FEMA compliance and tax tips for spousal gifts in India
A resident Indian is permitted to retain funds or investments made outside India if such funds were held or the investments made when the person was a non-resident. But on any other income received outside India, the funds would have to be repatriated to India within 180 days.
I am a retired foreign citizen with an OCI card and a tax resident of India, and have been filing annual returns, including foreign pensions credited to my Indian account, regularly. My wife, an Indian citizen and homemaker, has no income and is not a taxpayer. Can I transfer funds from abroad to her as a gift or by selling investments, insurance maturity funds, or pension payouts? If yes, what will be the tax implications for her, and can she invest the funds in bank FDs, equity funds, or property?
—Name withheld on request
At the outset, such a gift needs to be in compliance with the Foreign Exchange Management Act (FEMA), 1999. Under FEMA regulations, a resident Indian is permitted to retain funds or investments made outside India if such funds were held or the investments made when the person was a non-resident. However, in respect of any other income received outside India, the regulations require the resident to repatriate the funds to India within 180 days.
In this case, your wife, who is a resident under FEMA, would be required to repatriate any funds received by her (including as a gift) back to India within 180 days of receiving the funds. Therefore, any overseas investments to be made by your wife would have to be undertaken only under the Liberalised Remittance Scheme, by remitting the funds from India.
From an Indian income-tax perspective, amounts received by the wife from her husband, by way of gift, are exempt as they are received from a specified relative. However, any income arising out of investments made by the wife out of the gifted funds would be clubbed along with the income of the husband.
The clubbing provisions apply only in respect of the income earned out of the transferred funds or assets, and not to the income arising from reinvestment of the clubbed income.
For example, if you gift ₹10 lakh to your wife and this amount is invested in shares. which yield a dividend of ₹1 lakh, the dividend income of ₹1 lakh received by your wife would be clubbed as income in your hands. Any income arising out of the reinvestment made by your wife of the ₹1 lakh dividend income received, would be taxable in her hands and not clubbed in your hands.
In case of clubbed income, foreign tax credit, if any, in accordance with the tax treaty or Income Tax Rules has to be claimed by the husband who is offering such income to tax, even though tax may have been withheld or paid in the name of the wife in the country of source.
Interestingly, even though the income earned by the wife would be taxed in the hands of the husband, the wife would still be required to file her return of income in India, even if it is a nil return, because she owns a foreign asset outside India during the year. She would be required to disclose such assets in Schedule FA in her tax return.
—Mahesh Nayak, chartered accountant, CNK & Associates