December 9, 2012
Tax implications for Indian Americans of receiving gifts from India. Understand of the tax impact for Indian Americans who make gifts to persons in India.
As an NRI, if you make gifts to people in India, the onus of paying tax in India would be on the recipients.
December 9, 2012
Tax implications for Indian Americans of receiving gifts from India. Understand of the tax impact for Indian Americans who make gifts to persons in India.
As an NRI, if you make gifts to people in India, the onus of paying tax in India would be on the recipients.
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 Act according 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. oExample 1: You gift your mother $13,000 and your brother $13,000 in 2012. You pay no gift tax in the US. oExample 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%.
Reporting in the US
If you are a citizen or resident of the United States, you must file a gift tax return (whether or not any tax is ultimately due) if you gave gifts to someone in the year totaling more than $13,000. You must do this by filing Form 709.
Tax planning
There are 3 circumstances under which you do not have to file Form 709. If you make gifts to political organizations, if you make payments directly to educational institutes on behalf of a student or if you make payments directly to health care providers on behalf of someone who received medical treatment under them. These 3 payments are not considered as gifts.
"For those looking to pass on gifts to the next generation, using the educational exclusion can be a good tax planning tool," advises Vinay Navani, CPA and director of tax at New Jersey based firm Wilkin & Guttenplan, P.C.
"There is no explicit requirement that the educational institution be based in the US, just that it would qualify for tax exempt status in the US, not necessarily that it has US tax exempt status. In short, as long as the educational institution is acting like a US tax exempt educational institution, it should qualify," he adds.
Tax law changes
Finally, individuals must keep in mind an important point. "The current exemption limit of $5,120,000 and tax rate of 35% were created by the 2010 tax law changes. These rates are set to expire on 31 Dec 2012, unless the Congress extends them. If these rates are not extended the exemption limit will fall to $1 million and the rate will go up to 55% from Jan 1 2013. Given the uncertainty around this, it might be prudent for individuals who are seeking to make large gifts or bequests to evaluate their situation and take action before these rates expire," Navani adds.
Courtesy: TOI
