Indian parents, whose children study abroad, have discovered a new way of saving their earnings in a non-taxable manner.
Way back in 2003, the Reserve Bank of India (RBI) introduced a rule where money earned by Indian students in a foreign land, when sent to India, would become taxable here. The students were categorised as non-resident Indians (NRIs) for this reason.
The loophole, however, in the rule was that when the students took up jobs overseas, they stopped sending money back to India, but instead took money for their sustenance from their parents based in India. This way, both the parents and the students could evade paying taxes on their income.
Under FEMA (Foreign Exchange Management Act), when a person is considered ‘non-resident’, they are entitled to repatriate freely any income in India in addition to capital sums of up to Rs.8 crore from their NRO bank account, every financial year. In the case of a resident, only Rs.2 crore can be remitted. With the primary criteria for determining one’s residency being an individual’s intention to leave India for an uncertain period, the misuse of financial limits under the NRI category by students will have to be seriously looked into by the RBI. A restructuring of the original rule would enable a clear distinction between students going abroad for an education period of more than four years and those enrolling for short-term courses with no intention of securing their own income. – Illustration by freepik – editor@nrifocus.com
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