Taxability for Indian students on F1 visa
It’s such a waste of time reading all the formalities you have to do to comply with governments so that you end up paying your tax correctly. And I like doing it very much.
Just for the background, I’m a Indian citizen going to US on a student visa (F1). In this post, I am going to dump my research, some interesting facts and some unanswered questions.
First of all, all financial institutes including banks, MF houses, etc. follow FEMA. This act, passed by Parliament of India in 1999, regulates the foreign exchange related matters. It has its own definition that defines the residency of Indian citizens. According to it, you are a resident Indian if you have been in India for more than 182 days in the preceeding financial year. There are some exception to the rule. It doesn’t include following people. If you are:
1) going for employement outside India, or 2) going for carrying on outside India a business or vocation, or 3) any other purpose that indicates your intention to stay outside India for uncertain period.
RBI clarified it in its circular that students going abroad come under point (3) above, since they stay outside India for uncertain period. Quoting (4) from the RBI circular mentioned above:
4. Having regard to the circumstances stated above, it is clear that on both counts viz. their stay abroad for more than 182 days in the preceding financial year and their intention to stay outside India for an uncertain period when they go abroad for their studies, they can be treated as Non-Resident
This means you become a NRI right in the year you leave India for studies abroad. Now it’s illegal for NRIs to hold a resident saving accounts in India. This means that a student like me, leaving in August for studies, will have to convert his resident saving accounts in India to NRO accounts. I wish that was easy but unfortunately not. When I asked my bank about it, they said you need to close your existing account (that means all your FDs too) and then open a new NRO account. How convenient! I know many people don’t convert their accounts to NRO account and no one cares at least for the first time they are leaving India as a student.
This residency status doesn’t just affect your bank accounts. It also affects other financial institutions you have been dealing with for your financial assets such as Mutual Funds houses. It’s your duty to inform all these houses of your residency status. Unfortunately, there are not many houses that allow investments from NRIs based in US/Canada. Other houses would just refuse to deal with you if you are an NRI. I am yet to find a solution to what I can do with my existing MF investments in India while I am abroad. Can I just let them there? Main reason I don’t want to touch them is because majority of money is in ELSS; if I break them before 3 years, I’ll have to pay tax on it.
Taxability has its own definition of residency. Here’s the official meaning by IT department for a non-resident Indian. Let me rephrase what is written in these. You are resident in any FY if:
1) You are in India for a total of 182 days or more, or 2) You are in India for total of atleast 60 days AND you were in India for a total of 365 days or more within four years preceeding the current FY.
Based on this definition, if I leave India on August 1, 2018, I will be a non-resident according to IT dept. only for FY 19-20 while I will be a resident for FY 18-19 (because I satisfy (2) above). Being a resident means that one is supposed to report his global income(income arising in US) to India while one is not under any obligation to do it when he’s a non-resident. This means if you are getting a stipend in US during your studies, you pay the tax in US against it but you report it in your Income tax return in India as well.
See how you are a resident according to IT department but non-resident according to all banks and MFs (FEMA). What fun!
First you need to find out if you’re a resident alient or nonresident alien. To be a resident alien, you need to pass either green card test or substantial presence test. Personally for me, I fail the first test, but I pass the second test (substantial presence test), if I leave to US on August 1, 2018. To pass this test, you need to be physically present in US on atleast:
1) 31 days during current year AND 2) 183 days during the 3-year period counting days as: 2a) All days you were present in current year, plus, 2b) 1/3 days you were present in previous year, plus, 2c) 1/6 days you were present in previous to previous year.
For me, first condition is true but second is not. For second, my calculation will be as:
152 days (1 August, 2018 - Dec 31, 2018) + 0 + 0
So, I am in no way a resident alien. I must be a nonresident alien then. This was easy but what about from next calendar year (from Jan 1, 2019). In that year, I will pass the above test. Does that mean I will become a resident alien? The answer is “No” because students on F1 visa come under ‘exempt individuals’. See this where it says that you cannot count days as we counted above for the days you are an exempt individual. This means that second condition in ‘substantial presence test’ above would be calculated as:
0 + 0 + 0
and not how I calculated above. Too many rules, huh, no?
As a nonresident alien, I am free from reporting my income earned in MFs and other investments in India. This would have become a huge pain had I been a resident alien because even unrealized gains are taxed in US. As long as one is on F1 visa, they only have to report their incomes generated in US (your stipend as TA/RA/GA or other jobs).
So, ideally you should change the residency status to non-resident in your bank accounts in India and inform all the MF houses to do the same as well. Then you should file your IT return in India as a resident in your first year you leave from India (means report your foreign income/stipend as well; you don’t have to pay tax on it as it’s already paid in US - see double taxation). From next year (2019 in my case), you would have to report your unrealized gains in all MFs in India in your US income tax return. This couldn’t be more fun, no? Feel free to post your views or correct me, if I was wrong, in comments section.
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