As you may be aware, unlike India, in the US, there is something known as “estate tax”. That means, any property devolving on the heirs on death carries a tax that needs to be paid from the estate. To evade this tax, people used to gift assets during their lifetime. Hence, to curb revenue loss, a federal gift tax exists that taxes any gifts made by a person in his lifetime which exceeds a certain threshold. Similarly, in India, the person receiving the gift above a certain monetary threshold has to treat it as income for the year and report and pay tax on it.
In this article, I have tried to de-complicate US and India tax rules on gifts so that you can structure your wealth transfers in the most tax efficient and compliant manner.
Tax rules on gifts under IRS tax code
Following is a summary of IRS rules on gift:
- IRS tax rules on gifts apply to only US persons.
- Gift tax applies to a US person who “gives” the gift and not the one who “receives” the gift from anyone (even a non-US person). However, if person receiving a gift is US person and gift exceeds $1,00,000, reporting is required in Form 3520. See these resources: Form 3520 (PDF) and Instructions for filling Form 3520 (PDF). This form has to be filled by April 15 every year.
- There is an annual exclusion limit of $14,000 per donee per financial year ((assuming a USD/INR rate of 67, this amount is INR 9.38 lacs). Any gift below this amount is excluded from lifetime exclusion limit and also not reportable to IRS.
- Any gift exceeding above mentioned annual exclusion limit of $14,000 per donee per financial year requires a reporting to IRS in Form 709. Refer Form 709 (PDF) and Instructions on Form 709 (PDF). This form has to be filled by April 15 every year.
- The applicable annual exclusion limit of $14,000 can become $28,000 if your spouse consents to “split” the gift in Form 709.
- If the gift is of a “future” interest in a property, then the $14,000 exclusion does not apply and even a single dollar of gift requires a 709 reporting. In other words, annual exclusions only apply to “present” interests in property.
- The gift is not taxable upto a lifetime exclusion limit of $54, 50, 000 (assuming a USD/INR rate of 67, this amount is INR 36.38 CR). Any amount over and above lifetime exclusion is taxed at the individual tax rate of 40%
- If the form has to be filled by both spouses, each spouse has to file a separate form and there is no concept of a joint return, even if they’re filing their 1040 in “married filing jointly status”
- The annual and lifetime exclusion limits mentioned above are for 2016, may be subject to inflation adjustment every year. Please check IRS website for latest limits.
- Following transactions are NOT considered as taxable gifts and, hence do not count as part of annual or lifetime exclusion limits: Charitable gifts, Gifts to a U.S. citizen spouse and Educational & Medical expenses paid directly to the provider.
Let us understand the above from the examples below:
Example 1
Ramesh, a US citizen, gave his son $20,000 to help him meet his living expenses. In this case, Ramesh must file a gift tax return in Form 709 and report that he used $5,000 ($20,000 minus the $14,000 annual exclusion) of his $545000 lifetime exclusion.
Example 2
Same facts in Example 1, except that Ramesh give son and daughter $10,000 each. Both gifts qualify for the annual exclusion as the exclusion limit applies at a donee level. Ramesh does not need to file Form 709.
Example 3
Same facts in Example 1, but here Ramesh and her spouse agree to “split” the gift—basically this means his wife agrees to let him use part of his or her exclusion for the year. In this case, exclusion limit automatically becomes $28,000. Ramesh will be required to file Form 709 indicating that his wife has agreed to split the gift. Since the gift value of $20,000 is less than revised limit of $28,000, it will not eat into couple’s individual lifetime exclusion of $545000.
Tax rules of gifts under Indian law
Unlike IRS tax code, under Indian tax law, the tax impact is on “receiver” of gift and not the “giver” of gift. Under Section 56 of the Income Tax Act, any gift received in excess of INR 50,000 (on aggregate basis in a financial year) qualifies as “income” for the receiver and has to be disclosed and tax payable in the tax return. Unlike Form 709/3520 in IRS, there is no separate reporting in India. Good point is that gift in certain situations like a gift to relative, received on marriage, or as inheritance or on contemplation of death are completely exempt.
Other Indian laws that apply to gift transactions
Under FEMA, a resident can send max. USD 2,50,000 per financial year on a donor level (assuming USD/INR rate of INR 67, this comes to something around INR 1.67 CR) through regular banking channels to close relatives under the Liberalised Remittance Scheme (LRS) of RBI. So, upto this limit, there is no RBI approval required.
