Friday, December 7, 2012

NRIs in US: Things to remember while giving gifts in India

Understand tax impact for Indian Americans who make gifts to persons in India.

Tax in India

Prior to 1998, gifts used to be taxed in the hands of the giver in the form of Gift Tax. However, in 1998, this Gift Tax was abolished. Subsequently in 2004, a new tax on gifts was introduced in the Income Tax Actaccording to which, tax would be levied, in certain cases, in the hands of the receiver.

According to this provision, any gifts in excess of Rs 50,000 received by an individual will be taxed in the hands of the receiver. The value of the gift would be added to the receiver's total income and tax would be calculated thereon. This includes cash gifts as well as gifts in kind. For gifts in kind, such as property, jewellery etc., the asset must necessarily arise in India and for valuation purposes, certain rules would apply:

In case of immovable property, the value will be based on the stamp duty value of the property 

In case of any other property such as shares and securities, jewellery, paintings, work of art etc., value would be based on the fair market value of such property

However, there are some exemptions to the tax on gifts:

Any gift received from a blood 'relative' is exempt even beyond the limit of Rs 50,000 ('relative' in this case is defined as spouse, brother or sister, spouse's brother or sister, parents and lineal ascendants of individual or his spouse, siblings of parents of individual or his spouse)

Gifts received on occasion of marriage are also exempt beyond the limit of Rs 50,000

Gifts received under Will or inheritance are exempt beyond the limit of Rs 50,000

In a nutshell, as an NRI, if you make gifts to people in India, the onus of paying tax in India would be on the recipients. Recipients in India who are 'relatives' would not have to pay any tax while non-relatives would have to pay tax on gifts in excess of Rs 50,000.

Tax in the US

In the US, tax on gifts is levied in the hands of the donor, so an Indian American making a gift to someone in India may attract tax in the US depending on the amount gifted. This includes cash gifts as well as property, irrespective of where the property is located. It also includes cash transfers made from the NRE or NRO account. Currently, gift tax exemption limits are fairly liberal and are as follows:

You can make gifts of up to $13,000 per gift to as many people as you like in a year without paying any gift tax. The only things to remember is that each recipient must not get more than $13,000 in the year. Also, this is an individual limit. So a couple can make gifts up to $26,000.

Example 1: You gift your mother $13,000 and your brother $13,000 in 2012. You pay no gift tax in the US.

Example 2: You gift your mother $50,000 and your brother $13,000 in 2012. $26,000 will be exempt from gift tax.

In case of gifts in excess of the $13,000 limit, you can still pay zero tax as long as you do not exceed the lifetime exemption limit. Currently, that is for 2012, up to $5,120,000 is allowed to be gifted/ bequeathed by a person during his lifetime without any tax implication. Any gifts made in excess of the $13,000 limit will be reduced from the $5,120,000 exemption limit. Anything in excess of this limit will be taxed at 35%.

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