US ETF gifting: Tax rules for Indian investors transferring wealth
Indian families investing in U.S. ETFs often overlook a costly estate-planning gap. If you hold US-domiciled ETFs worth more than $60,000 at death, the IRS can tax up to 40% of your portfolio. Lifetime gifting offers a powerful escape route that most investors never explore.
The good news? U.S. tax law treats stock and ETF gifts by non-resident aliens very differently from inherited assets. India's Income Tax Act also exempts gifts between close relatives without any upper limit. Together, these rules create a clear path for transferring wealth to children and family members.
This guide walks you through every rule, exemption, and practical step for gifting US ETF shares as an Indian investor in 2026.
How the U.S. gift tax rules work for Indian investors
The single most important rule governing the gifting of US ETF shares is IRC § 2501(a)(2). This provision exempts all transfers of intangible property by non-resident aliens from the U.S. gift tax. Stocks, ETFs, and bonds all qualify as intangible property under this section.
This means an Indian resident can gift unlimited US ETF shares during their lifetime without paying any U.S. gift tax. There is no dollar cap, no annual limit, and no filing requirement for the donor. The IRS clearly states this on its website regarding non-resident non-citizen gift tax rules.
The U.S. annual gift tax exclusion stands at $19,000 per recipient for 2025 and 2026. However, this limit is largely irrelevant to Indian investors, as the intangible property exemption already covers all stock and ETF gifts without restriction.
One critical compliance point affects the recipient side. If a US-based family member receives aggregate gifts exceeding $100,000 from a foreign person in one year, they must file Form 3520 with the IRS. Missing this deadline triggers a penalty of 5% of the gift value per month, up to 25%.
U.S. estate tax considerations you cannot ignore
U.S. estate tax poses the largest financial risk to Indian investors holding US-domiciled ETFs. While U.S. citizens enjoy an exemption exceeding $13.99 million in 2025 (made permanent by the One Big Beautiful Bill Act signed in July 2025), non-resident aliens receive only $60,000.
This $60,000 threshold has stayed frozen since 1988. It is not adjusted for inflation. Any US-situs assets above this amount are subject to graduated tax rates, starting at 18% and reaching 40% on amounts exceeding $1 million.
US-situs assets include US-domiciled ETFs like VOO, SPY, VTI, and QQQ. They also include U.S. stocks, U.S. corporate bonds, and cash held in U.S. brokerage accounts. There is no estate tax treaty between the U.S. and India to provide relief.
Consider a practical example. An Indian resident holding $500,000 in U.S. ETFs at death would face roughly $145,800 in estate tax. At $1 million, the bill would be approximately $345,800. The estate must file Form 706-NA and receive IRS clearance before the broker releases any assets.
This stark difference between gift tax and estate tax treatment creates the core planning opportunity. Assets you gift during your lifetime permanently leave your taxable estate. Assets you hold until death face up to 40% tax with almost no exemption.
For a detailed breakdown of dividend withholding, capital gains, and DTAA credits, read our guide on tax implications for Indian residents investing in U.S. stocks.
Indian gift tax rules that favour family transfers
India's Income Tax Act makes intra-family gifting remarkably simple. Under Section 56(2)(x), gifts received from relatives are completely exempt from income tax. There is no upper limit on this exemption for relative-to-relative transfers.
The definition of "relative" under this section includes your spouse, children, grandchildren, parents, grandparents, and siblings. It also covers siblings of your spouse and the spouses of all individuals listed above.
Notable exclusions exist. Cousins, nephews, nieces, and their spouses do not qualify as relatives. Gifts to non-relatives exceeding ₹50,000 in aggregate during a financial year become fully taxable. The entire amount gets taxed at the recipient's slab rate under "Income from Other Sources."
When you gift US ETF shares to a relative, the recipient inherits your original purchase cost under Section 49(1). Your holding period also carries over. For U.S. ETFs classified as unlisted securities, the long-term holding threshold is 24 months. Long-term capital gains attract a 12.5% tax rate without indexation benefit under current rules.
The FEMA framework also supports these transfers. Under the Overseas Investment Rules 2022, a resident individual may receive foreign securities as a gift from a relative who is also a resident. No monetary limit applies, provided the donor acquired the securities in compliance with FEMA regulations.
Documentation you need to keep ready
Proper documentation protects both the donor and the recipient across two tax jurisdictions. Start with a formal gift deed that records the donor and recipient details, proof of relationship, a description of ETF shares, including ticker symbols and quantity, the market value on the transfer date, and both parties' signatures.
