Section 64 of the Income Tax Act contains India's 'clubbing of income' rules: when a person transfers an asset (including cash) to a spouse or minor child without adequate consideration, any income the transferred asset subsequently generates -- interest, dividends, capital gains -- is clubbed with, and taxed in the hands of, the person who made the transfer, not the recipient. NRIs are not exempt from this simply because the gift itself, made to a relative, is not taxable.
How it plays out in practice
If an NRI transfers funds into their resident spouse's NRO or savings account and the spouse invests it, the resulting interest or capital gains are clubbed back into the NRI's own Indian income and taxed at the NRI's applicable rate -- not the spouse's, even if the spouse has a lower slab. The same applies to a minor child's investments, with a narrow exemption of Rs 1,500 per child (up to two children) carved out separately. Clubbing on spousal transfers applies for as long as the marriage subsists; on minor children, until the child turns 18.
There are recognized exceptions: income the spouse or child earns through their own professional skill or effort isn't clubbed, and transfers made before the marriage existed don't trigger clubbing on that basis. Gifts to adult children or to parents fall outside Section 64's clubbing rules entirely -- the provision specifically targets spouses and minor children.
What this means for planning
None of this makes gifting to family in India a bad idea -- the FEMA remittance rules and the gift itself remain unaffected. It does mean the NRI should expect to report and pay tax on whatever income the gifted funds go on to earn, and should plan the TDS and advance-tax consequences of that income as if it were still their own, since for tax purposes it effectively is.