RBI Takes Note: How Wealthy Parents Use Overseas Students to Stash Money Abroad
RBI Takes Note: How Wealthy Parents Use Overseas Students to Stash Money Abroad
The RBI is closely examining the potential abuse of a 2003 regulation that permits Indian students studying overseas to be classified as NRIs.
The Reserve Bank of India (RBI) is said to be reviewing a foreign exchange regulation that has been in place for two decades, originally designed to support Indian students studying overseas. For years, these students have been discreetly managing international money transfers, a practice that is now coming under scrutiny.
Wealthy Indian families have come to understand, as reported by ET, that their children’s NRI status presents a significant opportunity for considerable international fund transfers, a possibility that is not accessible to ‘resident’ parents due to current regulations, learn more about why RBI is concerned about this development.
In 2003, the central bank introduced a regulation that designated overseas students as ‘non-resident Indians’ (NRI). This initiative was primarily aimed at assisting students who pursued jobs overseas to finance their education..Before this change, these individuals were categorized as ‘residents’. The adjustment was intended to safeguard working students from unintentionally breaching the Foreign Exchange Management Act (FEMA) of 2000, which mandated that residents must repatriate their foreign income.
Several tax and FEMA specialists consulted by the financial daily suggested that the RBI may reconsider the circular to clarify the distinctions between genuine students engaged in part-time work overseas and individuals pursuing NRI status primarily for the purpose of transferring funds abroad.
A person classified as a non-resident under FEMA is permitted to repatriate all income earned in India and capital amounts up to $1 million annually from their NRO bank account. In contrast, residents are limited to remitting only $250,000. If the RBI is contemplating a review of this circular, it would be beneficial for the regulator to differentiate for students enrolled in extended programs, especially those lasting more than four years. These individuals could maintain their non-resident status under FEMA, informs a financial expert.
Certain analysts propose that significant financial transfers could have played a crucial role in the approach taken by wealthy families opting for relocation abroad and acquiring foreign citizenship. Existing laws allow funds that were transferred or received earlier to stay overseas, even if the student eventually returns to India to establish residency.
The circular from 2003 regarding students qualifying as NRIs was released a year after the RBI introduced the Liberalized Remittance Scheme (LRS). Now, after 22 years, it is evident that the RBI recognizes these students as NRIs. Nevertheless, students must understand the RBI’s intent behind the circular, rather than solely leveraging it for their families’ financial gain. The RBI may take action to limit the application of this circular if they find it necessary, informs financial experts.
“The primary criteria for determining residency is an individual’s intention to leave India for an uncertain period. The regulators or the government may be seeking to clarify this distinction to prevent the misuse of enhanced financial limits available to NRIs by students enrolling in short-term programs without the intention or ability to secure employment or remain abroad,” says an expert
