NRI sending money to parents in India? This one mistake could trigger an income tax notice

Many non-resident Indians (NRIs) send money to their parents in India, but even genuine family remittances can attract scrutiny from the income tax department if the transaction is not properly documented.

A large transfer into a parent’s bank account could prompt questions about the source and nature of the money.

This instance was highlighted by a case where a US-based NRI’s ₹11 lakh transfer to his parents led to an income tax notice, which he contested for six years before the Income Tax Appellate Tribunal (ITAT) quashed it in May this year.

Why proper documentation is important?

While money received from an NRI child is not automatically taxable in the parent’s hands, it is important to maintain documents that establish where the money came from and why it was transferred.

If a clear trail is not maintained, even a legitimate family transfer could lead to an income tax notice and other unnecessary complications.

Cross-border remittances are regulated under the Foreign Exchange Management Act (FEMA), 1999, while operational guidelines are issued by the Reserve Bank of India (RBI).

Banks also require every inward remittance to be tagged with the correct purpose code, which helps identify why the money is being sent to India. It can include reasons such as family maintenance, investments, property purchases, educational expenses or NRE deposits.

An incorrect or missing purpose codes can result in processing delays or additional verification by banks.

Are gifts from NRIs subject to tax?

Money sent by an NRI to specified relatives, including parents, spouse, children and certain other family members, is fully exempt from tax under the Income-tax Act. There is no upper monetary limit on such gifts.

However, the rules are different when you receive gifts from people who do not qualify as specified relatives, such as friends or colleagues. If an individual receives gifts exceeding ₹50,000 in a financial year, then the entire amount may be taxable in the recipient’s hands, as per income tax law.

Is there any limit on family remittances?

There is no general upper limit on personal remittances sent by NRIs to India through authorised banking channels. Such transfers can be made for purposes such as family support, medical expenses, investments or savings, without seeking prior RBI approval. However, the source of funds should be legitimate and the transaction must comply with FEMA regulations.

However, the country from which the money is sent may have its own reporting limits, foreign exchange rule and disclosure requirements. So one should always check their residing nation’s regulations before sending money to India.

An NRI can send or hold funds in India through two different banking routes:

• NRE account: It is typically used for holding foreign income in India and offer fully repatriable funds along with tax-free interest in India.
• NRO account: It is meant to hold income that earned in India through rent, investments or pension, and the interest earned is subject to tax.
• FCNR account: This allow NRIs to maintain deposits in designated foreign currencies, helping reduce exchange-rate risk.

One must also know that the rules are different when a resident individual in India sends money abroad to their family members. Under the Liberalised Remittance Scheme (LRS), a resident can remit up to $250,000 in a financial year. Additionally, there is no prescribed limit on the number of remittances.