Taxes on Money Transfers From India to the USA

When moving funds from India to the United States, the process involves navigating rules from both the Indian government and the U.S. Internal Revenue Service (IRS). The financial implications for both the sender in India and the recipient in the U.S. are determined by the amount of money being sent and the reason for the transfer. A transfer intended as a personal gift is handled differently from a payment for services rendered or investment income. Each country has regulations for monitoring these cross-border transactions, and compliance is necessary to avoid potential penalties.

US Tax Implications for the Recipient

For a person in the United States receiving money from India, the most immediate question is whether those funds are subject to U.S. tax. The IRS does not consider gifts or bequests received from a foreign person, such as a family member in India, to be taxable income for the recipient. This means if a parent in India sends their child in the U.S. money out of generosity, the recipient does not owe any U.S. income tax on that amount.

A gift is a transfer of money or property without the expectation of receiving anything of value in return. This contrasts with funds that would be classified as income. If the money is a payment for freelance work, compensation for services performed, or rental income from a property in India, it is considered earned income and must be reported on the recipient’s U.S. tax return.

This income would be subject to regular U.S. income tax rates, just like any other earnings. For example, if a U.S. resident provides consulting services to an Indian company and receives payment, that money is taxable. Similarly, if an individual in the U.S. owns an apartment in India and receives rent from it, that rental income is taxable in the U.S. The recipient must accurately determine the nature of the funds received, as mischaracterizing income as a gift can lead to back taxes and penalties.

US Reporting Requirements for Foreign Gifts

Even when a money transfer from India is a non-taxable gift, the U.S. recipient may have an obligation to report it to the IRS. This is an informational requirement designed to provide the government with visibility into large cross-border transfers. The document for this purpose is IRS Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

The filing requirement for Form 3520 is triggered when a U.S. person receives foreign gifts from a nonresident alien individual or a foreign estate that exceed $100,000 during the calendar year. This is an aggregate limit, meaning if a recipient receives $60,000 from their mother in India and $50,000 from their father in India in the same year, the $110,000 total exceeds the threshold and a Form 3520 must be filed.

To complete Form 3520, the recipient needs to provide the full name and address of the donor, the date the gift was received, and a description of the property. The form must be completed, signed, and mailed to the designated IRS service center.

The deadline for filing Form 3520 is the same as the due date for a federal income tax return, typically April 15, or October 15 if an extension has been granted. The penalties for failing to file on time or for filing an incomplete form are substantial. The penalty is 5% of the value of the gift for each month the form is late, with the total penalty capped at 25% of the gift’s amount. While the IRS recently announced it would first consider if the taxpayer had “reasonable cause” for the delay, the risk of a financial penalty remains.

Indian Tax Implications for the Sender

The person sending money from India to the U.S. must comply with Indian regulations, which are primarily governed by the Reserve Bank of India (RBI) and the Indian Income Tax Act. The framework for sending money abroad is India’s Liberalised Remittance Scheme (LRS). Under the LRS, a resident Indian individual is permitted to send up to $250,000 per financial year (which runs from April to March) for any permissible transaction, including gifting to a relative in the U.S.

A central component of these remittances is the Tax Collected at Source (TCS). TCS is an upfront collection of income tax that the sender’s bank is required to withhold and deposit with the government. The rules for TCS on foreign remittances are detailed under the Income-tax Act.

For money sent as a gift, a specific TCS structure applies. No TCS is collected on the first ₹10 lakh (1 million rupees) remitted in a financial year. Once the total remittances in a financial year exceed this threshold, a TCS rate of 20% is applied to the amount above the threshold. For example, if a person sends a total of ₹15 lakh as a gift in a financial year, TCS at 20% would be collected on the excess ₹5 lakh, resulting in a ₹1 lakh tax collection.

The amount collected as TCS is not a final tax liability. The sender can claim it as a credit against their total income tax liability when they file their annual Indian income tax return. If the TCS amount exceeds the sender’s actual tax due for the year, they can claim a refund for the difference. This mechanism ensures the government has a record of large foreign transfers while allowing the sender to reconcile the payment.

The Role of the US-India Tax Treaty

The interaction between the two countries’ tax systems is managed by the Double Taxation Avoidance Agreement (DTAA), a treaty between the U.S. and India. The DTAA’s purpose is to prevent the same income from being taxed by both countries. The treaty achieves this by establishing rules that assign taxing rights to either the source country where the income arises or the residence country where the recipient lives.

When the money transfer is a payment for services or other forms of income, the DTAA becomes relevant. For instance, if a U.S. resident earns income from India, the treaty provides mechanisms to avoid double taxation. A common method is the foreign tax credit, where the U.S. allows the taxpayer to reduce their U.S. tax liability by the amount of income tax already paid to the Indian government on that same income.

In the context of a genuine gift, the DTAA’s provisions on income are less applicable. Because the U.S. does not tax the recipient of a foreign gift, there is no double tax to mitigate. This makes the treaty’s income-specific articles less of a factor for this type of transfer.