Many people think that the day when their child leaves for another country for studies, he or she will become NRI the same day. And some think that until someone has started working there or till the time one is studying the residency status does not change.

When you apply the residency rules considering the number of days one has stayed out of the country, also the Intent of the duration of stay at the time of leaving the country, one gets the answer.

In this article, I will be sharing how the FEMA and Income Tax Residency rules apply to the Students going abroad for studies, and when they will become NRI.

NRI as per Income-tax Act:

Firstly, let us understand who is an NRI, as per the Income-tax Act:

Non-Resident Indians are those who have been out of the country for a period of time equivalent to –

1. 182 days in the FY; and
2. 365 days out of Preceding 4 FYs and 60 days in the Previous FY (Preceding to Year for which we are checking the status)

In order to qualify as an NRI, both of the above conditions must be met. If any of the conditions do not meet, then the person would be treated as Resident Indian.

Let’s understand this with an example:

Dr. Sharma’s Daughter Aditi, left India for Australia for higher studies in June’2018. In Feb 2019, she came to India and stayed here till 25th March 2019. If we count on the number of days, she was out of India for 245 days.

This means that though Aditi satisfied the first condition of being out of the country for 182 days or more, she does not satisfy the second condition. She was in India for 60 days in the Previous FY, and also 365 days in the preceding 4 years.

This means that she will not be considered as an NRI from an Income tax point of view.

NRI Definition as per FEMA:

Now let’s come to the definition of the Foreign Exchange Management Act (FEMA).

FEMA governs the money transactions. Investments, borrowings, Forex transfers, etc. 

Income-tax Act allows you to become an NRI after spending a specific number of days in India/abroad; however, FEMA evaluates whether a person is a resident or a resident outside India based on his or her intention. 

FEMA does not use the term NRI. However, it does take into account the number of days of stay, but still, Intention matters most to it.

Through Circular 45 dated 08.12.2003, RBI has declared that for the purpose of FEMA, students studying abroad will be treated as NRI as soon as they go abroad for studies.

According to FEMA, Aditi is a Resident outside India (NRI), but she is a Resident Indian (RI) according to the Income-tax Act. As a result, she must file an ITR as an Indian Resident but follow FEMA rules for NRIs regarding monetary transactions.

How important is it to know a person’s residential status according to the Income Tax Act and FEMA?

Below are the conditions not just for students studying abroad, but for all NRIs in general.

The first thing you need to know is that if you are an NRI you are not permitted to keep a savings or fixed deposit account with the bank. It is not possible for you to open a Postal Savings Account, PPF account, NSC, or Senior Citizen account, etc. But if you already have one before becoming an NRI (FEMA) you may continue with it till maturity. (Also Read: Is PPF a good long-term investment for doctors?)

An NRI must convert his or her Savings bank account to an NRO (Non-Resident Ordinary) account. They can also open NRE and FCNR accounts. 

India does not allow NRIs (FEMA) to invest in Agricultural land. They can, however, invest in any residential or commercial project. (Also Read: Why Real Estate Investment is riskier for doctors than Equity?)

NRI as per FEMA is eligible to receive remittances from India, which are:

1. Upto US$1 million per FY out of sale proceeds of assets in their NRO account
2. Upto US$ 250000 per FY under the Liberalized Remittance Scheme.

RBI may also lay down multiple other rules, as a result, it is better to contact a good Tax Advisor once you have determined your residency status.

As we have discussed in Dr. Sharma’s daughter’s case since she is a resident from the Income-tax perspective, she has to file a tax return (if at all) as a resident Indian, as well as follow all Indian tax rules. (Also Read: Tax Planning Strategies for Young Doctors)

It is common for students to take up some employment abroad in order to cover their expenses, such as teaching, research, etc., which may qualify as taxable income both in the country of residence and in India according to Indian income tax law. The income needs to be reported on your tax return.

Students do not have to pay taxes in both countries, as they can take benefit of DTAA (Double Taxation Avoidance Act).

Conclusion:

It is very important to know your residency status. This will keep you on the right side of the law. With a change in residency, you may need to change everything from your bank account to your investments to your tax rules. So, the moment you start planning to move abroad, regardless of the reason, you must clearly know what your residency status will be (if any).