• NRI lending money to Indian citizen

Hi,

We are running Peer 2 Peer lending platform, Our concept is LendinIndia - encouraging NRIs to lend Indian citizens.

As per the RBI draft guidelines, "The guidelines would also prohibit the platforms being used for any cross-border transaction in view of FEMA provisions relating to transactions between residents and non-residents".

One of our consultants proposed following model:
2.1 NRI giving hand loan/gift to Blood relation in India (BRII)
2.2 BRII lending money to actual Borrower
2.3 Borrower paying princiapl + interest
2.4 BRII paying IT
2.5 BRII giving amount back to NRI as gift

kindly share the legal provision for the above and elaborate with respective clauses which I can push into one of the blogs.

I request you to help us with White Paper in pushing the alternative solution and how effective it is?
Asked 7 years ago in Taxation

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7 Answers

1) NRI is at liberty to gift money to his relatives in india

2) the gift received by relative should be declared by the recipient in his income tax returns

3) in case BRII is lending money to number of borrowers the BRILL would need a money lender licence

4) for one or two isolated transactions money lender license is not required in India

5)on repayment of loan by the borrower with interest the lender is free to gift the money to his relative abroad

Ajay Sethi
Advocate, Mumbai
95205 Answers
7607 Consultations

5.0 on 5.0

1) As per the Income Tax Act, 1961 if the value of gifts received is more than Rs. 50,000 a year, then such amount is taxed as income in the hands of the receiver. These gifts may be in any form – cash, jewellery, movable and immovable property, shares etc.

2) However, this rule is not applicable if your relatives present the gifts.

There is a specific exemption under Indian income tax laws on cash or gifts from relatives.

3) Gifts, including cash and immovable property, from a relative are not liable to tax in the hands of the recipient or in the hands of the person giving the gift.

A relative is defined to include spouse, brother or sister, brother or sister of the spouse, brother or sister of either of the parents, any lineal ascendant or descendant, any lineal ascendant or descendant of the spouse, and others.

4) As per Master Circular, dated July 1, 2006, Indian residents are allowed to remit abroad up to $100,000 per annum for maintenance of close relatives.

Ajay Sethi
Advocate, Mumbai
95205 Answers
7607 Consultations

5.0 on 5.0

:1) Can an individual resident Indian borrow money from his close relatives outside India?

an individual resident Indian can borrow sum not exceeding USD 250,000 or its equivalent from his close relatives staying outside India, subject to the conditions that: 1. the minimum maturity period of the loan is one year;

2. the loan is free of interest; and

3. the amount of loan is received by inward remittance in free foreign exchange through normal banking channels or by debit to the NRE/FCNR(B) account of the NRI.

2) Further according to Foreign Exchange Management (Borrowing and lending in rupees) Regulations, 2000

Borrowing in rupees by persons other than companies in India:- A person resident in India, not being a company incorporated in India, may borrow in rupees on non-repatriation basis from a non-resident Indian or a person of Indian origin resident outside India, subject to the following conditions

: (i) the amount of loan shall be received by way of inward remittance from outside India or out of Non-resident External (NRE)/Non-resident Ordinary (NRO)/Foreign Currency Non-resident (FCNR)/Non-resident Non-repatriable (NRNR)/Non-resident Special Rupee (NRSR) account of the lender maintained with an authorised dealer or an authorised bank in India,

(ii) the period of loan shall not exceed three years;

(iii) the rate of interest on the loan shall not exceed two percentage points over the Bank rate prevailing on the date of availment of loan;

(iv) where the loan is made out of funds held in Non-resident Special Rupee (NRSR) account of the lender, payment of interest and repayment of loan shall be made by credit to that account; and in other cases, payment of interest and repayment of loan shall be made by credit to the lender's Non-resident Ordinary (NRO) or Non-resident Special Rupee (NRSR) account as desired by the lender; and

(v) the amount borrowed shall not be allowed to be repatriated outside India.

