Taxability of Indian students Studying abroad

All incomes earned in a foreign country are combined and taxed in India (applicable to students too, except for minors). As per the Income Tax Act, 1961, an individual deputed in a foreign country on work for less than 180 days, or six months, is considered an Indian resident. These students fall in the resident and ordinarily resident category and their global income is taxable in India

 

Maintain F1 Student Status [an official student in the USA]

According to the 2018 data released by the Institute of International Education (IIE) in collaboration with the US Department of State's Bureau of Educational and Cultural Affairs, 17.9% of the total foreign students in the US in 2017-18 were Indian students. A total of 196,271 Indian students, who contributed $7.5 billion towards the US economy, are the second highest group of foreign students in the US, next to the Chinese.

 

In the United States, the F visas are a type of non-immigrant student visa that allows foreigners to pursue education (academic studies and/or language training programs) in the United States. F-1 students must maintain a full course of study. F1 visas are intended for full-time students and are not designed as work visas. F-1 visas are only issued in U.S. embassies and consulates outside the United States, although extensions of stay and changes of status may be possible within the United States. F-2 visas are for spouses and children of F-1 visa holders. These are technically called "dependents."

Filing of a tax return on an F-1 visa

Most F-1 students are considered non-resident aliens by the IRS. As a non-resident alien, you will need to file Form 1040NR-EZ or 1040-NR to assess your federal income and taxes. An international student will be taxed in the same manner as a non-resident alien for US federal income tax purposes, which means that they will be taxed only on US-source income.

 

Every international student is required to file their tax return if you received US income. Even if you do not earn money during your time in the US, you will still need to file Form 8843 with the Internal Revenue Service (IRS) by the 15 April deadline. You may also be required to fill out state tax documents, depending on the state. And even if you did not work or receive income in the US, you are still obligated to file a Form 8843 with the IRS.

 

Federal tax

Federal income tax is the tax levied by the Internal Revenue Service (IRS) on the annual earnings of individuals, corporations, trusts, and other legal entities. It applies to all forms of a taxpayer’s income, such as employment earnings. It is also the largest source of revenue for the US government.

State income tax

Most states in the US will collect state income tax in addition to federal income tax. Tax rates and deductions will differ for each individual state in the US, so the amount you will pay will depend on where you are. Because of this, F-1 students may have to a file state tax return and pay state income tax even when no federal return is due

KEY NOTE

The US has income tax treaties with 65 countries.

Type of tax will have to pay

F-1 international students, like all non-residents, must pay tax in the US on the following types of income:

(i)          Wages and compensation

(ii)        Salaries

(iii)       Tips

(iv)      Interest

(v)        Dividends

(vi)      Some scholarships/fellowship grants

(vii)     Prizes/awards

 

The amount of tax you will have to pay will largely depend on your personal circumstances.

Payment towards Tuition Fee for a child studying abroad

Since the institution is abroad, deduction under section 80C(2)(xvii) r.w.s 80C(4)(c) for the tuition fee cannot be claimed. Only Paid to University/Institution in India is allowed for 2 child and Full time education.

Liberalised Remittance Scheme (LRS) of USD 2,50,000

Once a student proceeds to the destination abroad, they will be expected to pay their tuition and living expenses. Some countries allow for the students to work part-time along with their studies to meet the cost of living in the designated area and most Indian students are supported by families. For students receiving money from India, there are a few guidelines set by the Reserve Bank of India (RBI) under the Liberalised Remittance (LRS) Scheme, which all students studying abroad must abide by.

 

Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to a maximum limit of USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both. Also, resident Indians can avail  foreign exchange facility (buying foreign currency as cash/forex card/ traveller’s cheques) within the same limit of USD 2,50,000. Parents who have sent their wards for studies abroad are the biggest users of the LRS, using this window to pay both the fees and regularly meet the student’s living expenses abroad.

 

LRS Rules Indian Students - Maximum money you can send abroad from India

As per the Liberalised Remittance Scheme, Authorized Dealers can allow money transfer abroad up to USD 2,50,000, by resident individuals per financial year for permitted current account/capital account transactions or both. This limit covers the purposes of :

(i)       Overseas education

(ii)     Living expense of student studying abroad

The limit of USD 2,50,000 can be used in a single forex transaction or multiple forex transactions combined in a financial year.  In the case of the remitter being a minor, their natural guardian must sign the LRS declaration form (A2 Form).

If you are going to the US for your studies. You have a flight from Mumbai to London and another flight from London to New York. Then, the air ticket for the flight from London to New York is counted as part of your LRS limit of USD 2,50,000.

Remittance for Living Expenditure

Living expense of student studying abroad is also covered under LRS because it is an integral part of studying abroad. It is usually the case that the student is required to either live in a hostel (if the college or university has such facility) or at a rented accommodation, while the study is in progress, for at least for the first year. The overall limit of US $ 250000 is the same for any academic year.