Further, in case of any gift of immovable property that resides in India, as per Transfer of Property Act, the gift deed requires to be duly registered. Any transfer without registration is null and void.
Different US-India gifting scenarios & implications explained
In the below table, I have tried to capture the tax implications under both India and US law for certain situations. In the table, US refers to US person which may be a USC, Green Card Holder, resident alien, or a spouse of any of these who elects to be a “resident”. Indian refers to a person who retains Indian citizenship whether he is a resident or an NRI.
| Giver | Receiver | Giver | Receiver |
| US | Indian | Gift to spouse =<1,47,000 in a financial year: No tax and reporting implication Gift to spouse >1,47,000 in a financial year: Reporting required in Form 709 and tax impact if amount > $5450000 on a lifetime basis <$14000 per donee per financial year: No tax and reporting implication > $14000 per donee per financial year: Reporting required in Form 709 > $5450000 on a lifetime basis: Pay tax @40% on excess amount | Received from a relative: No tax implication, no reporting required irrespective of amount Received from a non-relative: Amount in excess of INR 50,000 to be disclosed as income from other sources in tax return & tax payable as per applicable tax slab. |
| US | US | Gift to spouse: No tax and reporting implication irrespective of amount. <$14000 per donee per financial year: No tax and reporting implication > $14000 per donee per financial year: Reporting required in Form 709 > $5450000 on a lifetime basis: Pay tax @40% on excess amount | No tax and reporting implication |
| Indian | US | No tax and reporting implication | No tax implication. Reporting in Form 3520 required in following situations: > $1,00,000 from individual or estate > $15,601 if received from companies/partnerships |
| Indian | Indian | No tax and reporting implication | Received from a relative: No tax implication, no reporting required irrespective of amount Received from a non-relative: Amount in excess of INR 50,000 to be disclosed as income from other sources in tax return & tax payable as per applicable tax slab. |
© CA Abhinav Gulechha www.abhinavgulechha.com
Tax planning and best practice strategies for US India gift transactions
- If you’re a USC, instead of cash gift to someone to finance tuition or medical expenses, pay directly to the education provider so that it does not count in the $14000 annual exclusion. Also, understand implications of “kiddie tax” that has significantly reduced the tax planning done to transfer assets to young family members. (I will try to cover it in a separate post)
- As a best practice, prepare a simple gift deed for any gift you make. Consult a lawyer in case you need professional help.
- Filing of Form 709/3520 marks a three year limitation period for IRS to question the valuation of property. Hence, in case of property, even if is less than $14000 exclusion, it is recommended that you file the return
- In case of educational expenses, you can pay tuition fee directly to completely exclude it from the purview of gift tax. If you want to pay for living expenses etc., then you can make an annual cash gift of upto $14,000 to the student with no tax and 709 reporting requirement. Also, there is a provision where you can make a one-time $70000 payment for 5 years provided you give a declaration that you’ll not give a donation to that person for next 5 years.
- There are penalties for non-reporting of eligible transaction in Form 709/3520 so one has to be meticulous in doing that. If you require professional help, contact a CPA.
- If you’re planning to gift an asset that is making a loss, remember that you’ll lose the set off benefit if you gift the asset. A more tax efficient approach can be to sell the asset, book the loss and then make a gift of cash/proceeds from that asset.
Soham Financial Planners Take on India-USA gifting transactions
Lot of US NRIs wish to transfer money to relatives in India. Though the payment can trigger the $14,000 annual exclusion, but very less likely to breach the $5450000 lifetime exclusion. Hence, such NRIs can gift to distribute assets to relatives back in India after meeting the 709 reporting requirement, and with a zero tax implication to such relatives given the provisions in Indian tax law. US NRI receiving gift from Indian relatives > $1,00,000 should also comply with Form 3520 reporting. To avoid an unpleasant situation in case of tax scrutiny, such NRIs are advised at all times to maintain proper documentation of source of funds and in case of transfer of immovable property situated in India, to register the gift deed in India. Last but not the least, before transferring huge amounts to relatives back in India, NRIs should also mind the social and personal aspects of the transaction. “Gift” essentially means that you lose all rights over the asset, so if those assets represent an investment corpus for your financial goals, think ten times before gifting those assets.
Hope this post helped you to get a clearer perspective of India USA taxation on gift transactions.