In order to spread and promote education in the country, the government has provided many income tax exemptions and deductions under the Income Tax Act, 1961 (“Act”). This article discusses various tax benefits available to an assessee under the Act.
Exemption from Allowances for Education, research, etc. u/s 10(14)(i)
Section 10(14)(i) provides for exemption of any special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as may be prescribed, to the extent to which such expenses are actually incurred for that purpose.
For this purpose, Rule 2BB is notified. As per Rule 2BB(e), allowances for the purpose of section 10(14)(i) includes any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions.
Thus any allowance granted to meet the cost of education is exempt under section 10(14)(i).
Exemption from Child Education Allowance and Hostel Allowance under section 10(14)(ii)
Section 10(14)(ii) provides for exemption of any such allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides, or to compensate him for the increased cost of living, as may be prescribed and to the extent as may be prescribed.
For this purpose, Rule 2BB is notified. As per Rule 2BB(2), the following allowances are notified alongwith the maximum amount of exemption for the purpose of section 10(14)(ii) which are related to education.
Allowances which are exempt u/s 10(14)(i) and (ii) are granted to employees for his children by the employer which is chargeable under the head ‘Salaries’.
Exemption from Scholarship under section 10(16)
Section 10(16) of the Income-tax Act, 1961 (“Act”) provides that any scholarship granted to a person to meet the cost of education is exempt from tax. Thus scholarships or stipends received for pursuing higher education is always exempt from tax.
A stipend received to meet the cost of education may be treated as a scholarship being exempt under Section 10(16) of the Income-Tax Act, 1961. A scholarship would necessarily mean some payment to meet the cost of education to the person pursuing the education and incurring costs on it.
The salient features of the taxability of stipend is outlined below-
1. All Educational scholarships are exempt from tax or are tax free, whether sponsored by the Government or not; whether received from Indian Institutions or foreign Institutions.
2. The tax exemption on scholarship would continue even if the scholarship is received for pursuing an educational course not leading to a degree.
3. The quantum of scholarship is irrelevant. Even if the scholar saves money from scholarship, its eligibility from tax-exemption does not get changed so far as the objective for granting the scholarship is for the purpose of education.
4. Research fellowships, grants received from universities are exempt since it supports further education.
5. If the scholarship is paid to the employee's son by the employer for pursuing education, it is exempt from tax u/s 10(16) and not chargeable to tax as perquisite under the head salary.
Deduction under section 80C for Tuition Fees
An Individual can claim an income tax deduction towards payment of tuition fees paid to educational institutions for a maximum of 2 children of the taxpayer. The deduction is not available for fees paid for private tuition or coaching classes.
What constitutes 'tuition fees' is a matter of debate. The term 'tuition' is not defined in the Income Tax Act. The dictionary or literal meaning of 'tuition' is a sum of money charged for teaching by a college or university.
Therefore, the tuition fees will only include fees charged for imparting education by the institution. Fees paid towards development fees, bus fees, donations, etc. will not be eligible for deduction. However, education fees, computer education fees, etc. will be allowed.
Other important rules for claiming tuition fees as a deduction-
1. It should have been paid at the time of admission or thereafter.
2. It excludes any payment towards any development fees or donation or payment of similar nature.
3. It should have been paid to any university, college, school or other educational institution situated within India.
4. It should have been paid for for the purpose of full-time education. It is clarified that full-time education includes play-school activities, pre-nursery, and nursery classes.
5. It can be claimed for a maximum of any two children of the Individual.
Notes: The followings are noteworthy for tuition fees-
1. Deduction for tuition fees is allowed if the same is paid to any educational institution situated in India. Hence, no deduction is allowed if tuition fee is paid for foreign courses at a foreign land.
2. If the college or institution of any foreign university is located in India then tuition fees paid to such institution is allowed as deduction.
3. Tuition fees must be paid for full-time education. Hence, correspondence or distance or part-time courses are not covered.
4. It is clarified that the amount allowable as tuition fees shall include any payment of fee to any university, college, school or other educational institution in India except the amount representing payment in the nature of development fees or donation or capitation fees or payment of similar nature.
5. Deduction is not available for tuition fees paid for the self-education of the taxpayer.
6. Deduction is not available for tuition fees paid for education of the spouse of the taxpayer. The deduction for tuition fees is available only for education of children of the taxpayer.
7. If both the parents have taxable income then the deduction can be claimed by anyone who pays the tuition fees.
8. The limit of a maximum of 2 children applies to each parent separately for claiming deduction for payment of tuition fees.
Deduction under section 80E for interest on loan taken for higher education
1. This deduction is available only to an Individual.
2. The deduction under this section shall be allowed only if the payment is made out of the income chargeable to income-tax.
3. The deduction is allowed for payment of interest on loan taken from -
(i) any financial institution (includes a bank), or
(ii) any approved charitable institution for higher education
for the purpose of pursuing higher education-
(i) for the assessee himself, or
(ii) of his spouse or his children or the student for whom he is the legal guardian.
4. There is no limit on the quantum of deduction prescribed. The entire 100 percent of the amount of interest paid is allowed as a deduction.
5. However, there is a limit on the period for which deduction for payment of interest on higher education loans can be claimed. The deduction can be claimed for a maximum period of 8 assessment years from the first assessment year in which the individual starts paying interest. If the interest is paid in full before 8 years, then deduction shall be allowed only up to the year in which the interest was paid.
Deduction for tuition fees under section 80C is not available for self-education whereas deduction under section 80E is available for self-education of the assessee.
Notes: The followings are noteworthy for deduction u/s 80E-
1. Deduction is available for full time or part-time courses.
2. Deduction is available for higher studies from an Indian university or a foreign university and the Institute may be in India or in a foreign country.
3. The course may be a Regular Course or a Distance Course. Both courses are available for deduction.
4. Any course taken after passing the higher secondary examination or standard XII is considered as higher education for the purpose of deduction under this section.
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Tax exemption to educational institutions 10(23C)(iiiab)/ (iiiad) and section 11
Section 10(23C) of the Act is a specific exemption available to certain Government and non-government universities and educational institutions.
Income received by any university or educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government is fully exempt from tax vide Section 10(23C)(iiiab). Hence, a Government educational institution is fully exempt from income tax without any separate approvals etc. as long as it is not for profit purpose.
The exemption for non-government (private) educational institutions depends upon the aggregate annual receipts of the university/ educational institution.
Section 10(23C)(iiiad) provides that the income earned by any university or educational institution existing solely for educational purposes and not for the purposes of profit shall be exempt from tax if the aggregate annual receipts of such university or educational institution do not exceed Rs. 1 crore.
Thus, an educational institution having receipts up to Rs. 1 crore can claim full exemption under the above clause without requiring a separate approval or registration.
Similar exemption is also available under section 11 of the Act. Section 11 provides exemption for income derived from property held under trust wholly for charitable or religious purposes to the extent such income is applied for charitable or religious purposes in India. However, this exemption shall be subject to certain conditions. Education is defined as one of the charitable activities in India. Exemption will be granted subject to the condition that the Educational Institution is registered under section 12A (Section 12AB w.e.f 1st April 2021) and has applied at least 85% of the income towards educational activities.
Henceforth, an educational institution can avail tax exemption under any one of the provisions. It can either claim exemption u/s 10(23C)(iiiad) after obtaining the approval or under section 11 after getting itself registered u/s 12A (or section 12AB).
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