Students earning stipend in foreign currency need to pay tax, unless they get it as allowance.
An increasing number of management and engineering students from premier Indian institutes is bagging internship offers from institutions abroad. For instance, Indian Institute of Technology, Bombay (IIT-B), has placed around 80 B Tech students for internship with foreign universities such as Western Michigan, Carnegie Mellon and University of Alberta. According to reports, it may place 340 engineering graduates with many such companies and universities by April-end.
Besides, major companies such as Deutsche Bank, Barclays Capital, Procter & Gamble, ITC, Bank of America-Merrill Lynch, PricewaterhouseCoopers, Daimler, Microsoft, IBM, Sony and Honda have also recruited Indian students for summer internship abroad.
In addition to gaining hands-on technical experience, another perk is high stipends offered by these foreign institutions. The students will earn anywhere between $2,500 and $3,500 a month – Rs 1.10 lakh to Rs 1.50 lakh ($1 = Rs 44.42).
It must be remembered that since a stipend is considered as income by income tax authorities, it is taxable according to the applicable slab.
Taxation for resident Indian students: All incomes earned in a foreign country are combined and taxed in India (applicable to students too, except for minors). The Income Tax (I-T) Act says an individual deputed in a foreign country on work for less than 180 days, or six months, is considered an Indian resident.
Homi Mistry, tax partner, Deloitte Haskins & Sells, said, “These students fall in the resident and ordinarily resident category and their global income is taxable in India.”
A student earning Rs 1.50 lakh a month abroad will pay tax on income exceeding the basic exemption limit (Male: Rs 1.60 lakh; Female: Rs 1.90 lakh). In this case, the total income will be Rs 3 lakh, for a two-month internship.
A male student will be taxed 10 per cent on Rs 1.40 lakh (Rs 3 lakh - Rs 1.60 lakh), which comes to Rs 14,000. For a female student, the tax amount will be Rs 11,000 (10 per cent of Rs 1.10 lakh, after the exemption).
However, the tax outgo can be reduced by showing investments in tax-saving instruments. In some cases, this income could face double taxation - both in India and in the host country (as per their tax norms).
But, respite comes in the form of 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,” said Kaushik Mukherjee, executive director, PricewaterhouseCoopers.
But, the income will be taxed in the country of residence, India.
The good part is 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 50,000 in the foreign country and his total tax liability in India is Rs 1 lakh. He will have to pay only the remaining Rs 50,000 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 I-T Act exempts such allowances because these are given to facilitate academic learning,” said Mistry.
In case a minor earns an income, his/her income is coupled with the parent’s income and taxed accordingly.
Taxation for non-resident students: A non-resident Indian (NRI), studying in India for a fixed period, will not attract tax on his/her stipend earned abroad.
Reason: An NRI’s income earned in a foreign country is considered global income and does not come under the Indian tax regime. According to the I-T Act, any individual who has stayed outside India for more than 180 days is an NRI. Such individuals will be taxed only in the host country.
However, NRI students interning with an Indian company and earning, will be taxed as per the applicable tax slab under the I-T Act. “Since, the income is sourced in India, the student will be taxed as per the I-T norms here,” said Mukherjee.