Maintain your original purchase records showing the acquisition date and cost basis for each ETF position. The recipient will need these when computing capital gains on any future sale. Keep copies of your brokerage statements showing the transfer execution or sale proceeds.
For FEMA compliance, retain evidence that the original investment was made through proper LRS channels. Bank remittance certificates, Form A2 copies, and LRS transaction records serve as proof. If you used the sell-and-rebuy route, keep records of the repatriation and the recipient's fresh LRS remittance.
File Form 67 in India before submitting your income tax return if you need to claim foreign tax credits on U.S. dividend withholding. Report all foreign assets in Schedule FA of your ITR-2 or ITR-3 for the relevant calendar year.
Tax-efficient gifting strategies that work
Give to adult children first. Transferring wealth to children aged 18 and above avoids the clubbing provisions under Section 64(1A). The recipient files taxes independently, often at a lower slab rate. The gift stays fully exempt under Section 56(2)(x) since parent-child qualifies as a relative relationship.
Time your gifts around high-gain positions. Since the recipient inherits your cost basis, gifting shares with large unrealised gains shifts future capital gains tax to a family member in a lower tax bracket. Avoid gifting shares trading below your purchase price. Sell those yourself to harvest the capital loss instead.
Use the sell-repatriate-remit pathway when practical. Most India-focused international brokers do not support in-kind share transfers between different account holders. The practical workaround involves selling your ETF shares, repatriating the proceeds to India, gifting cash to a family member, and having them remit the funds under their own LRS quota. This route triggers capital gains tax for you but gives the recipient a fresh, higher cost basis.
Switch new investments to Ireland-domiciled ETFs. While gifting existing US ETF holdings, redirect all future purchases to Ireland-domiciled UCITS equivalents like CSPX, VWCE, or EQQQ. These are not US-situs property and fall completely outside U.S. estate tax exposure.
Maximise family LRS quotas from the start. Each family member has an independent $250,000 annual LRS limit—a family of four commands $1 million in annual remittance capacity. Distributing investments across individual accounts from day one avoids transfer complications later.
If you are new to US ETF investing from India, our complete beginner's guide covers KYC, LRS funding, and platform comparisons step by step.
Minor children's accounts and the clubbing trap.
Many Indian parents want to start building US ETF portfolios for their children early. However, UGMA and UTMA custodial accounts in the U.S. are available only to U.S. citizens and residents with Social Security numbers. Indian minors cannot open these accounts.
The practical approach is to open a brokerage account in the parents' name and earmark it for the child. When the child turns 18, you can transfer or gift the accumulated holdings. Alternatively, minors may use their own $250,000 LRS quota per year, with the natural guardian signing Form A2 on their behalf.
Section 64(1A) of the Income Tax Act requires all income earned by a minor child to be clubbed with the higher-earning parent's income. This includes dividends and capital gains from U.S. ETFs. The parent is entitled to a modest exemption of ₹1,500 per minor child per year under Section 10(32).
This clubbing rule ceases at the end of the financial year in which the child turns 18. After that, the child files their own return and pays tax at their applicable slab rate. Parents can claim the 25% U.S. dividend withholding tax as a foreign tax credit on Form 67, whether the income is rebated.
For families focused on transferring wealth to children over the long term, gifting to adult children remains far more tax-efficient than building portfolios for minors.
Annual gifting limits at a glance
Understanding the annual limits across both countries helps you plan transfers effectively. On the U.S. side, the $19,000 annual exclusion per recipient applies in 2025 and 2026. However, since intangible property gifts by NRAs are fully exempt, this limit does not practically restrict ETF gifting by Indian residents.
On the Indian side, there is no annual cap on gifts between relatives under Section 56(2)(x). For non-relatives, the ₹50,000 aggregate threshold per financial year determines taxability. The LRS limit of $250,000 per person per financial year governs the amount each family member may remit abroad for new investments.
Smart families coordinate these limits across multiple members and financial years. A parent can gift existing US ETF holdings to adult children while each family member simultaneously builds their own portfolio using individual LRS quotas.
The interplay of U.S. and Indian tax law rewards proactive planning over passive holding. Every year you delay gifting appreciated US ETF shares is another year those assets remain exposed to the 40% estate tax trap. Start the conversation with a qualified cross-border tax advisor and put a structured gifting plan in place this financial year.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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Table of Contents
Indian families investing in U.S. ETFs often overlook a costly estate-planning gap. If you hold US-domiciled ETFs worth more than $60,000 at death, the IRS can tax up to 40% of your portfolio. Lifetime gifting offers a powerful escape route that most investors never explore.
