How to transfer money from USA to India without tax?

Ever heard of the term ‘shrinking world’? Well, with each passing decade, our world is shrinking. We all are getting more connected to people across the globe, thanks to globalisation. Businesses and individuals move across the world like never before, leading to a higher number of international transactions. Even for individuals in their home country, buying products from foreign e-commerce websites or sending or receiving money from our loved ones abroad is common.

India is the country with the most number of expats in the world. Indians in different parts of the world may send money to India to their family and loved ones for education, medical or recreational reasons, investments, etc. This foreign inward remittance to India is highest from the United States of America.

However, when we speak about international money transfers, these transactions involve a certain degree of complexity due to taxation and other laws regulating them. Although the remittance procedure has become simpler in today’s age, taxation may be a matter of concern for many.

In this blog, we shall discuss how much money can be transferred without tax in India from the USA, the foreign money transfer tax and rules (specifically, for the USA and India), some tips for tax-friendly transfers and much more.

Some important statistics

• The Indian Finance Ministry released data showing a substantial increase in foreign inward remittance (26%) in the country from NRIs compared to the previous year in FY 2023[1].
• The United States of America accounts for 23.4% of the total remittances shared with India in 2021, as per a report by the Ministry of Finance[2].
• Indian Americans constitute about 6% of the US population and contribute about 6% of the total taxes[3].

Can you transfer money to India without any tax?

Yes, you can transfer funds from the USA to India without any tax up to a certain limit. For the taxation year 2023, you can transfer $17,000 per person domestically or abroad (including India) without attracting any tax. Moreover, if you exceed this limit, you still have a lifetime gift tax exclusion of $12.92 million, to save you from paying gift tax. We shall discuss this in detail later.

Also Read: Best way to send money to India

How much money can be transferred without tax in India?

Before we get into the details of how much money can be transferred without tax in India, it is important to consider the factors that are considered for tax implication. Money transfers (both inward and outward) may be taxed in situations like overseas property transactions, personal transfers like gifts to dependents (exceeding a certain amount), foreign investment, or inheritance. Staying compliant with the law is essential for every individual in the United States. Although not all money transfers are eligible for taxation, understanding the tax implications and circumstances where you need to pay tax is crucial.

Here’s looking at some of the factors that are considered for international money transfer tax implications:

• The amount of transfer: Although there are no laws in the US that restrict or limit money transfer amounts to be sent from the country, the receiving country may have certain restrictions that you need to abide by. 
• The residential status: Your residential status in the US determines the amount of tax to be paid; some tax may not be applied to non-residents.
• The source of funds: This is mostly applicable to inward money transfers to the USA. So, if you receive money from the sale of property outside the USA, you are likely to have tax implications.
• Tax regulations of both countries: Each country has its own set of tax laws on the way the funds are generated and where they are sent. This may have different impacts under different countries’ tax regulations.

Understanding tax implications on money transfers

According to the  Internal Revenue Service (IRS), the transfer of money can be considered as a gift if there are no goods or services in exchange. Thus, if you send money to India to your loved ones (who are not US citizens), it can be considered a gift, and you may be required to pay gift tax. It must be noted that the sender of the gift is eligible to pay the gift tax and not the recipient. Any international transfer exceeding $10,000 must be reported by the financial institutions or money transfer providers to the IRS.

Now, from the Indian perspective, an NRI sending money to his family in India (someone who is related to you by blood), has no tax implication, even for large amounts like inheritance. However, if you are transferring money to someone outside blood relations, an amount over ₹50,000 in a year is taxable in the hands of the receiver.

Also Read: NRE vs. NRO account: The ultimate A-Z guide

Different types of taxes related to international money transfers

Transferring money overseas from the USA is a common practice. Regardless of the reason for the transfer, it is important to be aware of the law subject to international money transfers. As mentioned earlier, money transfer from the US to India (or any other country) may attract gift tax in the hands of the sender.

Gift Tax in the USA

Gifts (including transfers) sent to non-US citizens are taxable. Let us take a deep dive into this.

Exemptions to Gift Tax

• Gifts to IRS-approved charities
• Gift to your spouse (US citizen)
• Gift covering other person’s tuition or medical expenses, provided the payments are made directly to the institution or medical provider.

