Wealthy Indian parents using their NRI children to siphon money to foreign shores: Report

The rule change was made to allow such students to take up a job in foreign lands to support themselves without going through the trouble of sending their money back to the country.

Indian parents sending their children to study in foreign institutions are reportedly using a loophole in India's financial laws to move their money overseas, as per a report by Economic Times.

In 2003, the Reserve Bank of India (RBI) had allowed Indian students travelling to foreign countries to be treated as NRIs or Non-resident Indians. This rule was made since resident Indians are required to send back to the country any amount they earn in a foreign land. Their income becomes taxable in India.

However, the change was made to allow such students to take up a job in foreign lands to support themselves without going through the trouble of sending their money back to the country.

With this, the RBI shielded working Indian students from unknowingly breaching the provisions of the Foreign Exchange Management Act (FEMA).

With this rule change, some parents were apparently moving their Indian earnings to foreign lands under the names of their children. Now these incomes will not be taxed in India, and as well as grow inadvertently if the forex market works in their favour.

"Once a person is treated as a non-resident under FEMA, he is entitled to freely repatriate all current income in India and all capital sums up to Rs 8 crore ($1 million) every financial year from his NRO bank account... compared to a resident who can remit only Rs 2 crore ($2,50,000). If RBI is considering reviewing this circular, it may be worthwhile for the regulator to draw a distinction for those students who go for long-duration courses, say, more than 4 years. Such people could continue to be classified as non-residents under FEMA," an expert told the publication in this regard.

"The primary criteria for determining residency is an individual's intention to leave India for an uncertain period," another said, adding, "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."