Avoid FEMA Violations in Gifts and Donations (LRS Rules)

If you’ve ever sent money abroad to support your child’s living expenses, pitched in for a cousin’s wedding in Canada, or contributed to your alma mater’s endowment fund, chances are you’ve already used the gift or donation route under LRS.

On paper, it looks simple: money goes out, you mark the purpose as “gift” or “donation,” and the job is done.

But here’s where most people get it wrong:

Parents mark tuition fees as a gift and end up paying 20% TCS instead of 5%.
Families cover hospital invoices under gift, not realising medical has a lower TCS rate.
Some even try to route travel tickets or investment transfers under the gift code.

On the surface, these feel like harmless shortcuts. In reality, they put you in compliance grey zones:

Misuse of purpose codes is treated as a FEMA violation.
Banks are required to flag suspicious transfers to the RBI.
That one wrong code doesn’t just cost you more in TCS, it can also invite unnecessary scrutiny.

We’ve seen these mistakes play out again and again. This guide will show you, with real-life examples and clear RBI rules, exactly when to use the “gift” code, when “donation” is valid, and when you’re better off choosing another category.

What is LRS
Gifting under LRS
Donations under LRS
Gifts vs Donations: Key Differences
Legal Use Cases for Gifting
Legal Use Cases for Donations
Tax Treatment of Gifts and Donations
Documentation & Bank Requirements
FAQs
Conclusion

What is LRS?

The Liberalised Remittance Scheme (LRS) is the RBI framework that allows resident Indians to legally send up to USD 250,000 per financial year (April–March) abroad for permitted purposes like travel, education, medical treatment, gifts, donations, or investments.

Every remittance under LRS is tracked against your PAN and reported by banks to the RBI. If your outward remittances exceed ₹10 lakh in a financial year, certain categories also attract Tax Collected at Source (TCS).

Gifting under LRS

When Indians talk about “sending a gift abroad,” they usually mean transferring money to a child, relative, or friend who is living outside India. Under RBI’s Liberalised Remittance Scheme (LRS), this is a permitted transaction and is tracked under the purpose code S1302 – Personal Gifts and Donations to Individuals.

What qualifies as a gift?

A gift is a transfer of funds with no expectation of return, you don’t get any asset, service, or repayment back.
The recipient can be your child studying abroad, your sibling living overseas, or even a friend.
It can be a one-time lump sum (say, $20,000 for wedding expenses) or smaller transfers spread across the year.

Important:

Always choose the right purpose code. If you send tuition or medical money as a ‘gift’, banks will apply the gift TCS slab: 0% up to ₹10 lakh, then 20%.
But under the correct codes, education is much lower (0% with an education loan, or 5% above ₹10 lakh otherwise) and medical is also just 5% above ₹10 lakh.

Using the right category saves you money and avoids compliance issues. Read our full guides on Education and Medical Treatment.

Examples of legal gifting under LRS

Sending $15,000 to your daughter in the US to help with day-to-day living expenses.
Funding $10,000 for a sibling’s wedding or relocation expenses abroad.
Gifting $5,000 to a friend who is facing financial hardship overseas.
Pooling limits as a family: Husband, wife, and child can each gift up to $250,000, together sending $750,000 in a year, as long as the transfers are genuine gifts.

What’s Not a Gift (Grey Use Cases)

Misuse Scenario	Correct Code	TCS if Marked as Gift	TCS if Marked Correctly	Why It Matters
Paying child’s tuition invoice as a gift	Education – S1107	20% above ₹10L	0% with education loan, else 5% above ₹10L	Education remittances have much lower TCS and are smoother with banks
Funding hospital bills abroad as a gift	Medical Treatment – S0304	20% above ₹10L	5% above ₹10L (0% up to ₹10L)	Medical code is cheaper and avoids compliance risk
Paying for airline tickets/travel abroad as a gift	Travel – S0301	20% above ₹10L	20% above ₹10L	Same TCS rate, but correct classification prevents red flags
Sending investment sale proceeds abroad as gift	None (must follow ODI/other FEMA rules)	20% above ₹10L	Not permitted under Gift/Donation	RBI crackdown risk, banks may block transfer

Donations under LRS

Apart from personal gifts, RBI also permits residents to send money abroad as donations. These are tracked under the purpose code S1303 – Donations to Religious and Charitable Institutions Abroad.

What qualifies as a donation?

The recipient must be an institution, not an individual.
Eligible donations include contributions to foreign universities, endowment funds, charitable foundations, or religious organizations.
Banks will apply KYC and AML (Anti-Money Laundering) checks on the receiving institution before approving the transfer.