The good news? U.S. tax law treats stock and ETF gifts by non-resident aliens very differently from inherited assets. India's Income Tax Act also exempts gifts between close relatives without any upper limit. Together, these rules create a clear path for transferring wealth to children and family members.
This guide walks you through every rule, exemption, and practical step for gifting US ETF shares as an Indian investor in 2026.
How the U.S. gift tax rules work for Indian investors
The single most important rule governing the gifting of US ETF shares is IRC § 2501(a)(2). This provision exempts all transfers of intangible property by non-resident aliens from the U.S. gift tax. Stocks, ETFs, and bonds all qualify as intangible property under this section.
This means an Indian resident can gift unlimited US ETF shares during their lifetime without paying any U.S. gift tax. There is no dollar cap, no annual limit, and no filing requirement for the donor. The IRS clearly states this on its website regarding non-resident non-citizen gift tax rules.
The U.S. annual gift tax exclusion stands at $19,000 per recipient for 2025 and 2026. However, this limit is largely irrelevant to Indian investors, as the intangible property exemption already covers all stock and ETF gifts without restriction.
One critical compliance point affects the recipient side. If a US-based family member receives aggregate gifts exceeding $100,000 from a foreign person in one year, they must file Form 3520 with the IRS. Missing this deadline triggers a penalty of 5% of the gift value per month, up to 25%.
U.S. estate tax considerations you cannot ignore
U.S. estate tax poses the largest financial risk to Indian investors holding US-domiciled ETFs. While U.S. citizens enjoy an exemption exceeding $13.99 million in 2025 (made permanent by the One Big Beautiful Bill Act signed in July 2025), non-resident aliens receive only $60,000.
This $60,000 threshold has stayed frozen since 1988. It is not adjusted for inflation. Any US-situs assets above this amount are subject to graduated tax rates, starting at 18% and reaching 40% on amounts exceeding $1 million.
US-situs assets include US-domiciled ETFs like VOO, SPY, VTI, and QQQ. They also include U.S. stocks, U.S. corporate bonds, and cash held in U.S. brokerage accounts. There is no estate tax treaty between the U.S. and India to provide relief.
Consider a practical example. An Indian resident holding $500,000 in U.S. ETFs at death would face roughly $145,800 in estate tax. At $1 million, the bill would be approximately $345,800. The estate must file Form 706-NA and receive IRS clearance before the broker releases any assets.
This stark difference between gift tax and estate tax treatment creates the core planning opportunity. Assets you gift during your lifetime permanently leave your taxable estate. Assets you hold until death face up to 40% tax with almost no exemption.
For a detailed breakdown of dividend withholding, capital gains, and DTAA credits, read our guide on tax implications for Indian residents investing in U.S. stocks.
Indian gift tax rules that favour family transfers
India's Income Tax Act makes intra-family gifting remarkably simple. Under Section 56(2)(x), gifts received from relatives are completely exempt from income tax. There is no upper limit on this exemption for relative-to-relative transfers.
The definition of "relative" under this section includes your spouse, children, grandchildren, parents, grandparents, and siblings. It also covers siblings of your spouse and the spouses of all individuals listed above.
Notable exclusions exist. Cousins, nephews, nieces, and their spouses do not qualify as relatives. Gifts to non-relatives exceeding ₹50,000 in aggregate during a financial year become fully taxable. The entire amount gets taxed at the recipient's slab rate under "Income from Other Sources."
When you gift US ETF shares to a relative, the recipient inherits your original purchase cost under Section 49(1). Your holding period also carries over. For U.S. ETFs classified as unlisted securities, the long-term holding threshold is 24 months. Long-term capital gains attract a 12.5% tax rate without indexation benefit under current rules.
The FEMA framework also supports these transfers. Under the Overseas Investment Rules 2022, a resident individual may receive foreign securities as a gift from a relative who is also a resident. No monetary limit applies, provided the donor acquired the securities in compliance with FEMA regulations.
Documentation you need to keep ready
Proper documentation protects both the donor and the recipient across two tax jurisdictions. Start with a formal gift deed that records the donor and recipient details, proof of relationship, a description of ETF shares, including ticker symbols and quantity, the market value on the transfer date, and both parties' signatures.
