Last Updated on – July 23, 2025
The cross-border movement of funds between Indian parents and their children residing in the United States often appears simple at first glance. After all, if the transfer is a gift, there is no tax in either India or the U.S., right? Unfortunately, it’s not that straightforward. With India’s evolving foreign exchange and tax reporting landscape and the U.S. Internal Revenue Service’s (IRS) extensive foreign asset disclosure regime, a casual transfer of funds could trigger unwanted scrutiny, penalties, or delays in remittance.
This article delves into the practical and legal considerations when Indian parents gift funds to a U.S.-resident child, particularly where the gift involves sale proceeds of inherited or self-acquired Indian property.
1. Understanding the Gift Framework: India to U.S.
In Indian tax law, gifts to relatives (which includes children) are not treated as taxable income under Section 56(2)(x) of the Income-tax Act, 1961. On the U.S. side, gifts received from non-resident aliens (such as Indian-resident parents) are not taxed either. However, they do attract information reporting requirements, particularly under Form 3520.
In the US, there is only one state i.e. Connecticut that taxes receipt of gifts but the there is a threshold of
$13,990,000 which is very high.
So while the gift itself is practically tax-free in both countries, the process of transferring the gift, especially when it involves sale proceeds of Indian property, is where things get complicated—mainly due to FEMA & Tax Regulations and certain U.S. reporting requirements.
2. The Tricky Part: Repatriation and the LRS-TCS Nexus
When Indian parents wish to remit funds to their U.S.-based child, they often do so from a resident savings bank account. Many believe that transferring to the child’s Non-Resident Ordinary (NRO) account does not fall under LRS. However, in my view, even this constitutes a remittance under LRS, and 20% TCS applies under Section 206C(1G) of the Indian Income-tax Act.
This is supported by how banks and authorised dealers interpret the law post-Budget 2023 changes. A transfer from a resident account to an NRO account—even though both accounts may be in India—ultimately aims at foreign remittance, which is the trigger point for LRS applicability. There is no regulatory exception under FEMA or the Income-tax Act that spares such intra-India transfers from TCS if their end-use is foreign remittance.
Furthermore, transferring directly from a resident Indian account to a foreign bank account (say, the child’s U.S. bank account) is not permissible under FEMA for gifts. The RBI has clearly stated under the LRS Master Direction (RBI/2015-16/86, Master Direction No. 7/2015-16) that gifts to a close relative abroad must be routed through a designated NRO account of the recipient.
3. Recommended Route: NRO Channel + Documentation
Here is a step-by-step view of a compliant process:
Step 1: Gift Transfer to NRO Account
- Parent gifts funds to U.S.-resident child’s NRO account in India.
- This transaction is subject to 20% TCS under Section 206C(1G), which the bank deducts before processing the LRS transfer.
- Parent will be required to file Form 15CA/CB if the remittance amount is above INR 5 lakh, or as per bank’s internal policy. A local CA can easily handle this.
Step 2: Repatriation from NRO to U.S. Bank Account
- Child can repatriate up to USD 1 million per financial year under Schedule III to FEMA (Remittance of Assets) Regulations, 2016.
- For repatriation, the bank will typically require:
- Form 15CA/CB
- Proof that funds are from a legitimate source (e.g., sale deed in case of sale of property)
- Gift deed from parent
The process, while document-heavy, is straightforward for a CA familiar with cross-border compliance.
4. Key Compliance Issues in the U.S.
While the funds may have cleared Indian tax and FEMA hurdles, U.S. compliance obligations persist.
a) Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts):
- Required when a U.S. tax resident receives gifts or bequests from foreign individuals exceeding USD 100,000 in a calendar year.
- Must be filed separately from Form 1040.
- Failure to file may lead to penalties of up to 25% of the gift amount.
b) FBAR (FinCEN Form 114) and Form 8938 (FATCA):
- If the child holds Indian bank accounts exceeding USD 10,000 (for FBAR) or other thresholds under IRC §6038D (for Form 8938), disclosure is mandatory.
- Penalties for non-filing are significant, even for unintentional errors.
c) Tax Return Disclosures in India:
- The U.S.-based child should file an Indian tax return (even if not taxable) and disclose the gift under Schedule EI (Exempt Income).
- This supports the repatriation request and demonstrates proper compliance if questioned by Indian authorities.
5. The Importance of a Gift Deed
Many individuals overlook the need for a gift deed, assuming family ties are self-evident. However, a written gift deed, even if executed on plain paper or e-stamped, offers documentary evidence in case of any FEMA scrutiny, tax authority queries, or future estate planning disputes.