Examples of legal donations under LRS

Contributing $10,000 to the Harvard endowment fund.
Donating $5,000 to the Red Cross abroad.
Making a one-time contribution to a religious organization or registered foreign charity.

What’s Not a Donation (Grey Use Cases)

Just like gifts, people sometimes misuse the “donation” code because it looks simple. But RBI is clear: donations must go to registered charitable, religious, or educational institutions abroad, not to individuals or unverified entities.

Misuse Scenario	Correct Treatment	TCS if Marked as Donation	TCS if Marked Correctly	Why It Matters
Donating to a friend’s medical fundraiser on a foreign crowdfunding site	Should be marked under Medical Treatment (S0304) if directly paying hospital, else often not allowed	20% above ₹10L	0% up to ₹10L, 5% above ₹10L	Banks may block crowdfunding transfers; safer to pay hospital directly under medical code
Contributing to an unregistered NGO abroad	Not permissible under LRS	20% above ₹10L	Not allowed	Banks usually reject; FEMA violation risk
Making a political donation abroad	Not permitted under LRS	N/A	Not allowed	Explicitly disallowed by RBI
Routing money to a foreign university for your child’s tuition as a “donation”	Should be marked under Education (S1107)	20% above ₹10L	0% with education loan, 5% above ₹10L otherwise	Wrong code means higher TCS and compliance risk
Sending money to an individual abroad but calling it a donation	Should be marked as Gift (S1302)	20% above ₹10L	20% above ₹10L	Misclassification; may be rejected by the bank

Note:

Just like gifts, donations need the right purpose code. If your money is really for tuition or hospital bills, calling it a “donation” only hurts you.
Donations attract 20% TCS above ₹10 lakh, whereas Education remittances are taxed at 0% with an education loan or 5% above ₹10 lakh otherwise, and Medical Treatment remittances are taxed at just 5% above ₹10 lakh.

Using the correct category not only keeps you compliant but can also save you lakhs in unnecessary TCS.

Gifts vs Donations: Key Differences

At first glance, gifts and donations under LRS look similar. Both are non-commercial transfers, both are capped at USD 250,000 per individual per financial year, and both attract 20% TCS above ₹10 lakh. But the recipient, documentation, and compliance treatment are very different — and mixing them up is one of the most common mistakes people make.

Here’s a side-by-side comparison:

Aspect	Gift (S1302)	Donation (S1303)
Recipient	An individual abroad (child, relative, friend)	An institution abroad (university endowment, charity, religious body)
Purpose	Personal support, weddings, general expenses, lump-sum transfers	Charitable, religious, or philanthropic contributions
Documentation	Form A2 with S1302 PAN card Simple declaration of relationship	Form A2 with S1303 Details of recipient institution (name, registration, address) Sometimes a receipt or acknowledgement letter
TCS treatment	0% up to ₹10 lakh, then 20%	0% up to ₹10 lakh, then 20%
Common Misuse	Using gift code for tuition fees or hospital bills (should be Education/Medical)	Using donation code for tuition fees or personal support (should be Education/Gift)

Why the distinction matters?

For gifts: If you are paying for your child’s tuition or medical expenses, coding it as a gift will not only look suspicious but also cost you more in TCS. Education and medical have lower slabs (0–5% vs 20%). You can read our detailed breakdowns here: Education and Medical Treatment.
For donations: If you are sending money to a foreign university, make sure it’s actually to an endowment fund or charity, not tuition. Tuition is education, not donation.
For both: Banks scrutinise these codes closely because RBI has warned against misuse (especially investment proceeds disguised as gifts or personal transfers disguised as donations).

