Page 8 - ICAI UAE TAX UPDATE_JUNE 2024

4 ARTICLES FROM MEMBERS

4.2 FEMA FAQs - Gift of Shares of

Indian Company between Residents
and Non-residents

CA Jini Jain

Gift as a mode of transfer is customary between close relatives and friends in India. It is essential to realize that
when this gift involves exchange between a resident and non-resident, Foreign Exchange Management Act, 1999
(FEMA) and its various rules and regulations are required to be adhered to.

Residential status under FEMA is the starting point to determine the extent to which the regulations are applicable
to a particular transaction entered into by a person. Residential status determines the restrictions and prohibitions
under the regulations applicable to various transactions entered into by the individual/entity. Following definitions
are important to understand for applicability under the provisions:

• Non- Resident Indian (NRI) : NRI is a person resident outside India who is a citizen of India.

• Overseas Citizen of India (OCI) : OCI is a person resident outside India who is registered as an Overseas Citizen of
India Cardholder under Section 7(A) of the Citizenship Act, 1955.

FEMA provides various benefits to individuals who have or had ties with India even if they are currently Non-
resident. To qualify for it, a Non-resident should either hold an Indian passport to be considered as NRI or should
hold an OCI card if the Indian Passport has been surrendered.

Since gifting is largely permitted between relatives, one must note that FEMA uses the definition of relative as
per Companies Act, 2013 and not Income Tax Act, 1961. ‘Relative’ means a relative as defined in Section 2(77) of
Companies Act, 2013 i.e. members of HUF, husband, wife, father (including step-father), mother (including step-
mother), son (including step-son), son’s wife, daughter, daughter’s husband, brother (including step-brother) and
sister (including step-sister).

1. What is the difference between investment on repatriation basis and non-repatriation basis?

NRIs/OCIs have an option to invest into the shares of an Indian Company on repatriation basis or non-repatriation
basis. Investment on repatriation basis means an investment, sale or maturity proceeds of which (net of taxes), are
eligible to be repatriated out of India. In case of investment on non-repatriation basis, the proceeds cannot be freely
repatriated outside India. Investment on non-repatriation basis is treated at par with domestic investment.

2. What are the provisions for gift of shares of Indian company between resident and non-resident?

Provisions relating to gift of shares as covered in Foreign Exchange Management (Non-Debt Instruments) Rules,
2019 have been summarized as under:
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UA E TAX U PDAT E NEWSLET TER ISSUE 03 - June 2024