The gift deed should mention:
- Donor and donee details (with PAN and passport)
- Nature of relationship
- Amount and purpose of the gift
- Declaration that it is given without consideration and not under duress
A notarised document is preferable but not strictly necessary for a financial gift. It may be signed in India or in the U.S., depending on where the parties are based.
A format of gift deed can be accessed here
Some finer points:
- Section 9(1)(viii): Deems any sum of money paid ≥₹50,000 by a resident to a non-resident or even RNOR to accrue/arise in India—unless it is a qualified relationship under Section 56(2)(x), the gift is taxable in India in the hands of the donee even if has been credited abroad.
- Be very sure on whether the relationship is a covered relationship under Section 56 to exclude the income from tax. If it is not, gift is still exempt till INR 50,000 or you need to wait for specific occasions like marriage, etc. wherein gift from a non-relative is also exempt.
- Irrespective of the fact that gift is exempt, the income Tax Authorities can still tax it under Section 68 if the identity and capability of donor to give the gift is not established.
- LRS limits presently are $250000 but are subject to change and have been changed in the past. So one should not rely on these limits as being sacrosanct.
- If a resident sends funds under LRS for purpose of gift and parks it in a overseas bank account, that may not be allowed by RBI except for a very short period. Ultimately the funds need to be transferred to the donee’s bank account.
- Care should be taken to gift the funds only via banking channels. Using unauthorised channels like Hawala or crypto can be treated as serious violations under FEMA.
- While gifting care should be taken to use reputed and RBI-approved money transfer services like Wise, Remitly etc. to avoid instances of fraud/loss of funds.
- Donor being a non-resident alien of US and gifting non-US situs property is generally not obliged to file Form 709 for gift of assets to a US resident. However, if gift is of US situs tangible property exceeding $19000 which may attract gift tax liability, a Form 709 filing may be required. As per IRS guidance here, Form 709-NA is under development and till then, it is advised to file using Form 709.
- In the FEMA regulations, there is no bar on a resident to gift funds to a non-resident who is not a relative to donate to an organisation out of India.
- When making a outward remittance, the resident should mention clearly the purpose code for gift which is generally S1302: Remittance towards personal gifts and donations. If money is sent outside with a purpose code for say gift and then invested by resident himself, in my view that will be a violation of FEMA – in that case, right approach can be to bring back the funds and then remit again.
- Gifting of overseas assets by resident is clearly not a permitted capital account transaction & not allowed under FEMA. However, whether the money is sent under LRS, can those funds be gifted to a non-resident remains a grey area. Lately there are news reports of RBI questioning such transactions. A safer approach can be to repatriate the funds back to India and re-send (however the downside is that it will count towards $250000 per year limit)
- In the case of Huang vs United States link to judgement , the Court overturned the penalty levied by IRS on late filing of Form 3520 stating that reliance on Turbotax explicitly advising non-filing of the Form 3520 counts towards “reasonable cause” for non-imposition of penalty.
6. Final Thoughts: Transparency and Compliance Are Critical
In conclusion, while gifting funds from an Indian parent to a U.S. child is legally permissible and tax-neutral, the route and documentation are critical for avoiding regulatory friction. The key risks lie not in the taxation of the gift itself, but in procedural non-compliance—with FEMA, the Indian Income-tax Act, and the U.S. Internal Revenue Code.
Key Takeaways:
- Use the NRO account route for such remittances.
- 20% TCS under LRS applies, even for transfers to NRO.
- Ensure Form 15CA/CB compliance on both the parent and child’s side.
- Repatriation from NRO is limited to USD 1 million per year and must be supported by documents.
- In the U.S., file Form 3520 and disclose Indian bank accounts via FBAR/Form 8938.
- Draft a simple gift deed to formalize the transaction.
While every situation may involve unique nuances—especially in cases involving jointly held property, inherited assets, or dual taxation issues—following the above framework ensures that a simple familial gesture does not lead to a complex regulatory headache.
Copyright © CA Abhinav Gulechha. All Rights Reserved. No part of this post can be reproduced without prior written permission of CA Abhinav Gulechha. The content of the post is for general information purposes only & does not constitute professional advice. For any feedback on this article, please write to contact@abhinavgulechha.com. For any India-US Crossborder Tax questions, please feel free to post on https://www.reddit.com/r/IndiaUSTax/