Ajay Sethi
Advocate, Mumbai
95205 Answers
7607 Consultations

5.0 on 5.0

Peer to Peer lending

In India, peer-to-peer lending is currently unregulated. If you want to start such type of business then registering P2P lending platforms as non-banking financial companies (NBFCs). RBI has powers to regulate entities which are in the form of companies or cooperative societies. However, if the P2P platforms are run by individuals, proprietorship, partnership or Limited Liability Partnerships, it would not fall under the purview of RBI. Hence, it is essential that P2P platforms adopt company structure. The notification can therefore specify that no entity other than a company can undertake this activity. This will render such services provided under any other organisational structure illegal. Alternatively, the other forms of structure may be regulated by the State Governments.

What the law says

Section 45S of RBI Act prohibits an individual or a firm or an unincorporated association of individuals from accepting deposits, if his or its business wholly or partly includes any of the activities specified in clause (c) of section 45-I (i.e. activities of a financial institution); or if his or its principal business is that of receiving of deposits under any scheme or arrangement or in any other manner, or lending in any manner.

Contravention of Section 45S is an offence punishable under section 58B (5A) of RBI Act. As per the Act, ‘‘deposit’’ includes and shall be deemed always to have included any receipt of money by way of deposit or loan or in any other form, but does not include any amount received from an individual or a firm or an association of individuals not being a body corporate, registered under any enactment relating to money lending which is for the time being in force in any State. Since the borrowers and lenders brought together by a P2P platform could fall within these prohibitions, absence of regulation may lead to perpetrating an illegality. It is important that the guidelines would also prohibit the platforms being used for any cross-border transaction in view of FEMA provisions relating to transactions between residents and non-residents.

What you can do

1. Funds will have to necessarily move directly from the lender’s bank account to the borrower’s bank account to avoid the threat of money laundering.

2. Guidelines would also prohibit the platforms being used for any cross-border transaction in view of FEMA provisions relating to transactions between residents and non-residents.

For invest and distribute large scale of money, the idea mention in your query is not work properly and not feasibly in long time process.

The idea is applicable, the money can transfer to BRII and they distribute the money and pay the tax (But they also take money lending license) and they also return it by way of Gift to NRI.

But the main issue starts at the time of default of payment. How you can interfere in this transaction and how to recover the lented money from borrowers. More over some more difficulty is that every transaction above 2 laksh should be done through cheque or DD or bank transfer. The accountability is another issue. If get more time I will answer how it is possible to operate.

Ajay N S
Advocate, Ernakulam
4080 Answers
111 Consultations

5.0 on 5.0

1) NRI can gift money to his close relatives in india

2) NRI can lend money to his relatives in India provided loan is interest free , for minimum period of one year and money is received through normal banking channels or debit his NRE account

3) you can grant loan to any person in india provided loan period is not more than 3 years and rate of interest is not more than 2 percentage points above bank rate

4) further repayment of loan shall be by credit to NRO account or NSRE account of the lender

Ajay Sethi
Advocate, Mumbai
95205 Answers
7607 Consultations

5.0 on 5.0

1. Yes, NRI can gift any amount to his/her blood relative in India.

2. The said blood relative can do the lending business in India and earn profit/interest and then refund the profit/interest to the NRI by counter gifting the said amount.

3. However, the blood relative can not run a lending business in India charging interest on the loans provided by him and for doing the said business, he/she shall have to take license from the RBI.

4. After the recent advent of Sarada, Rosevaley cases, RBI/SEBI has imposed strict restriction on such money lending Companies.

Krishna Kishore Ganguly
Advocate, Kolkata
27245 Answers
726 Consultations

5.0 on 5.0

As a NRI your concern is understood.

However the law is clear that there is no problem in gifting the amount to your relatives back in India, these are exempt from gift tax in India. These gifts may be in any form – cash, jewellery, movable and immovable property, shares etc.

To avoid scenarios like these, the income tax rules specify relatives from whom tax free gifts can be received. These are:

Parents

Spouse

Your and your spouse’s brothers and sisters

Brothers and sisters of your parents

Your lineal descendants (including spouses)

Lineal descendants (including spouses) of your spouse.

The further transaction by your BRII i.e., money lending business shall conform the local legal requirement, that has nothing to do with the cash gifts what you have given him or you have received from him.

T Kalaiselvan
Advocate, Vellore
85404 Answers
2236 Consultations

5.0 on 5.0

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