 

Special circumstances when you can send more money than the maximum limit for the purpose of studies abroad

You can draw more foreign exchange than the LRS limit of USD 2,50,000 under special circumstances. AD Category I bank and AD Category II may allow remittances (without seeking prior approval of the Reserve Bank of India) exceeding USD 2,50,000 based on the estimate received

For expenses abroad which are related to studies exceeding the LRS limit, an individual may be permitted to avail more foreign exchange than their limit of USD 2,50,000, provided they produce the required document proof (i.e. Estimate from university/ institution abroad for tuition fee (and or maintenance expense)

Maximum money that can be carried as cash on foreign trips 

Resident Indians going abroad from India or an Indian student going to study abroad are allowed to carry foreign money in the form of cash (purchase foreign currency notes / coins) only up to USD 3,000 (or its equivalent in other currencies). Going by today’s US dollor exchange rate in India, USD 3000 comes up to more than Rs 2,20,4400 (73.48 Indian Rupee). This is enough money to take care of the immediate expenditures of a student when moving abroad. The balance forex limit of the student (USD 2,50,000 – USD 3,000 = USD 2,47,000) may be carried in the form of stored value cards, forex card, traveller’s cheque or demand draft.

Payment method to use when buying foreign currency in India

Foreign exchange for travel abroad can be purchased from an authorized person against rupee payment in cash for transactions below Rs.50,000. However, if the sale of foreign exchange is for the amount equivalent to Rs. 50,000 or more, the entire payment should be made by way of NEFT/RTGS or debit/credit card (online banking) or debit/credit card (Payment Gateway available through ExTravelMoney). For Outward Remittance, only NEFT/RTGS options are the only payment modes available.

No limit to receiving money from abroad to India

Reserve Bank of India does not restrict inward remittances. Any person can remit money from a country abroad to India without any limit.

Using Currency Declaration Form when bringing back money to India

 A person coming into India from abroad can bring with him foreign exchange without any limit. However, if the aggregate value of the foreign exchange in the form of currency notes, banknotes or traveller’s cheques brought in exceeds USD 10,000 or its equivalent and/or the value of foreign currency alone exceeds USD 5,000 or its equivalent, it should be declared to the Customs Authorities at the Airport in the Currency Declaration Form (CDF), on arrival in India.

For students studying abroad is coming to India (for holidays or permanently

When a student studying abroad is coming to India (for holidays or permanently), they are allowed to bring with them foreign exchange without any limits whatsoever. However, if the value of the foreign exchange they are bringing exceeds US $10,000 (currency notes and / or traveller’s cheques) or its equivalent, then it has to be declared to the Customs Authorities at the Airport by way of the Currency Declaration Form (CDF). The same is the case if the value of foreign currency notes alone exceeds US $5,000. However, this is not applicable to foreign exchange brought in forex card.

 

Surrendering unspent foreign exchange within 180 days of return from abroad

On return from a foreign trip, travellers are required to surrender unspent foreign exchange held in the form of currency notes and traveller’s cheques within 180 days of return. However, they are free to retain foreign exchange up to USD 2,000, in the form of foreign currency notes or TCs for future use or credit to their Resident Foreign Currency (Domestic) [RFC (Domestic)] Accounts. The residents can hold foreign coins without any limit.

For students studying abroad : On coming back to India, foreign exchange in the form of currency notes and / or traveller’s cheques up to US $2,000 or its equivalent can be held indefinitely. Foreign exchange above this limit must be surrendered to an authorized dealer (RBI approved money changers or banks). This limit does not apply to forex card. Foreign currency in forex cards can be held indefinitely till the expiry period of the card.

RBI, for the purpose of Foreign Exchange Management Act (FEMA), accords special status to students going abroad for studies. They would be treated as NRIs from the day of their departure from India.

Therefore, student must intimate banks about the change in his residential status (under FEMA) before his departure. He can also update her KYC details with mutual fund houses and other financial institutions.

 

Tax benefit on education loan for studies abroad [Section 80E]
As per Section 80E, any individual who has taken a loan from any financial institution or approved charitable institution for pursuing higher education, whether in India or abroad, can claim deduction equivalent to the entire amount of interest paid on the borrowed sum for a consecutive period of eight years, beginning from the assessment year in which the individual has started paying the interest on loan or until the assessment year in which the interest is paid by the individual in full, whichever is earlier. The loan can be taken for the education of self, spouse, children or the student for whom the individual is the legal guardian.

Deduction for interest paid on loan taken for higher education [Section 80E]

(i)        Only individuals are eligible for tax deductions, Income Tax Deduction can be claimed only on the interest component.

(ii)      The benefit can be claimed by the parent as well as the child, which means that the person who pays the education loan whether parent or child can start claiming this deduction.

(iii)    Deduction can be availed only if the loan is taken to finance higher education. The deduction under section 80E is allowed only if the education loan was taken for higher studies. Higher studies refers to education after completing the Senior Secondary Examination. It includes both the vocational courses as well as the regular courses in India or abroad. Thus, loan taken for post graduate courses in medicine, management, engineering, applied science, etc. are covered under Section 80E.

(iv)    Deduction is only available if interest is paid out of income chargeable to tax (i.e., deduction under this section cannot exceed the taxable income).

