NRI

Indians who go to the USA for work usually become tax residents on account of a physical presence test, i.e., staying there for more than 182 days. Many Indians continue to work in the USA for years. So, these Non-Residents of India (NRI) become Resident Aliens. This post explains the taxation of gifts, bequests or inheritance received by such NRIs from parents or relatives who are settled in India.

Gifts or Bequests Tax Free in USA

The US tax code clearly states that property acquired by gift, bequest, devise, or inheritance is tax-free because it is not included in Gross Income. The meaning of property includes “money.” This is clear from plain reading of section 102 of the 26 U.S Code which is extracted below for your ready reference :

26 U.S. Code § 102 – Gifts and inheritances

(a)General rule

Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.

(b) Income

Subsection (a) shall not exclude from gross income—

(1) the income from any property referred to in subsection (a) or

(2) where the gift, bequest, devise, or inheritance is of income from property, the amount of such income

So, any gift of “property” received by a U.S. person (a US citizen and tax resident of the USA ) is tax-free as per section 102(1) of the 26 U.S. Code (Internal Revenue Code). 

What types of gifts or bequests are not tax-free under US tax law?

Receipt of property is tax-free, but not the income out of property. A gift of income from property is taxable under section 102(2) of the IRC. 

For example, say someone in India has gifted property that is put on rent or has term deposits with a bank. The rent receipt or interest that you receive will be taxable, but the value of the house property or the value of the term deposits will be tax-free.

Is receipt of the gift or bequests reportable in the US ?

Although US tax law exempts gifts of property, recipients are required to file Form 3520 if the amount of the gifts exceeds $1,00,000.

Time limit to File Form 3520

  • Recipient NRI, a tax resident, must file Form 3520 by the 15th of April next to the tax year. 
  • They can seek an extension of time to file an income tax return. In that case, Form 3520 is due on 15th of October, next to the tax year.

What about the taxation of gifts or bequests in India?

Any money or valuable properties received from relatives is tax-free under section 56(2)(x) of the Income Tax Act. The term “Relative” is defined under section 56(2) as under : 

  •  (i) spouse of the individual;
  •  (ii) brother or sister of the individual;
  •  (iii) brother or sister of the spouse of the individual;
  •  (iv) brother or sister of either of the parents of the individual;
  •  (v) any lineal ascendant or descendant of the individual;
  •  (vi) any lineal ascendant or descendant of the spouse of the individual;
  • (vii) spouse of the person referred to in clauses (ii) to (vi);
  • So, gifts of property from relatives are generally tax-free in India under section 56(2) and in the USA under section 102(1).

What about the income out of gifted property? Will that be taxed in two years?

The income will be taxable in both countries, depending on the facts and circumstances of the case. In the case of double taxation, the good news is that there is a duty avoidance agreement between India and the USA.

Article 25 of the DTAA between the USA and India provides relief from double taxation of income. As per this Article, you may claim credit for tax paid on income earned in India that is also taxable in the USA (for a US Person, global income is taxable in the USA).

The said article 25 of DTA is given below for reference : 

1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income—

(a) 

the income-tax paid to India by or on behalf of such citizen or resident ; and

(b) 

in ,,,,,,,,,,,,,,,,,.

So, it can be concluded that even if the gifts, bequests and inherited property from your dear ones are tax free in USA and in India , the recipient has an obligation to intimate IRS through Form 3520 . Further , when you sell those properties , capital gains are taxable in India as well as USA. However DTA signed between them provide relief from double taxation.

Prashant Thakur

Prashant Thakur

Prashant Thakur is a practicing tax advisor on Income Tax Act of India . He also blogs on US taxation law (IRC) . He has more than 30 years of experience in dealing with tax issues ( 20 years on the other side of the table i.e for Income Tax department) . He has written three books - Tax Evasion Through Shares( 2008 & 2012) , Taxing Question Simple Answer (2013) and Crypto Taxation in USA (2022) . Other than taxation , he has great interest in cloud technology, WordPress and is found of small tech company .
Prashant Thakur
Prashant Thakur
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