Are you aware of the income-tax benefits available to an individual in relation to the education costs as per the provisions of the Income-Tax Act, 1961?
For many of us education costs, be it for secondary or higher education, constitute a significant outlay from the disposable income available. This makes us think whether any income tax benefit is available against such costs.
This article seeks to highlight the income-tax benefits available to an individual taxpayer in relation to the education costs as per the provisions of the Income-Tax Act, 1961 (the “ITA”).
A) Children education, hostel allowance
An employer may provide the said allowance to employees for meeting expenses towards education and hostel expenses of an employee’s children. Such allowance is exempt from tax under Section 10(14) of the ITA, as under:
# Children Education Allowance: Rs 100 per month per child up to a maximum of two children;
# Hostel Expenditure Allowance: Rs 300 per month per child up to a maximum of two children.
The tax exemption is subject to the condition that the individual can substantiate the claim by providing the employer with appropriate documentary evidences towards expenditure incurred.
B) Tuition fees
An individual is eligible to claim a tax deduction for tuition fees paid to any university, college or other educational institution in India for two children. It is important to note that payments made towards development fees or donation or any other payment of similar nature will not be eligible for deduction under this Section.
The deduction for tuition fees is covered under Section 80C of the Income Tax Act and is subject to an overall ceiling limit prescribed under this section (i.e. Rs 150,000) which includes other deductions such as contribution to provident fund contribution (PPF), life insurance premium (LIP), subscription to savings certificate, sums paid towards at least 5-year term deposits with a scheduled bank, repayment of principal component of home loan, etc.
Let’s understand the above by way of an illustration:
Jacob, an individual, gets a taxable salary of Rs 900,000 per annum during the tax year 2017/18. He has incurred Rs 100,000 towards tuition fees and Rs 80,000 towards PPF/LIP. During the said year 2017-18, he is eligible to claim deduction under Section 80C of the ITA as follows:
Rs 80,000 under Section 80C of the ITA (sums paid towards PPF/LIP);
Balance Rs 70,000 for tuition fees (150,000 – 80,000) or vice versa.
In other words, the maximum limit that can be claimed under Section 80C of the ITA, cannot in any case, exceed the prescribed limit of Rs 150,000, irrespective of amounts incurred.
C) Deduction for interest on education loan
An individual is eligible to claim a deduction for interest payments on education loan taken for pursuing his higher education or the higher education of a specified relative (ie. spouse, children or student for whom the said individual is the legal guardian). Higher education for this purpose means any course of study pursued after passing the Senior Secondary Examination or its equivalent, from any school, board or university recognised by the Central Government or State Government or local authority or by any other authority authorised by the Central Government or State Government or local authority to do so. The deduction is available under Section 80E of the ITA for a period of 08 years, including the year
D) Tax exemption for Scholarships
Scholarships received by an individual towards meeting costs of education is exempt from income tax under Section 10(16) of the Income Tax Act.
An individual should take cognizance of the various tax deductions/ exemptions available under the ITA while computing his tax liability during the financial year. In view of the steep rise in education costs over the years, representations have been made with the appropriate authorities to revise the existing exemption limits for children education/ hostel allowance since these limits were set way back in the year 1997.
Given the governments’ focus on education and skill development, it is hoped that adequate tax incentives are provided to help individual taxpayers meet the rising cost of education. After all, education is one of the important foundation stone for the country’s economic growth.
(The author is National Leader Tax – Grant Thornton India LLP. With inputs from CA Sudeep Das and Joel Jacob)