(v)      Deduction can be availed for the maximum period allowed to claim deduction is up to 8 years starting the year in which you start repaying the interest on the loan or till the time interest is paid fully, whichever is less.

 

Foreign tax credit and tax treaty benefits

For example, students who earn from internship in the US will be exempted from paying tax, as part of the India-US tax treaty. But, the income will be taxed in the country of residence, India. If the tax is paid in both the countries, there is a provision whereby an individual can get foreign tax credit in the home country.

 

Suppose an individual is taxed Rs 1,00,000 in the foreign country and his total tax liability in India is Rs 200,000. He will have to pay only the remaining Rs 1,00,000 in India after claiming the foreign tax credit, provided he has a foreign tax certificate. But, if the tax in the home country is less than what was paid in the foreign country, the differential is not refunded.

 

Also, if an Indian resident student goes abroad on scholarship or under a student exchange programme, the allowance given for expenses incurred in the foreign country does not come under the tax ambit. The Income Tax Act exempts such allowances because these are given to facilitate academic learning.

 

TCS on foreign remittance through Liberalised Remittance Scheme [Section 206C(1G)(a)]

Outward Remittance falls under the Liberalized Remittance Scheme (LRS) of the Reserve Bank of India.

With effect from 01.10.2020, an authorised dealer receiving an amount or an aggregate of amounts of seven lakh rupees or more in a financial year for remittance out of India under the Liberalised Remittance Scheme of Reserve Bank of India, shall be liable to collect TCS, if he receives sum in excess of said amount from a buyer being a person remitting such amount out of India.

 

Studying Abroad: For students planning to go abroad for studies, and who have taken an education loan from a financial institution, rate of TCS shall be 0.5 per cent on the amount exceeding Rs 7 lakh. “At the rate of 0.5 per cent, if the amount being remitted out has been sourced from an education loan as defined in Section 80E. If the buyer does not furnish his PAN, the tax shall be collected at the rate of 5 per cent.”

 

Remittance facilities for students [RBI/2015-2016/80 - Master Circular No.8/2015-16, dated 01.07.2015]

Students going abroad for studies are treated as Non-Resident Indians (NRIs) and are eligible for all the facilities available to NRIs under FEMA.

As non-residents, they will be eligible to receive remittances from India up to (i) limits prescribed under the Liberalized Remittance Scheme which would include remittances from close relatives in India towards maintenance and remittances towards their studies. However, for the purpose of studies, the limits would be as demanded by the university abroad; and (ii) USD 1 million per financial year, out of sale proceeds of assets/ balances in their NRO account maintained with an Authorised Dealer bank in India.

All other facilities available to NRIs under FEMA are equally applicable to the students.

Educational and other loans availed of by them as residents in India will continue to be available as per FEMA regulations.

CBDT 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.

Press Release : 2003-2004/710 Dated 08.12.2003

Residential Status of Indian Students Abroad Revised

The Reserve Bank of India has been receiving representations from Indian students studying abroad requesting that they may be treated as non-residents under FEMA. The purport of their argument is that though they are students, they are, in reality, not dependent for a dominant part of their expenses on remittances from their households in India. Often they are permitted to work and have to undertake certain related financial transactions. They urge, therefore, that the definition needs to be revised.

Taking into account the definition of resident under FEMA and the intention of the student to stay abroad for uncertain period though not for permanent settlement, it has been decided to treat them henceforth as non-residents from the FEMA angle. As non-residents, students will, in any case, be eligible for receiving remittances 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 also, (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 in regard to their academic pursuits.

 

Scholarship

You generally would not have to pay tax on scholarship money used to pay for basic expenses related to your education. The IRS calls these “qualified education expenses”. These expenses include:

(a)     Tuition and student fees

(b)     As well as books and any required equipment or supplies for your courses

This means that if your scholarship funds are used to pay for access to classes or for special supplies that your school requires you to buy to complete a course, you likely would not have to count these funds as income or pay tax on them.

Taxed Scholarship Funds

Some scholarship funds are subject to taxation, however. If you have scholarship money left over after covering your qualified education expenses, you must include that amount as part of your gross taxable income. That means scholarship money used to pay:

(a)           Rent or board

(b)           Utilities

(c)           And other expenses (including school supplies not listed as required in your program) counts as income when calculating your tax liability

Taxable Stipend Scholarships

In some cases, a scholarship is really more of a stipend, providing compensation for services while you are in school or for services you’ll provide in the future. If, for example:

• You receive a $10,000 scholarship with $3,000 of it designated to pay for your teaching services. The $3,000 counts toward your taxable income for the year.
• The remaining $7,000 is usually not taxable, as long as you're a degree student at a qualifying institution and the money is used for qualified education expenses.

Scholarship with the condition

If you receive a scholarship with the condition that you provide services in the future, you’ll need to count the scholarship as income in the year you receive it. Payment for services at a military academy also count toward your taxable income.

 

Student goes abroad on scholarship or under a student exchange programme

If an Indian resident student goes abroad on scholarship or under a student exchange programme, the allowance given for expenses incurred in the foreign country does not come under the tax ambit. The Income Tax Act exempts such allowances because these are given to facilitate academic learning.