Legal Use Cases for Gifting

Objective (what you are paying for)	Allowed as Gift?	Notes
Monthly living expenses for your child abroad (rent, groceries)	✅	Clean personal support. Use S1302. If you are paying the landlord or utility company directly in your child’s name, some banks prefer Maintenance of close relatives (S1301).
One-time wedding gift to a relative abroad	✅	Classic gift. No invoice needed.
Emergency support to a friend or sibling abroad	✅	Permitted as a personal gift. If it is for a specific hospital bill, use Medical S0304 for lower TCS.
Security deposit or advance rent for student housing	⚠️	Many banks accept as gift or Maintenance S1301. If tied to a degree program, route under Education S1107 to keep all student expenses under one code and to benefit from lower TCS.
General allowance for a student’s off-campus living	✅	Gift works, although some banks prefer Maintenance S1301 for recurring allowances.
Paying tuition fees to a university	❌	Use Education S1107. TCS is 0% up to ₹10L and 5% above, or 0% with an education loan, while gifts are 20% above ₹10L.
Paying school fees for a minor studying abroad	❌	Treat as Education S1107. Same TCS benefits as above.
Paying hospital or clinic invoices abroad	❌	Use Medical S0304. TCS is 0% up to ₹10L and 5% above. Calling it a gift triggers 20% above ₹10L.
Paying health insurance premium for your child abroad	⚠️	Banks differ. Many accept Maintenance S1301 for recurring premiums. If insurance is linked to medical treatment, use Medical S0304. Avoid misusing “gift.”
Paying airline tickets or tour packages	❌	Use Travel S0301. TCS is 20% above ₹10L, same slab as gift, but correct coding avoids scrutiny.
Visa application fees for study or travel	❌	For students, most banks accept Education S1107 with the admission proof. For general travel, use Travel S0301.
PR or Immigration fees	❌	Do not mark as gift. These have a separate permissible category. Ask bank for the correct code.
Car purchase or house down payment for a relative abroad	✅	Gift to an individual is permitted within your LRS limit. Expect enhanced due diligence on large values. Never route the seller’s invoice as a “gift.”
Investment money for a relative to invest as they wish	⚠️	A cash gift to an individual is allowed, but if the real intent is to move investment proceeds or fund an overseas entity, this invites scrutiny. Do not disguise ODI or capital account transactions as gifts.
Sending money to your own foreign account	❌	Not a gift. Opening or funding your own foreign account is permitted under LRS with a different purpose, not S1302.
Gifting beyond USD 250,000 in the same financial year	❌	LRS limit is hard capped per person. Consider genuine family pooling, each within their own USD 250k limit, and track TCS per PAN.
Crowdfunding to an individual abroad (non-medical)	⚠️	Technically a personal gift to an individual can pass if beneficiary KYC is clear. Banks often refuse due to AML (Anti-Money Laundering) concerns. If it is a hospital fundraiser, better to pay the hospital under Medical S0304.
Gifting foreign investment sale proceeds	❌	High-risk misuse. RBI has flagged such routing. Follow ODI or other capital account rules, not Gift.

Legal Use Cases for Donations

Objective (what you are paying for)	Allowed as Donation?	Notes
Donation to a foreign university endowment or research fund	✅	Classic donation to an institution. Provide institution details. Not tuition. No Section 80G benefit in India.
Donation to an international charity (for example, Red Cross)	✅	Permitted. Banks run KYC and AML (Anti-Money Laundering) checks. Keep the receipt. No 80G in India.
Donation to a religious organization abroad	✅	Permitted under S1303. Some banks ask for additional due diligence.
Alumni fund contribution to your foreign university	✅	Allowed if routed to the university’s charitable or endowment arm. Tuition is not a donation.
Sponsoring a research chair or scholarship at a foreign institution	✅	Permitted when paid to the institution’s charitable arm. Ensure you are not receiving a commercial benefit.
Paying a student’s tuition but calling it a donation	❌	Wrong code. Use Education S1107. Education has lower TCS than donation.
Funding an individual’s medical expense via “donation”	⚠️	Donation must go to an institution, not an individual. If you can pay the hospital directly, use Medical S0304 for lower TCS.
Donating via crowdfunding platforms abroad	⚠️	Often rejected unless the beneficiary is a registered charity and the platform routes to the institution. High AML (Anti-Money Laundering) risk.
Donation to an unregistered foreign NGO	❌	Banks typically block. Fails KYC or regulatory checks.
Political donations abroad	❌	Not permitted under LRS.
Paying membership fees to overseas associations, clubs, or alumni bodies	❌	Memberships confer benefits. This is not a donation. Treated as a service or subscription, not S1303.
Buying event tickets to a charity gala overseas	❌	Quid-pro-quo benefit. Not a pure donation. Treated as a service purchase, not S1303.
Donation in kind (for example, shipping goods)	❌	LRS is for remitting foreign exchange. In-kind donations sit outside typical LRS flows and face customs and NGO rules.
Donation to a diaspora association for community events	⚠️	Depends on the association’s status. If it is a registered charity with compliant accounts, banks may allow. Otherwise, expect rejection.
Donation to a foreign school that is not a charity arm	❌	If it is for a student’s benefit, this is education. If it is a general endowment and the entity is a registered charity, it can be S1303.

Tax Treatment of Gifts and Donations

When you send money abroad under LRS, taxation has two layers:

TCS (Tax Collected at Source) – charged upfront by banks at the time of remittance.
Income Tax treatment – how gifts and donations are taxed (or exempt) under the Income-tax Act, 1961.

