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Best tax wishes on Teacher’s Day

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Teachers Day is celebrated on every September 5th in India and is a day to express the gratitude we feel towards our teachers. It is not only a teacher who propagates the education, Indian Income-tax laws also promote education in the field of tax. When we are in schools and colleges, it reminds us of the time when we used to get scholarships, pay tuition fees & hostel expenses, take education loans, etc. On this auspicious day, we identified few provisions of Income-tax Act related to these.

Exemption for scholarship

Remember the days when colleges and schools used to award scholarships to outstanding students. Income tax act too appreciates this but in a different way. Any amount received by way of a scholarship to cover the cost of education is not chargeable to tax as it will be exempt under section 10(16) of the Income-tax Act. The term ‘cost of education’ takes within its ambit not only tuition fee but all other incidental expenses incurred for acquiring education. Even if any scholarship money is claimed to be exempt from tax, it shall be disclosed in the Income-tax return.

FAQ 1: Whether an expenditure is necessary to claim the exemption?

The only condition to claim such exemption for the scholarship income is that it should be for meeting the education expenses only. If the recipient does not spend the whole amount towards education or he saves something out of it, the portion of scholarship not spent on the education shall be charged to tax.

FAQ 2: Whether the exemption is allowed only to an Indian citizen?

Even if the scholarship is received by any person of foreign origin, it shall be exempt from tax in the hands of the recipient provided the purpose of the payment is meeting the education cost. Thus, if a foreign citizen person has received a scholarship from foreign institute to aid his studies and research in India, the amount so received shall not be taxable in India even if it is taxable in the source country.

FAQ 3: Whether scholarship received from the employer for children’s education is exempt?

Any sum received by an employee from his employer towards the scholarship of his child is eligible for exemption. Even if the payment is made by the employer directly to the child, such amount shall not be treated as income in the hands of the employee.

Children’s education allowance

College and school days don’t last forever. People grow and work in organizations. When we work, some employers offer children education allowance as a component of salary. Income-tax Act provides certain benefits when one receives the allowance. Children Education Allowance received by an employee is exempt from tax if he incurs some expenditure on the education of his children. This exemption is allowed to both private and government employees. This allowance is exempt up to Rs. 100 per month per child for a maximum of 2 children. Thus, the maximum amount of exemption is Rs. 100 per month or Rs. 1,200 per annum for 1 child. Maximum deduction for this allowance can be claimed up to Rs. 2,400.

The amount actually incurred by the employee on the education of his children is not relevant for claiming this exemption. If an employer provides a free or concessional educational facility to the employee’s children in an educational institution owned and maintained by him or in any other institution, the value of such benefits shall be taxable as perquisites in the hands of the employees.

Children’s hostel allowance

Do you know that when we were living in hostels, our father might have got certain tax exemptions for bearing our hostels fees? No, we can’t go back and spend more but we can certainly know what exemptions were those. Similar to Children Education Allowance, children’s hostel allowance is granted to meet the hostel expenditure of Children. It is exempt up to Rs. 300 per month per child for a maximum of 2 children. Thus, the maximum amount of exemption is up to Rs. 300 per month or Rs. 3,600 per annum for maximum up to 2 children. Maximum deduction for this allowance can be claimed up to Rs. 7,200.

Deduction for tuition fees

The tuitions fees remind us of the days when we used to get reminders from schools and colleges to pay the amount. The Income-tax Act recognizes this hardship on parents and that’s whey any amount paid by an individual as tuition fees to any university, college, an educational institution in India for full-time education of his any 2 children qualifies for deduction under Section 80C. The deduction is allowed only for full-time education in a formal educational institute. No deduction is allowed for the tuition fees paid in any coaching institute.

The term ‘tuition fee’ does not include any amount paid by the individual towards development fees, donation or payment of similar nature. Thus, transportation charges, hostel charges, mess charges, library fees, parking charges, etc. are not eligible for deduction.

Deduction for interest paid on education loan

Not everyone had a decent financial backup. Some of our friends and family members took an education loan to fund the studies of their children. Income-tax Act supports you during tough times. A deduction is allowed under Section 80E to an individual taxpayer for the payment made towards the interest on loan taken from any financial institution or approved charitable institution for pursuing higher education or for the purpose of higher education of his ‘relative’.  The deduction is allowed with respect to payment of interest on loan only, and not for the principal amount.

The deduction is allowed if the loan is taken for the purpose of pursuing higher education or it’s equivalent from any school, board, university. It can be for the education of the taxpayer himself or his relative.

The borrower is allowed to claim such deduction from the taxable total income of 8 financial years. The first year of deduction shall commence from the financial year in which the borrower starts repaying the interest on the loan or until the interest is paid in full, whichever period is earlier.

The term ‘relative” in relation to an individual means the spouse and the children of that individual or the student for whom the individual is the legal guardian.

FAQ 1: For how many children, the deduction for interest on education can be claimed?

There is no restriction in section 80E on the number of children. Thus, interest on the loan for higher education may be paid for any number of children.

FAQ 2: Can a father claim Section 80E deduction, if the child, for whom education loan had been taken, has started earning salary income?

Deduction under Section 80E is allowed to a taxpayer (father) if he has taken an education loan for the higher education of his child. This deduction shall be available to the father, only if he actually pays the interest from his own bank account. If a son pays the EMI towards the education loan, no deduction shall be allowed to the father.

FAQ 3: What are higher studies for Section 80E deductions?

Higher Education covers, MBA, B.Tech. BE, B.Com., M.Com., MBBS, LLB, etc.

FAQ 4: Is deduction available under Section 80E if higher studies are pursued outside India?

There is no prohibition in Section 80E on the location of the college or educational institute in which higher studies are pursued. Thus, the deduction can be claimed under this provision notwithstanding the fact that higher education are pursued in India or in abroad.

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