are ROI and there are no INR funds involved here, you can go ahead without any restriction from FEMA.

Scenario #8: Mr. A (RI) wants to give a gift to Mr. B (RI) by transferring INR 10,0,000 from his resident savings account with ICICI Bank in India to Mr. B’s resident savings account in ICICI Bank in India.

1. In this case, AL position of Mr. A as well as Mr. B in India does not change with this transaction hence it is a current account transaction.
2. The transaction is NOT restricted by any FEMA rules and regulations

Hence, you can proceed to carry out this transaction as there is no restriction in FEMA. 

Scenario #9: Mr. A (RI) wants to give a gift to Mr. B (RI) by transferring USD 10,000 from his checking account with Citibank USA to Mr. B’s checking account with Citibank USA

1. In this case, AL position of Mr. A as well as Mr. B outside India changes with this transaction hence it is a capital account transaction.
2. The transaction is NOT permissible under Schedule II of FEM (Permissible Capital Account Transactions) Regulations, 2000.

In my view, this transaction is not allowed under FEMA & in such a situation, if you still wish to go ahead, I will advise you to seek a specific permission of RBI.

Important Note from an Income Tax Act perspective

There is the Income Tax Act (ITA) angle that you need to ensure: even after transfer of funds, borrower/donee has to maintain sufficient documentation to prove that the credits to the account were genuine funds and not some bogus entries. I have written separate posts on taxation as below, you can also check that –

• Tax implications of “gift transactions“
• Gift by NRI to Resident: Be aware of Section 68 of Income Tax Act

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