Annual Exclusion Limit for Gift Tax

• The annual federal gift tax exclusion limit for 2023 is $17,000 per person. This is the amount you can give or transfer overseas without having to report to the IRS.
• This annual exclusion limit of $17,000 is per person and recipient. For example, you can send $17,000 to your mother, $17,000 to your cousin, $17,000 to your friend and $17,000 to your neighbour in India in 2023 without having to file a gift tax return in 2024. Moreover, if you are married, your wife gets the same exclusion limit.

Lifetime gift tax exemption

• What happens if you exceed this $17,000 threshold limit for a single recipient? Firstly, you must file a gift tax return by submitting IRS Form 709 to disclose the gift. This won’t necessarily save you from gift tax since it’s just a declaration. But, over and above the $17,000 annual gift tax exclusion, you get a $12.92 million lifetime gift tax exemption! Let’s see how it works:
• For example, you send money to your relative in India, say, $30,000 in 2023 and transfer $10,000 to your friend. The $30,000 fund transfer will be considered a taxable gift since it exceeds the $17,000 annual exclusion limit. But you still won’t be liable for gift tax unless you have utilised your lifetime gift tax exemption limit of $12.92 million.
• Considering you haven’t utilised this limit yet, the calculation would be as follows:

• Money transfer to your relative will simply be deducted from your lifetime exemption by $13,000 ($30,000 – $17,000 = $13,000).
• Money transfer to your friend will be ignored since it is lower than the annual exclusion limit of $17,000.

• Hence, you won’t be liable for gift tax for 2023, and if you exceed the annual exclusion limit the next year as well, the same is applied, and the portion of your lifetime exemption reduces to that amount until it gets exhausted.

On exhausting your lifetime gift tax exemption

• Now, if your lifetime gift tax exemption limit is exhausted, the gift tax kicks in. An important thing to remember here is that you are not liable to pay gift tax until you exhaust your lifetime gift tax exemption limit plus your annual exclusion limit.
• The gift tax ranges from 18% to 40%. For example, if the transfer amount exceeds $10,000 over the lifetime gift tax exemption, 18% of the tax would be levied. Similarly, if the amount exceeds $10,001 to $20,000, a 20% tax would be applicable. Thus, the gift tax is applied based on the bracket, with each incremental bracket being taxed at a higher rate.

Important Note: Gifts in cash, property, vehicle, securities, and art are also eligible under this tax. Thus, the limits are for gifts in any forms and are not restricted to money transfers alone.

Foreign inward remittances in India

• Funds received from abroad to an Indian account are called foreign inward remittances. This is governed by the FEMA or the Foreign Exchange Management Act (FEMA). Foreign inward remittances are tax-free on two conditions, namely, who is sending the money and the purpose. However, it must be noted that the tax is imposed on the receiver of the funds and not on the sender.
• FEMA specifies which family members can receive tax-free inward remittance. The sender’s legal spouse, parents, siblings, etc., are eligible for tax-free inward remittance if the money is for purposes like financial support, gifts, education, medical treatment, donations, travel expenses, etc. If you send money to India to your friend, any amount exceeding ₹50,000 in a year will be taxed. Moreover, a transfer from the USA to India under Business payment is also eligible for tax.
• You can send money to India in two ways: a Rupee Drawing Arrangement (RDA) and a Money Transfer Service Scheme.
• Under the Rupee Drawing Arrangement (RDA) in India, there is no limit to inward transfer when funds are sent for personal use. In contrast, there is an upper cap of ₹15 lakhs for commercial remittances.
• The Money Transfer Service Scheme (MTSS) in India specifically caters to personal remittances from abroad (including the USA) to recipients in India. Hence, if you send money to India for financial support to your family or foreign tourists visiting India, only then a beneficiary is permitted to receive a maximum of $2,500 and 30 remittances in one calendar year. Remittance for investment, credit to NRE accounts or any other purpose does not qualify under this scheme.

Also Read: 10 best countries to migrate from India 

NRI tax exemptions in India: Transferring money to your NRO Account

NRO is a Non-Resident Ordinary Account that NRI can open to receive funds either in Indian or foreign currency. If, as an NRI, you repatriate your savings to your NRO account in India, the principal amount in your account will not be taxable. However, interest earned on this amount will be eligible for taxation.

Laws on international money transfer

Consumer Financial Protection Bureau: The Consumer Financial Protection Bureau is the regulatory body in the US which regulates international money transfers over $15. It ensures lawful overseas transfers and consumer protection.