Gifts

Gift Tax abolished in 1998: Gifts are no longer taxed at the sender’s end in India.
Section 56(2)(x) of the Income Tax Act (current framework)
- From non-relatives (within India): If the total value of gifts you receive from non-relatives exceeds ₹50,000 in a financial year, the entire amount becomes taxable under “Income from Other Sources.”
  - Example: If you receive ₹70,000 from a family friend in India, you must pay tax on the full ₹70,000, not just the excess ₹20,000.
- From relatives: Gifts from specified relatives (spouse, parents, children, siblings, lineal ascendants or descendants) are fully exempt, no matter the amount.
  - Example: A father gifting ₹20 lakh to his son - completely exempt.
- On special occasions: Gifts received on your own marriage are exempt, even from non-relatives.
  - Example: Receiving ₹5 lakh from a family friend at your wedding - fully exempt.
Gifts to someone abroad
- If you remit money as a gift to your child or relative abroad, Indian tax laws do not tax the recipient because the income does not “arise in India.”
- However, foreign tax rules may still apply.
  - Example: In the US, if your child receives more than USD 100,000 in gifts from you in a year, they must file Form 3520 with the IRS, even though it is not taxable income.
- Edge case: If you gift money to a non-relative abroad, India doesn’t tax it, but the recipient might face local reporting or tax obligations in their country.

TCS (Tax Collected at Source)

Threshold: No TCS on the first ₹10 lakh of LRS remittances in a financial year (per PAN).
Rate for gifts and donations: Above ₹10 lakh, banks deduct 20% TCS.
Refund: TCS is not a final cost. It is an advance tax credit and can be claimed back in your Income Tax Return (ITR).

Example:

₹8 lakh gift to your child abroad → No TCS, since it is below the ₹10 lakh threshold.
₹20 lakh donation to a foreign charity →
- First ₹10 lakh exempt.
- Next ₹10 lakh @ 20% = ₹2 lakh TCS, claimable in ITR.
₹15 lakh gift for living expenses + ₹15 lakh education fee →
- Gifts: ₹15 lakh → ₹10 lakh exempt, ₹5 lakh @ 20% = ₹1 lakh TCS.
- Education: ₹15 lakh → ₹10 lakh exempt, ₹5 lakh @ 5% = ₹25,000 TCS.
- Total TCS = ₹1.25 lakh.
- If you had incorrectly tagged the education transfer as “gift,” TCS would have been ₹2 lakh — almost 8x higher.

Documentation & Bank Requirements

When remitting money abroad under LRS for gifts or donations, banks act as Authorised Dealers (ADs) and are responsible for compliance. This means they will always ask for a minimum set of documents before processing your transfer.

Common Documents (for all LRS remittances)

Form A2: The RBI-mandated form that records the purpose code (e.g., S1302 for gifts, S1303 for donations).
PAN card: Required for all remittances to link transactions to your annual LRS limit of USD 250,000.
Bank’s KYC compliance: Updated address, ID proofs, and in some cases a declaration that the funds are from your own account.

Gifts (S1302)

Declaration of relationship: Most banks will ask for a simple self-declaration that the transfer is a personal gift, often stating your relationship with the recipient.
No invoice needed: Unlike education or medical remittances, you are not required to submit bills, invoices, or proof of expenses.
Form 15CA/15CB: Not usually required for gifts because they are exempt from CA certification under RBI’s simplified LRS process.

Donations (S1303)

Institution details: Banks will ask for the beneficiary institution’s name, address, and registration details.
Donation acknowledgement/receipt: Some banks request a copy of the institution’s receipt or letter confirming the donation, especially for larger values.
AML/KYC checks: Banks may run additional due diligence on foreign charities, especially lesser-known ones, to ensure the institution is genuine and compliant with Anti-Money Laundering (AML) rules.

Gifts require minimum paperwork (Form A2, PAN, and a declaration). Donations require more scrutiny (Form A2 plus recipient institution details and sometimes receipts).

Always be prepared for banks to ask extra questions if the recipient is not a well-known institution or if the transfer amount is unusually large.

FAQs

Can I gift money to my NRI child for tuition fees?
Yes, technically you can send money as a “gift” to your child abroad, even if it is meant for tuition. But this is not the correct purpose code. RBI has a separate code for education remittances (S1107) that is better to use.

