Planning to Study Abroad? Learn How FEMA Affects Residential Status and Loans.
The numbers are monumental when it comes to Indian youth studying abroad. Whether to study abroad and return home or to have a permanent stay in those countries, recent reports suggest that India has become one of the major sources of outbound students.
But with the practical side of money transactions and other legal matters such as the residential status, remittance facilities, educational loans to pay universities fees,., many FEMA provisions are important and applicable.
What Is FEMA?
FEMA, Foreign Exchange Management Act, passed in 1999. The act facilitated a more liberal and easy-to-handle approach towards foreign exchange transactions.It is an important legal aspect to understand if you are planning to study abroad. FEMA deals with money transactions, investments, borrowings, Forex transfers, etc.
This article takes a detailed look at two important aspects: the residential status and Educational Loans under the point of view of FEMA.
Considering the circumstances of students who are mostly planning to study abroad for two years, there is confusion in terms of whether to consider them as NRIs or RIs. They are usually considered as Residents of India (RI), which creates certain practical issues, including income tax, money exchanges, etc.
As per Section 6 of the Income tax Act, 1961, an NRI is
- a person who is away from India for 182 days in a financial year
- The person should be away from India for 365 days during the preceding four financial years and 60 days in the financial year.
So, when you go abroad for your studies, even if you completed the first criteria of 182 days, the second criteria comes as a hurdle. You are not considered as an NRI.
One of the major arguments from students studying abroad was to make their residential status as “non-residents” (NRI), since students are allowed to work in most of the foreign countries and, hence, dependency on their households in India regarding financial matters is considerably limited.
To tackle the issue that is constantly affecting the Indian Students abroad, RBI made necessary changes from the FEMA point of view. It has been decided that we will henceforth consider the students who go abroad for studies even though their intention is to stay abroad for an uncertain period though not for permanent settlement as “non-residents”.
Also, as non-residents, students are eligible to receive remittance from India, as follows:
“(i). Up to USD 100,000 from close relatives from India on self-declaration towards maintenance, which could include remittances towards their studies as well.
(ii) Up to USD 1 million out of sale proceeds/balances in their account maintained with an AD in India.
(iii) All other facilities available for NRIs under FEMA.
(iv) Educational and other loans which were availed (as residents in India) by students would be allowed to continue. It is also clarified that these instructions do not dilute in any way the utilisation of the existing foreign exchange remittance facilities to students regarding their academic pursuits.”
RBI introduced the Liberalised Remittance Scheme (LRS) in 2004, which helped to facilitate resident individuals to remit money outside India. It can be used for expenditure and investment purposes including expenses like travelling, medical purposes, studying, gifts, donation, maintenance etc but restricts using it to buy lottery tickets, buying or selling of foreign exchange, or capital account remittances.
Interestingly, LRS also states that the remitted money should be the own money of the remitter but not borrowed. However, a liberal and passive approach by the RBI has been visible and banks are even advertising plenty of educational loan options. Hence there are loans available for students and taking loans for studying abroad is currently possible.
A clear picture of residential status, understanding how it affects money exchange and other financial aspects saves the students from much of their practical issues. Some of the work students do during their time of stay might be taxable and clarification on the residential status is a must-have to ensure a smooth experience. For loans, the approach from RBI is considered liberal and banks are offering loans to students who are planning to study abroad, hence it is something that takes less of a worry.
Author: CA. Anand Kumar H