23.  How to Save Tax on Educating Your Children

One of the best tax proposals as per the Finance Act, 2005 related to the abolition of the system of granting rebate on certain investments including payment of tuition fees for children and substitution of the tax benefit by a more positive proposal by grant of a straight deduction in the computation of total income in place of the tax rebate. As this new tax proposal enables a tax payer to have many options for investments and tax saving in various channels including the payment of tuition fees are discussed in this tip.

The Finance Act, 2005 inserted a new Section 80C, effective from FY 2005-06, provides a straight deduction in the computation of taxable income in respect of life insurance premium, deferred annuity, contributions to public provident fund and other provident funds, subscription to certain equity shares or debentures, and sums spent or deposited during the financial year as tuition fees for an two children of the tax payer. The aggregate of the amounts paid or deposited in the previous year, however, should not exceed ` 1 lakh.

One of the special features of this deduction as per Section 80C is that many sectoral caps have been removed.

Thus, one of the great advantages for many tax payers as per Section 80C is that deduction would be available in respect of tuition fees payable for any two children of the tax payer up to
` 1 lakh without any necessity or compulsion to invest in life insurance premia or public provident fund.



In the matter of claiming of deduction up to ` 1 lakh in respect of tuition fees under Section 80C (2) (xvii) whether at the time of admission or thereafter during the financial year.

For availing this deduction “higher education” would mean any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university by the Central government or State government.

It should be paid for the purposes of the full time education of any two children of the tax payer.

Thus, it is clear that the educational institution should be situated within India.

This means that no deduction can be claimed by a tax payer in respect of tuition fees paid for the education of child in an educational institution which is situated outside India. The tuition fees paid to any such institution will qualify for deduction up to the maximum amount of
` 1 lakh. However, the deduction is only for tuition fees and not for any other fees like conveyance fees, bus charges, development fees or donation or any other fees of similar nature.

Thus, if these precautions are observed by a tax payer, then he would be able to enjoy the new tax deduction to the full extent and save maximum amount of income tax up to
` 30,000 every year.
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