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Can students be NRIs?

A N Shanbhag | July 19, 2003 12:52 IST

Can a student on a fellowship open an NRI-related account? What about Indian executives posted abroad?

The legal provisions related to such queries are so complicated that I have come across cases where Indian banks have refused to let such people  open NRE accounts because they are not NRIs and have also not let them open ordinary resident accounts because they are abroad!

This is an attempt to resolve the complications and find a right answer to these questions.

The right to hold NRE/FCNR accounts in India is governed by FEMA which defines a person resident in India as a person residing in India for more than 182 days during the course of the preceding financial year (April to March), but does not include a person who has gone out of India or who stays outside India, in either case:

  • For or on taking up employment outside India, or
  • For carrying on a business or vocation outside India, or
  • For any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.

A Person who is not a Resident in India is a Person Resident Outside India.

Any student does not satisfy any of the three exceptions mentioned above and therefore, his residential status for FEMA has to be determined as follows:

A student going abroad for the first time will always be a resident in India, whether his stay during that year was more than 182 days or not. The fact that he was in India for the preceding year for more than 182 days makes him a resident.

During the subsequent fiscal years, he will be a resident if his stay in India during the previous year was more than 182 days.

Will be an ROI if his stay in India during the previous year was 182 days or less.

The taxability of his foreign income is governed by the residential status as defined by the Income Tax Act. Accordingly:

A resident is one who, during a FY satisfies any one of the following two basic conditions:

He is in India for at least:

  • 182 days in the fiscal year, or
  • 365 days out of the preceding four fiscal years AND 60 days in the fiscal year.

If an Indian citizen leaves India in any year for the purpose of employment, or as a member of the crew of an Indian ship, the 60 days in the clause 'b' above is to be replaced by 182 days.

Anyone who has gone abroad as a student, is caught by condition 'b' above. He does not become an NRI unless his stay in India is less than 60 days.

A student going abroad for the first time will be an NRI if his stay in India during the fiscal year is less than 60 days.

The same will be the situation next year and subsequent years until he ceases to be in India for at least 365 days out of the preceding four fiscal years.

In that case he ceases to be governed by the clause 'b' and Clause 'a' becomes applicable. Consequently, he will be an NRI if he is not in India for 182 days or more.

When the student becomes an NRI, his forex income --- stipend, fellowship, fees from moonlighting assignments, etc. -- is tax-free in India. If he is a resident, it is taxable in India. If it is taxable in his host country also, he is eligible for the benefit of DTAA between the two countries.

Now, let us take the case of executives who are sent abroad by Indian employers. The executive does not go abroad for the purpose of employment.

He already has a job. Even after he becomes an NRI from Income Tax Act point of view, his forex income, received as a executive, is taxable in India because it has a direct nexus with India.

Therefore, under Section 5 of Income Tax Act, it is received or is deemed to be received in India. However, any income received from moonlighting assignments is tax-free in India.

As and when such a student or executive becomes an ROI as defined by Foreign Exchange Management Act, he can open and operate NRE and FCNR accounts and credit his forex earnings therein after paying tax thereon, if any. This is so, even if he has not become an NRI as defined by Income Tax Act.

A lot of confusion mainly arises when the person is a resident as per Income Tax Act and an ROI as per FEMA and vice versa.

Is interest earned on NRE/FCNR tax-free?

Section 10(4ii) of ITA states: In the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 (46 of 1973), and the rules made thereunder will not be included in computing the total income of the individual.

This presents a difficulty. FEMA has replaced FERA w.e.f. June 1, 2000. Even the sunset clause has outlived its tenure.

Therefore, the above mentioned section has become inapplicable. The difficulty is attempted to be solved by the authorities by inserting in Schedule-I clause(9g) of FEMR (Deposit) that states -- "Income from interest on balances standing to the credit of NRE accounts is exempt from income-tax. Likewise balances held in such accounts are exempt from wealth-tax."

This has two implications.

Students, deputees and others who have opened NRE accounts as permitted by FEMA, enjoy freedom from tax. Some of my readers have reported me that their income tax officers have refused to accept this tax-free status of NRE on the grounds that it is only the Income Tax Act that dictates taxability!

Turning to FCNR, Section 10(15fa) exempts income from a scheduled bank to a non-resident or to a person who is not ordinarily resident within the meaning of sub-section (6) of Section 6, on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the Reserve Bank of India.

This means that if a resident as defined by Income Tax Act opens an NRE or FCNR account, which an ROI as defined by FEMA is allowed to do, the interest thereon will be taxable in his hands.

Yes, I feel that this is too complicated and am sure that you also feel likewise. Different income tax officers are bound to take different views on the subject causing much heartburn, litigation and rent-seeking (thanks to Kelkar Committee for coining this word for corruption).

To expect the officers of different authorised dealers and their branches across the length and breadth of the country to take correct decisions is a Utopian dream.

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