Maintain your original purchase records showing the acquisition date and cost basis for each ETF position. The recipient will need these when computing capital gains on any future sale. Keep copies of your brokerage statements showing the transfer execution or sale proceeds.
For FEMA compliance, retain evidence that the original investment was made through proper LRS channels. Bank remittance certificates, Form A2 copies, and LRS transaction records serve as proof. If you used the sell-and-rebuy route, keep records of the repatriation and the recipient's fresh LRS remittance.
File Form 67 in India before submitting your income tax return if you need to claim foreign tax credits on U.S. dividend withholding. Report all foreign assets in Schedule FA of your ITR-2 or ITR-3 for the relevant calendar year.
Tax-efficient gifting strategies that work
Give to adult children first. Transferring wealth to children aged 18 and above avoids the clubbing provisions under Section 64(1A). The recipient files taxes independently, often at a lower slab rate. The gift stays fully exempt under Section 56(2)(x) since parent-child qualifies as a relative relationship.
Time your gifts around high-gain positions. Since the recipient inherits your cost basis, gifting shares with large unrealised gains shifts future capital gains tax to a family member in a lower tax bracket. Avoid gifting shares trading below your purchase price. Sell those yourself to harvest the capital loss instead.
Use the sell-repatriate-remit pathway when practical. Most India-focused international brokers do not support in-kind share transfers between different account holders. The practical workaround involves selling your ETF shares, repatriating the proceeds to India, gifting cash to a family member, and having them remit the funds under their own LRS quota. This route triggers capital gains tax for you but gives the recipient a fresh, higher cost basis.
Switch new investments to Ireland-domiciled ETFs. While gifting existing US ETF holdings, redirect all future purchases to Ireland-domiciled UCITS equivalents like CSPX, VWCE, or EQQQ. These are not US-situs property and fall completely outside U.S. estate tax exposure.
Maximise family LRS quotas from the start. Each family member has an independent $250,000 annual LRS limit—a family of four commands $1 million in annual remittance capacity. Distributing investments across individual accounts from day one avoids transfer complications later.
If you are new to US ETF investing from India, our complete beginner's guide covers KYC, LRS funding, and platform comparisons step by step.
Minor children's accounts and the clubbing trap.
Many Indian parents want to start building US ETF portfolios for their children early. However, UGMA and UTMA custodial accounts in the U.S. are available only to U.S. citizens and residents with Social Security numbers. Indian minors cannot open these accounts.
The practical approach is to open a brokerage account in the parents' name and earmark it for the child. When the child turns 18, you can transfer or gift the accumulated holdings. Alternatively, minors may use their own $250,000 LRS quota per year, with the natural guardian signing Form A2 on their behalf.
Section 64(1A) of the Income Tax Act requires all income earned by a minor child to be clubbed with the higher-earning parent's income. This includes dividends and capital gains from U.S. ETFs. The parent is entitled to a modest exemption of ₹1,500 per minor child per year under Section 10(32).
This clubbing rule ceases at the end of the financial year in which the child turns 18. After that, the child files their own return and pays tax at their applicable slab rate. Parents can claim the 25% U.S. dividend withholding tax as a foreign tax credit on Form 67, whether the income is rebated.
For families focused on transferring wealth to children over the long term, gifting to adult children remains far more tax-efficient than building portfolios for minors.
Annual gifting limits at a glance
Understanding the annual limits across both countries helps you plan transfers effectively. On the U.S. side, the $19,000 annual exclusion per recipient applies in 2025 and 2026. However, since intangible property gifts by NRAs are fully exempt, this limit does not practically restrict ETF gifting by Indian residents.
On the Indian side, there is no annual cap on gifts between relatives under Section 56(2)(x). For non-relatives, the ₹50,000 aggregate threshold per financial year determines taxability. The LRS limit of $250,000 per person per financial year governs the amount each family member may remit abroad for new investments.
Smart families coordinate these limits across multiple members and financial years. A parent can gift existing US ETF holdings to adult children while each family member simultaneously builds their own portfolio using individual LRS quotas.
The interplay of U.S. and Indian tax law rewards proactive planning over passive holding. Every year you delay gifting appreciated US ETF shares is another year those assets remain exposed to the 40% estate tax trap. Start the conversation with a qualified cross-border tax advisor and put a structured gifting plan in place this financial year.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
Ready to earn on every trade?
Invest in 11,000+ US stocks & ETFs
