Gifts gone wrong: RBI rains on rich Indians' offshore parade

Here comes a bump on the road for rich Indian families busy building a corpus outside the country. Their best laid plans to give away their overseas wealth as ‘gifts’ to children — to pay for their EB-5 US visa, acquire properties abroad, and share a slice of the family pie — are under question.

A few ultra high net worth individuals (HNIs) and their advisors are learnt to have received the Reserve Bank of India’s feedback that sale proceeds of offshore investments cannot be transferred abroad as gifts to other non-residents, persons aware of the matter told ET.

The central bank’s stance stems from a plain reading of the regulation. A resident individual can invest in overseas securities and properties as well as transfer funds for maintenance of relatives abroad up to $250,000 a year under the RBI’s liberalised remittance scheme (LRS). Investors can retain and reinvest income earned on the investments, but once investments mature or assets are sold, the money must be reinvested or brought back.

Stricter View

According to the revised RBI regulations of August 2022,
“The received/realised/unspent/unused foreign exchange, unless reinvested, shall be repatriated and surrendered to an authorised person within a period of 180 days from the date of such receipt/realisation/purchase/acquisition or date of return to India, as the case may be.”

But instead of bringing back funds after exiting investments, many give the money away to next-gen members living abroad. Had they brought back the money and resent it as a gift to their children working or studying overseas, it would have exhausted their year’s LRS limit.

To avoid this, the funds are transferred outside the country to children who have become non-resident Indians (NRIs). With the LRS limit intact, they repeat the transaction — remitting $250,000, and gifting the forex realised some years later. Meticulously planned, each family member remits $250,000 a year. Regulatory circles, sources said, think such a plan rests on an aggressive interpretation of the law.

“While the FEMA (Foreign Exchange Management Act) clearly prohibits gifting overseas portfolio investments to non-residents, whether the funds from sale of such overseas assets can be gifted or not, remains a grey area under LRS,” said Harshal Bhuta, partner at CA firm PR Bhuta & Co.

RBI, Banks More Wary

While authorities intended to discourage capital outflows with tighter rules, they were also meant to curb non-permitted investments, especially as monitoring fund end use is tough.

“Realised forex in your LRS bank account can be used towards foreign travel expenses. This is a permitted LRS transaction even if the expenditure is made from an overseas bank account. By the same logic, it can be said that since giving a gift is a permitted transaction under LRS, it should also be permitted from overseas bank accounts. Since both interpretations carry weight, the issue of gifts has become a subject of regulatory ambiguity,” said Bhuta.

RBI and banks (responsible for FEMA compliance) have become more circumspect. Some private sector banks are objecting to mismatches between the stated ‘purpose code’ (ticked in the specified form for LRS submitted to the bank) and actual use.

The Enforcement Directorate has questioned a person who, having remitted money over the years for ‘maintenance of relatives’, later used the funds to buy a property overseas. Changing purpose code from current account to capital transactions raises eyebrows.

“When LRS came in 2004, the thought process was to allow a certain amount for overseas spending. It was a step towards rupee convertibility. The term ‘liberalised’ in LRS has now given way to ‘restrictive’. RBI should step in, reintroduce the same thinking, and allow more flexibility,” said Rajesh P Shah, partner at Jayantilal Thakkar & Company, a CA firm which specialises in FEMA.

“Multiple compliance and differing interpretations defeat the very purpose of LRS. One such interpretation is that the money remitted for stock investment must be either brought back post disinvestment or reinvested, but cannot be gifted — as it does not amount to reinvestment,” said Shah.