47.  The Income Tax Law with regard to Education Expenses, Education Loans etc.

The Income Tax Act, 1961 contains certain provisions with regard to the expenses incurred by a tax payer with reference to the education of his children. In the first place specially for the salaried employees if such salaried employees receive children education allowance the same is exempt from income-tax but unfortunately the maximum amount of children education allowance which is being exempted in the hands of the employees is just ` 100 per month per child subject to maximum of two children. The provision to this effect is contained in the Income Tax Act, 1961 which specifically exempts the said education allowance granted to the employees for the education of his children within the above mentioned limit. Similarly, Rule 2BB of the Income Tax Rules further provides that if the employee receives any allowance to meet the hostel expenditure for his child in that case the same will also be exempted from income-tax but to the maximum extent of ` 300 per month per child subject to a maximum of two children only.

Rule 3 of the Income Tax Rules further provides that the value of benefit resulting to the employee as a result of free or concessional education facility for any member of the household shall be treated as a perquisite and the value will be determined as the sum equal to the amount of expenditure which is incurred by the employer in that behalf. If, however, the educational institution in which the children of the employees go for study is maintained and owned by the employer and free educational facilities are provided to the children of the employees then no perquisite will be added in the case of the employee if the cost of such education or the value of such benefit per child does not exceed ` 1,000 per month. It is a fact that these days education of the children is really becoming very costly. Most of the employers also do not make payment of the education expenses for the children of the employees. However, a very good provision is existing in Section 80C of the Income Tax Act, 1961 which provides for clear cut deduction from the income of the employee if such employees have spent money on the tuition fee of their children. This deduction is available not merely to the employee but to every other individual also. It may further be noted here that this deduction relating to deduction on account of tuition fee is granted in term of Section 80C of the Income Tax Act, 1961 within the overall total deduction of ` 1 lakh, which is so available in terms of said Section 80C of Income Tax Act, 1961. This implies that there is no separate deduction in respect of expenditure incurred by a person towards education of his children. The deduction for the tuition fee, etc. is inclusive of the deduction available for life insurance premium payment, for provident fund payment, etc. It may further be noted that the provisions of Section 80C provides for a deduction only in respect of tuition fees of the children. It does not provide payment of any other type of fee or development fee or donation or payment of similar nature made to the school. Moreover, strictly going by the law even the expenses towards bus charges for the children, cost of books of the children, etc. are not allowed as a deduction while computing the income of the person. This deduction in respect of expenses incurred on the tuition fee is allowed as a deduction only in the case of individuals and for any two children of such individuals. Thus, the Hindu Undivided Family incurring the expenditure on the tuition fee of the children of the family will not enjoy this deduction mainly because of the fact that the law specifically provides that this deduction will be available only for two children of the individual. It may also be noted here that the deduction for tuition fee will not be available for the amount spent by you for the children of your brother or your sister. Similarly, if you spend the money by payment of tuition fee for your grandchildren then also the deduction will not be allowed. Now we come to the theme of what are the various items of tuition fees that can be allowed as a deduction in terms of Section 80C of the Income-tax Act, 1961. When we have a deep insight into this provision we find that the deduction of tuition fees will be allowed in respect of payment to any university, college, school or other educational institution situated within India. Thus, it is very clear that if you are spending some money on the tuition fee of your children for his studies in a foreign country the said payment by way of tuition fee made by you will not be allowed as a deduction in terms of Section 80C of the Income-tax Act, 1961 which specifically mentions that the tuition fee should be paid to the educational institution in India only. Another important condition is that the payment of tuition fee will be allowed as a deduction only for full time education of the children. Hence, if your children are taking up some part-time courses and you are making payment of the tuition fee for the same then the payment for part-time tuition fee will not be allowed as a deduction to you. This point should be very carefully remembered.

 

The Income Tax Act also provides for deduction in respect of interest on loan taken for higher education. This deduction is permissible as per Section 80E of the Income Tax Act, 1961. A very special feature of this deduction is that there is no upper limit for grant of deduction in respect of interest on loan for higher education. The deduction for interest on higher education is granted if such loan is taken for the higher education of the individual himself or for the higher education of his spouse as well as the higher education of his children. There is no upper limit of the rate of interest which will be allowed as a deduction. Likewise, there is no upper limit of the quantum of interest that will be allowed as a deduction. Another special feature of this special deduction is that the loan for higher education can be taken for higher education in India or outside India. There is no restriction that one should take higher deduction in India only, hence, if you are going in for taking a loan for higher education to be taken up outside India, in that event also the deduction in respect of interest on the loan will be allowed as a deduction. One of the most important point which should be always taken into consideration while claiming deduction in respect of interest taken for higher education is that the interest on loan should be taken by the assessee only from any financil institution or any approved charitable institution for the purposes of pursuing higher education. Thus, if the loan is taken from a friend or from a relative or even from an employer the said interest will not be allowed as a deduction.


Another special feature which must be always kept in mind before taking a loan for higher education is that the deduction as per Section 80E of the Income Tax Act, 1961 by way of interest on higher education is allowed by way of interest payment on education only in respeci of higher education. The section now provides for very liberal education of virtually every kind.


We have afready mentioned above that there is no upper limit for grant of deduction in respect of interest on education loan for higher education. However, this deduction by way of interest on education loan is allowed in computing the total income of the assessee in respect of the initial assessment year and seven assessment years immediately succeeding the initial assessment year or until the interest is paid by the assessee in full, whichever is earlier. The initial assessment year for this purpose would mean the previous year in which the assessee starts making payment of the interest on such education loan. All those assessees who are interested to take education loan for higher studies either for self or spouse of children should carefully consider the various salient features relating to deductibility of the interest on such education loan so that they do not commit a mistake while filing their income tax returns.
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