Who Is Your Relative? Why Does It Matter In NRI Financial Management?

1. Who Is Your Relative? Why Does It Matter In NRI Financial Management? For most NRIs, financial connections to India are deeply rooted in family – from supporting parents to gifting money to siblings or investing jointly in property. However, when it comes to managing finances between India and abroad, the term “relative” carries more than emotional meaning; it carries legal, tax, and compliance significance. In fact, the way Indian laws define “relative” can directly impact how NRIs send money, receive gifts, manage inheritances, or transfer property. Misunderstanding this definition could unintentionally lead to tax liability or even regulatory non-compliance under the Foreign Exchange Management Act (FEMA). Let us explore how the term “relative” differs under key Indian regulations and why it’s vital for NRIs to understand these definitions when planning their financial affairs. Who is your relative? The definition of “relative” is different in different Acts and also for different provisions. So while your brother’s wife is not a relative under the Income Tax Act, she is a relative for gift tax purposes under the Income Tax Act. However, she is not a relative under FEMA. Also, grandparents or grandchildren are a relative under Income Tax Act, including for gift tax purposes, however, they are

2. not a relative under FEMA. Also, the definition changes based on the point of view. For example, if Umang is Aanya’s mother’s brother; Umang is a relative to Aanya but Aanya is not a relative to Umang. This could easily confuse anyone. So come, let us understand the definition of relatives as per the Income Tax Act, for gift and under FEMA. Relative under the Income Tax Act As per the Income Tax Act: Section 2(41), “relative”, in relation to an individual, means the spouse (husband / wife), brother or sister or any lineal ascendant or descendant of that individual. This definition is important because it determines whether gifts or money transfers between individuals are tax-free or taxable. For NRIs, this can directly influence how they structure remittances to family members in India. For example, a gift from an NRI to their parents or children, all of whom qualify as “relatives”, would be exempt from tax in India. But if the gift is made to a cousin, nephew, or friend, the recipient may need to include it as taxable income if it exceeds ₹50,000. Understanding this clause helps NRIs avoid unexpected tax implications while supporting family financially. Relative under Gift Tax (Section 56(2)) As per Gift Tax under Section 56(2), a ‘relative’ includes the following: the spouse of the individual; the brother or sister of the individual or of the spouse; the brother or sister of either of the individual’s parents; any lineal ascendant or descendant of the individual or of the spouse; and the spouse of any of the relatives mentioned above. This expanded definition allows NRIs greater flexibility in gifting money or property to close family members without triggering gift tax liabilities. For example, if an NRI gifts money to their brother- in-law or mother-in-law, those relationships are covered under the above clause, making such gifts tax-free for the recipient in India. However, the moment a gift is made to someone outside this circle, such as a cousin or uncle, the amount becomes taxable if it exceeds ₹50,000. Relative under FEMA FEMA relies on the definition in the Companies Act. As per Section 2(77) of the Companies Act, 2013, a person is considered related to another if they are members of a Hindu Undivided Family (HUF), if they are husband and wife, or as may be prescribed. According to Rule 4 of the Companies (Specification of Definition Details) Rules, 2014, the term ‘relative’ includes the father and mother, the son and daughter and their respective spouses, and the brother and

3. sister. For NRIs, this definition is particularly important because FEMA governs cross-border transfers, remittances, and investments. Under FEMA regulations, an NRI can transfer or gift funds or assets to a relative (as defined above) without prior RBI approval. However, transferring assets or money to anyone not qualifying as a “relative” could require RBI permission and might trigger compliance scrutiny. Understanding FEMA’s narrow definition of “relative” helps NRIs avoid unintentional violations when transferring property, shares, or money between India and abroad. The one-way nature of relationship definitions In our example of Umang and Aanya, as mother’s brother is a relative for the purpose of a tax-free gift, Umang is Aanya’s relative and any gift from Umang to Aanya would be considered as a gift from a relative and would not be taxable for Aanya. However, as sister’s daughter is not a relative, Aanya is not Umang’s relative. Any gift by Aanya to Umang would be considered as a gift from a non- relative and added to Umang’s income if it is more than Rs. 50,000. It is also important to note that Umang is not Aanya’s relative for any other purpose under the Income Tax Act or under FEMA. This asymmetrical definition can easily confuse NRIs who assume that a family relationship automatically means tax exemption both ways. Understanding this distinction prevents costly compliance mistakes. Why this matters for NRI financial management Tax-free gifts and remittances For NRIs, gifting money to family is common, but tax treatment depends on the legal definition of “relative.” Gifts to relatives under the Income Tax or Gift Tax Acts are fully tax-exempt, while those to non-relatives above ₹50,000 become taxable. Identifying eligible relatives ensures efficient, tax-compliant remittance planning. FEMAa compliance Under FEMA, the definition of “relative” determines what transfers can occur without RBI approval. NRIs can transfer property, shares, or funds freely to FEMA-defined relatives, while transactions involving non-relatives may require additional documentation or permissions. Understanding these parameters ensures smooth cross-border transactions and protects against unintentional regulatory non-compliance.

4. Estate and succession planning When NRIs prepare wills or plan inheritance, knowing who qualifies as a relative simplifies property transfers and repatriation. Inheritance from relatives is tax- exempt, reducing administrative burdens. Aligning succession planning with FEMA and Income Tax definitions ensures wealth distribution remains legally valid, tax-efficient, and dispute-free for beneficiaries in India and abroad. Each law interprets “relative” differently, affecting how the same transaction is treated. For example, a grandparent is a relative under the Income Tax Act but not under FEMA. Understanding which law applies before making gifts or transfers helps NRIs maintain clarity, avoid conflicts, and manage finances confidently across jurisdictions. Navigating the financial landscape as an NRI requires balancing multiple regulations, from tax residency and FEMA compliance to the varying legal definitions of “relative” across Indian laws. While family and finances often overlap, not every emotional relationship aligns with the legal framework – a niece, grandparent, or in-law may or may not qualify as a “relative” depending on the Act in question. Understanding these nuances ensures your gifts, remittances, and inheritances remain legally valid, tax-efficient, and free from regulatory complications. A well-informed strategy, guided by experts, can help structure cross-border transfers correctly, simplify compliance, and prevent unnecessary taxation. ExpertNRI, with its deep knowledge of NRI financial management services in India, can help you plan and execute every aspect of your wealth management confidently, ensuring that your financial intentions translate seamlessly into compliant, efficient outcomes. Read more: Who Is Your Relative? Why Does It Matter In NRI Financial Management?