The Reserve Bank of India (RBI) has introduced the Liberalised Remittance Scheme (LRS), allowing Indian citizens to send up to $250,000 abroad for various legal purposes. However, recent notices from the Income Tax Department to parents of minors have raised questions about the use of bank accounts held in the name of minors for remittance abroad.
The Foreign Assets Investigation Unit of the Income Tax department discovered transactions being conducted from the bank accounts of minors, which involved sending money overseas for various reasons. Although sending money abroad is legal, minors’ bank accounts are often utilized to bypass the 250,000 dollar limit of remittances abroad. Wealthy Indians frequently use this method to establish bank accounts and acquire properties overseas.
Parents who hold bank accounts in the name of minors for the purpose of remitting funds abroad are not required to file tax returns since minors are considered to have no source of income. However, remittances abroad are likely to trigger an inquiry from the department’s system, which cannot connect the transaction to any wealth declaration by the minor.
The tax department may have sent tax notices due to concerns about the non-disclosure of foreign investment information in the Income Tax Returns. Taxpayers must declare the information about foreign holdings in their minor’s name at the time of filing their tax return. Indians are also required to disclose information about foreign bank accounts and assets in their tax returns.
The Income Tax department had also identified about 68,000 cases for e-verification due to underreporting of income in tax returns in comparison to the Annual Information Statement for the fiscal year 2019-20. The e-verification process involves informing taxpayers about the discrepancy in the Annual Information Statement (AIS) of their financial transactions and the Income Tax Returns filed.
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When the Finance Bill 2023 was passed in the Lok Sabha, Union Finance Minister Nirmala Sitharaman brought the RBI’s attention to payments abroad made using credit cards, which may not have triggered tax recoveries under LRS. While this move is expected to boost tax recoveries, it may encourage purely cash-based transactions among people who can afford to do so, according to experts.
In conclusion, while sending money abroad under the Liberalised Remittance Scheme is legal, the use of bank accounts in the name of minors to circumvent the $250,000 limit of remittances abroad has come under scrutiny by the department, resulting in the service of notices.
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