Education is not all about learning. Its also about money, or more specifically, about taxes. Money spent on education, for self, children or spouse, can impact your tax bill in more ways than one. Two provisions in the tax laws will enable you to claim tax benefits for such expenditure. There is one provision that uses education as the reason to actually lighten your wallet.
It is important to know the kind of education expenditure that can be claimed for deduction and the conditions that have been built into each of these provisions. This will enable you to plan your expenditure in the right way so as to take full advantage of the two beneficial provisions in the I-T Act. The three provisions and how they impact your wallet are illustrated below:
Tuition fee deduction under Section 80C: This deals with investments made in eligible instruments for the purposes of saving tax. Investments made in these eligible instruments/avenues, up to a total value of Rs 1 lakh are deducted from total income for the purposes of determination of taxable income. Also, in the eligible list for the purposes of claiming deduction from income is the expenditure incurred on tuition fees of children - whether at the time of admission or thereafter- to any university, college, school or other educational institution situated within India. The fee has to be paid for full-time education of any two children.
An important point to note is that the earlier limit of Rs 12,000 per child also does not apply any more. In its first year, when Section 80C existed as section 88, there was a limit of Rs 12,000 per child per year. Now, a taxpayer is free to utilise the entire Rs 1 lakh limit for this purpose.
From the provisions, it is clear that expenditure on tuition fee for only two children (and not more) will be allowed as deduction. Also, this excludes any payment towards any later fees or donation or payment of similar nature.
Deduction for education loan under Section 80E: This section saw a major change in the budget proposals announced this year and is most important for all those who wanted to access finances in the form of an education loan for themselves, their spouse or their children. In its earlier form, this section allowed for a deduction from income of interest paid on an education loan for higher education. That is, a person could take a loan for his own studies and could claim deduction from income for the interest paid on such loan.
Now, the budget proposes to let individuals claim deduction for loan taken for higher education of relative also. Relative here means spouse and children. This will enable parents to not only reduce tax on their income but also enable students to start their careers with a lower or nil amount of outstanding loan. The deduction will continue to be allowed in eight assessment years.
It is important to note though that while Section 80C covers deduction on account of tuition fee for children, this section covers deduction for interest paid on education loan for self. If the budget is passed in this form also, it will also cover spouse and children of the individual. While in Section 80C it did not matter whether the expenditure was for higher education or not, here the loan has to be taken for the purpose of higher education. Higher education too has been clearly defined in the Act. Clause (c) of sub-section 3 of Section 80E explains that higher education means full time studies for any graduate or post graduate course in engineering, medicine, management or for PG course in applied sciences or pure sciences.
Education Cess: While the first two provisions relating to education provide benefits, this one takes some bit of that away. This cess is imposed on the income tax payable, inclusive of surcharge if applicable. As of now, education cess at the rate of 2% is payable on the income tax calculated. However, the budget proposes to introduce an additional cess at the rate of 1%. This additional tax has been called the secondary and higher education cess and is meant to fund secondary and higher education commitments of the government. The saving grace is that calculation base for the additional higher education cess will be income-tax payable and surcharge. It will not include education cess on income tax.