RBI’s 180-Day Rule: A Crucial Check for Indian Families Supporting Children Abroad

In today’s interconnected world, it is increasingly common for Indian parents to support their children financially, even when they reside abroad. These gifts may fund higher education, assist in property purchases, or contribute toward residency programmes like investor visas in the United States or Europe.

But while intentions may be simple, the process isn’t always so. The Reserve Bank of India (RBI) has laid down specific regulations under the Liberalised Remittance Scheme (LRS) and the Foreign Exchange Management Act (FEMA). These rules govern how and when funds sent abroad must be brought back, and ignoring them can lead to serious regulatory consequences.

Meet Rahul: A Common Case With an Uncommon Problem

Consider the case of Rahul, a businessman from Mumbai. In 2022, he invested $200,000 in U.S. stocks under LRS. By 2025, those investments grew to $250,000. His daughter, Devika, studying in Canada, needed financial support. Rahul decided to sell the stocks and directly transfer the entire amount from his U.S. brokerage account to Devika’s Canadian bank.

At first glance, this seems logical and harmless. But under RBI rules, it violates FEMA.

Read More: ITR Filing FY25: Is Money Transfer from Father to Son in the Form of a Gift Taxable in India?. 

What Does the RBI Say?

According to the RBI, any proceeds from overseas investments made under LRS must either be:

1. Repatriated to India within 180 days, or
2. Reinvested abroad.

Gifting is not considered reinvestment. If Rahul directly gifts the $250,000 from his U.S. account, he bypasses both the repatriation rule and potentially the LRS limit of $250,000. Such actions can invite regulatory scrutiny and penalties.

How Families Try to Work Around It

Several wealthy Indian families attempt to navigate these restrictions through non-compliant yet seemingly clever methods:

• Avoiding repatriation: Keeping funds offshore after selling overseas assets.
• Direct transfers: Sending money to NRI children from foreign accounts.
• Pooling LRS limits: Using the $250,000 quota of multiple family members (e.g. parents, grandparents) to send larger sums.

While such tactics may seem convenient, they often raise red flags with regulators and may result in FEMA violations.

The Compliant Route: Step-by-Step

Returning to Rahul’s case, here’s the compliant approach:

1. Sell the U.S. stocks and receive $250,000 in the brokerage account.
2. Repatriate the entire sum to Rahul’s Indian bank account within 180 days.
3. Initiate a fresh outward remittance under LRS from India to Devika, marking the transaction clearly as a “gift to a relative.”

If the amount exceeds $250,000, Rahul’s wife can use her separate LRS limit to send an additional $250,000 in the same financial year. Proper documentation—like sale records, remittance receipts, and a formal gift deed—is essential.

Tax Considerations: India and Abroad

In India:

• Gifts from parents to children are fully exempt from income tax, regardless of the amount.
• However, gifts from non-relatives above ₹50,000 become taxable under Section 56(2)(x) of the Income Tax Act.

Overseas:

• U.S.: Gifts above $18,000 (2025 limit) must be reported to the IRS, though they may not be taxed.
• UK & Canada: Local rules vary. Some gifts may be subject to inheritance or other taxes. It’s wise to consult a cross-border tax advisor to ensure compliance in both countries.

What Happens If You Violate the 180-Day Rule?

If Rahul were to bypass the repatriation and directly gift the money from abroad, he could face:

• Penalties under FEMA
• Suspension of future LRS transactions
• Increased tax scrutiny—both in India and the recipient’s country
• Potential legal proceedings for repeated non-compliance

Mitigating Risk: Prudent Financial Planning

Here are some compliance strategies families can consider:

• Always repatriate proceeds of overseas investments before using them for gifts.
• Consider establishing a family trust for structured wealth transfers.
• Use the individual LRS limits of different family members for larger remittances.
• Ensure all transactions are well-documented with valid records, bank statements, and gift deeds.

Conclusion

Gifting money to NRI children is a legal and cherished practice among Indian families. However, the RBI’s 180-day repatriation rule makes it crucial to follow the right process, especially when the funds originate from overseas investments.

The safest approach involves bringing the proceeds back to India and then using the LRS route to gift money abroad, while maintaining thorough documentation. By doing so, families can avoid legal complications and protect their financial legacy, all while staying firmly on the right side of the law.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.