Transfer of immovable property has always been a hot topic, encompassing various methods such as sale, gift, relinquishment, and extinguishment of rights. While the domestic transfer of gifts is generally permissible, gifting immovable property to or from Non-Resident Indians (NRIs) is governed by the Foreign Exchange Management Act (FEMA). This blog discusses the nuances of such transactions, including their classification and regulatory framework under FEMA.
The Two Broad Categories of Transactions Under FEMA
FEMA classifies transactions into two types:
1. Current Account Transactions
Current account transactions refer to those that do not alter the assets or liabilities outside the country of a person residing in India, or within the country of a person residing outside India . These transactions are generally permissible and do not require approval from the Reserve Bank of India (RBI). Examples include payments related to foreign trade, travel, education, and remittances for maintenance.
2. Capital Account Transactions
In contrast, capital account transactions involve alterations to the assets or liabilities outside the country of a person in India residing, or vice versa. These transactions are subject to FEMA regulations as they impact the economic framework of the nation. For example, the acquisition or transfer of immovable property to NRIs falls under this category.
Domestic Transfers vs. Transfers Involving NRIs
When it comes to transferring immovable property:
Domestic Transfers
Transfers between residents of India are generally free from FEMA restrictions. These transactions are straightforward and involve no additional regulatory compliance.
Transfers Involving NRIs
The transfer of immovable property by a person residing in India to an NRI is considered a capital account transaction. Since it alters the NRI’s assets in India, such transfers are regulated under FEMA. Specific provisions apply to ensure compliance with the law.
Gifting Immovable Property: Key Regulations
The gifting of immovable property is a common mode of transfer. Rule 24(b) of the Non-Debt Instruments (NDI) Rules permits the acquisition of immovable property by way of gift, provided it is received from a “relative.” The term “relative” is defined under Section 2(77) of the Companies Act, 2013, and includes the following relations:
- Members of a Hindu Undivided Family (HUF)
- Husband and wife
- Specific relationships, as prescribed:
- Father (including stepfather)
- Mother (including stepmother)
- Son (including stepson)
- Son’s wife
- Daughter
- Daughter’s husband
- Brother (including stepbrother)
- Sister (including stepsister)
A Closer Look at the Definition of “Relative”
The definition of “relative” is not extensive, which has significant implications. Notably, grandparents and grandchildren are excluded from the definition. This means that a grandfather or grandmother residing in India cannot gift immovable property to their NRI grandson or granddaughter. Such a transaction is not permissible under FEMA regulations, irrespective of familial ties.
Key Takeaways on Gifting Under FEMA
- Permissibility: While gifting immovable property to a “relative” is allowed, the relationship must fall within the defined scope.
- Limitations: Transactions outside this scope, such as gifting property to a grandchild who is an NRI, are restricted.
- Liberalized Remittance Scheme (LRS): Gifting of immovable property does not fall under the LRS, which primarily governs financial remittances by residents to NRIs.
Conclusion
The transfer of immovable property, especially involving NRIs, is intricately regulated under FEMA. While domestic transfers are relatively simple, cross-border transactions require adherence to specific rules and definitions. Understanding the scope of “relative” under the Companies Act, 2013, is crucial for compliance, particularly in the context of gifting.
For individuals and families navigating the complexities of property transfers, consulting legal and financial experts like chartered accountant or advocate is advisable to ensure compliance with FEMA and other applicable regulations. By staying informed, one can facilitate smooth and lawful transactions, avoiding potential legal pitfalls.
This blog is intended for informational purposes only and should not be construed as legal, financial, or professional advice. Readers are encouraged to consult with a qualified professional for guidance specific to their circumstances. The information provided here is general in nature and may not apply to individual situations or needs.