Why it matters:

Lower TCS: Education remittances attract 5% TCS above ₹10 lakh (and just 0.5% if routed via an education loan). If you mark the same transfer as a gift, it will attract 20% TCS.
Compliance clarity: Banks process education remittances faster because they have documentation (admission letter, fee invoice).
- Example: If you send ₹20 lakh as tuition under “gift,” you’ll pay ₹2 lakh in TCS. If you mark it correctly as “education,” TCS would be only ₹50,000.

Can I donate to my child’s foreign university fund?
Yes, if the university has a registered endowment fund or charitable trust, you can classify the transfer as a donation (S1303). But you cannot mark tuition fees as a donation.

Why it matters:

Tuition = Education (S1107): Attracts lower TCS (5%).
Donations = S1303: Attract 20% TCS above ₹10 lakh and no tax deduction in India.
Example: Contributing USD 5,000 to the Harvard endowment is a donation. Paying USD 50,000 for your child’s course fees must be tagged as education.

Do NRIs pay US tax on gifts received from India?
No, gifts from abroad are not taxable income in the US. But US tax law requires reporting if the value crosses certain thresholds.

Key rule:

If a US resident receives more than USD 100,000 in a year as gifts from a foreign person (including parents in India), they must file IRS Form 3520.
There is no tax liability, but non-reporting attracts penalties.
Example: If you gift your daughter in the US USD 150,000, she owes no tax but must file Form 3520.

Can I gift stocks or property abroad under LRS?
Generally, no. LRS is meant for cash remittances in foreign exchange. You cannot directly gift shares, ETFs, or property abroad through the LRS route.

What you can do:

Gift cash (within the USD 250,000 limit) to your child abroad. They can then invest it in shares through a compliant account.
If you already hold foreign securities via LRS, gifting them directly involves additional FEMA/SEBI rules and is not processed as a simple “gift” remittance.
Example: Sending USD 50,000 to your son in Canada as cash gift = allowed. Transferring your Apple shares held abroad into his brokerage account = not permitted under normal LRS gifting.

Is TCS a permanent cost when I gift or donate abroad?
No. TCS is not a tax in itself; it is an advance tax credit collected upfront by banks.

What happens next:

You can adjust this against your income tax liability while filing your Income Tax Return (ITR).
If your total tax liability is less than the TCS collected, you can claim a refund.
Example: You donate ₹20 lakh abroad. Bank collects ₹2 lakh as TCS. At year-end, if your actual tax liability is only ₹1 lakh, you’ll get a refund of ₹1 lakh.

Conclusion

Gifts and donations are straightforward under LRS when you use the correct purpose codes. A gift should go to an individual abroad, a donation should go to a registered institution, and expenses like tuition or medical bills should be tagged under their own categories.

Misclassification not only risks compliance but also leads to unnecessary TCS outflows.

Need clarity on your remittance?

Paasa is a global investing platform for Indian investors, enabling access to equities and strategies across markets such as the US, China, Europe, Japan, and beyond. Our clients use Paasa to build globally diversified portfolios, from direct stocks to curated managed strategies.

Every cross-border allocation sits within the FEMA and LRS framework, and our team has developed strong in-house expertise in compliance, documentation, and purpose code selection. While remittance itself is not our core offering, we support investors in structuring flows so that their global allocations remain cost-efficient and fully compliant.

If you would like expert guidance on how FEMA and LRS apply to your investment plans, you can reach us at [email protected] or schedule a consultation with our team.

About Paasa

Paasa is an Indian investor’s gateway to global investing, trusted by HNIs, family offices, and institutions to diversify into markets across the US, Europe, China, Japan, and beyond.

What sets Paasa apart is its India-facing compliance layer:

FEMA and LRS compliance embedded into every transaction.
Tax reporting and analytics built for Indian investors (LTCG, STCG, dividend tax, TCS tracking).
End-to-end support for remittance structuring, reconciliation, and compliance queries.

Whether it’s equities, ETFs, UCITS funds, managed strategies, or even helping you protect your RSUs from estate tax, Paasa provides a single transparent platform for global portfolios with the confidence that India-specific compliance is taken care of.

Disclaimer
This blog is for informational purposes only and should not be considered investment, tax, or legal advice. The information shared reflects publicly available regulations and our understanding of the Liberalised Remittance Scheme (LRS) as of the date of publication. Rules, tax laws, and RBI guidelines are subject to change, and their application may vary based on individual circumstances.

Overseas remittances for gifts, donations, education, medical, and investments carry risks, including foreign exchange fluctuations, regulatory changes, and policy updates. Readers are advised to consult their financial, tax, and legal advisors before making any remittance or investment decision.