TCS on Gifts to an NRO Account: What Every Resident Indian Should Know

Many Indian residents financially support family members who have moved overseas by transferring money to their Non-Resident Ordinary (NRO) accounts. Due to this many questions comes up asking is whether such transfers attract Tax Collected at Source (TCS).

A common misunderstanding is that a gift moving from a resident's own bank account to a relative's NRO account (an Indian rupee account) is only a domestic transfer and therefore outside the purview of TCS. However, the assumption is incorrect.

This article will guide you the applicable provisions, RBI guidelines, TCS rates and the practical implications for resident individuals making such gifts.

The Core Question: Can a Resident Gift money to an NRO account?

Yes,
A resident individual can transfer rupees as a Gift to a Non-Resident Ordinary (NRO) account of a relative who has become a Non-Resident Indian (NRI) or Person of Indian Origin (PIO). Such transfers are governed by the Liberalised Remittance Scheme (LRS) and may be subject to Tax Collected at Source (TCS).

The Governing Provision

The applicable TCS provision is Section 394 of the Income Tax Act, 2025. Authorised dealers (banks) are required to collect TCS when the resident individual remits funds, including as a gift into a non-resident’s NRO account.

Why a Gift to an NRO account come under LRS?

A common misunderstanding is that a gift moving from a resident's own bank account to a relative's NRO account (an Indian rupee account) is only a domestic transfer and therefore outside the purview of TCS. That is incorrect and the Reserve Bank of India (RBI) owns FAQs on the Liberalised Remittance Scheme, which clarify the situation as under:

• Gift or donation is an explicitly listed permissible transaction under the LRS, meaning a resident individual can remit funds for a gift within the overall USD 2,50,000 per financial year limit.
• Specifically on rupee gifts to an NRO account, the RBI clarifies (Q26 of the FAQ) that a resident individual can make a rupee gift to an NRI or PIO who is a close relative, by crossed cheque or electronic transfer with the amount credited to the recipient's NRO account. Here the RBI states that such a gift amount "would be within the overall limit of USD 250,000 per financial year as permitted under the LRS". The responsibility is placed on the resident donor to ensure that this gift together with all other remittances made during the year does not exceed the LRS limit.

This RBI clarification is the regulatory foundation for treating a rupee gift into an NRO account as an LRS remittance. Since section 394 of the Income Tax Act, 2025 imposes TCS on remittances made under LRS, banks apply TCS on such gift transfers just as they would on remittances made directly overseas.

Current Rate and Threshold (Current Position)

• No TCS is applicable on the first Rs 10 lacs of gift remittances under LRS in a financial year. 
• Rate beyond exemption threshold is 20% on the amount of the gift exceeding Rs 10 lakh in the financial year.

The ₹10 lakh threshold applies to the resident individual’s aggregate remittances under the Liberalised Remittance Scheme (LRS) during the financial year.

Practical Takeaway

Suppose a resident individual has made an LRS remittance of ₹9 lakh during the financial year and if the individual gifts ₹5 lakh to an NRO account:

• Total LRS remittance will become ₹14 lakhs.
• The first ₹10 lakhs will be exempt
• TCS will apply only on ₹4 lakh
• The authorised dealer will collect the applicable TCS
   

Conclusion

A gift to an NRO account is made in Indian Rupees within India, the RBI treats it as a remittance under the LRS. Before making substantial gifts to an NRO account, residents should consider the cumulative value of their LRS transactions, understand the applicable TCS implications, and maintain proper documentation to ensure smooth tax compliance. 

If you are looking for professional assistance with NRI Taxation, FEMA Advisory & compliance, and Liberalised Remittance Scheme (LRS) transactions, KDP is here to provide professional advisory services. Reach us at enquire@kdpaccountants.com, our team provides practical and compliant solutions tailored to your needs. 

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