The Federal Law: The Federal Law mandates the banks and other financial institutions to provide correct exchange rate details, fees and other aspects to the consumers to enable proper international transactions.

Foreign Account Tax Compliance Act (FATCA): According to the Foreign Account Tax Compliance Act (FATCA) regulations, US citizens situated in the country or abroad must file annual reports on their foreign account holdings. Typically, banks and financial institutions identify US accounts that have any foreign account holding and report it to the IRS or the FATCA Intergovernmental Agreement (IGA).

IRS rules on international money transfer: There is no limit to the amount of money you can send or receive, however, money transfer service providers/banks/other financial institutions may have a daily transaction limit. If you are sending a large amount of money overseas, you are required to report the transfer to the IRS. Any transaction of $10,000 or more is usually reported by the money transfer service provider or the bank to the IRS.

Reserve Bank of India (RBI) Rules for NRI transfers:

• The inward foreign remittance to India must be associated with a certain purpose.
• For every inward transfer, the recipient bank must issue a Foreign Inward Remittance Certificate (FIRC).
• Inward foreign remittance in India can be done through RDA or MTSS methods.

Expert tips on how to save on tax expenses legally

In the sections above, we learned the laws and foreign money transfer taxes applicable when transferring money from the USA to India. If you comply with the rules, are aware of the transfer limits, and benefit from the gift tax in the US, money transfers from the US may not attract any tax. However, suppose you exceed the lifetime gift tax exemption limit of $12.92 million and fail to report to the IRS on transactions over $10,000. In that case, you may be liable to pay taxes or penalties.

Here are a few tips for tax-friendly transfers:

• When sending large amounts of money abroad, add the gift (transfer amount) to your lifetime exemption limit rather than choosing to pay the gift tax.
• If you are married, file your taxes jointly with your spouse to combine your annual exclusion limit to one ($17,000+$17,000=$34,00).
• Always report transfers over the annual exclusion to the IRS via Form 709.
• Transferring to the annual exclusion limit is a good way to reduce your estate tax.
• Inward transfer in the US below $100,000 is not subject to income tax unless it generates income. If the transfer exceeds $100,000, you must submit IRS form 3520.
• Choose a money transfer provider that offers higher daily transfer limits if you have to transfer more significant amounts.

Save with Instarem while sending money to India

Instarem is one of the leading money transfer services that can help you transfer money to India in a breeze. Here’s how you can save money on your transfers with Instarem.

• We offer you competitive, bank-beating exchange rates and fees.
• Instarem is one of the most affordable# ways to transfer money to India with low fees, complete transparency and no hidden charges.
• Our Exchange Rates and Fees have secured a rating of 9.4 from Monito (a leading comparison platform for international money transfers), meaning we offer competitive exchange rates and lower fees compared to our peers.
• Our quick* transfer facility proves that for us, surely, time is money!

Simply download the app or sign up here.

FAQs

Q. What’s the IRS limit on sending money to India?

There is no IRS limit on sending money to India; however, if you exceed the lifetime gift tax exemption limit of $12.92 million, you will be liable for taxation.

Q. How do I avoid double taxes on money transfers to India?

The US has double taxation treaties with many nations worldwide, including India. The IRS offers several tax credits like the Foreign Tax Credit and exclusions like Foreign Earned Income Exclusion that expats can use to avoid double taxation.

Q. How do I avoid IRS penalties if I fail to file?

To avoid IRS penalties, know the international money transfer rules and regulations, tax implications and transfer limits.

Q. Do I have to pay tax in India if I receive money from abroad?

If you receive money from abroad from a person of blood relation (e.g. son, daughter, etc.) for financial support, there are no tax implications.

Disclaimers:

This article is intended for informational purposes only. All details are accurate at the time of publishing. Instarem has no affiliation or relationship with products or vendors mentioned.

* Fast meaning 75% of our transactions are completed in 15 minutes. Depending on the funding method.

#When it comes to affordable exchange rates and fees, it’s worth noting that the cost will vary depending on how you choose to fund your transactions. Credit card funding and bank transfer fees can differ significantly. 

Citations:

[1]https://indbiz.gov.in/remittances-to-india-up-by-26-in-fy23-finance-ministry/

[2]https://pib.gov.in/PressReleasePage.aspx?PRID=1897036

[3]https://www.bqprime.com/business/1-of-us-population-indian-americans-pay-6-of-taxes-congressman