Education allowance and education facility: how their tax treatment differs (as set, 1961 Act, AY 2022-23)

1. Education allowance

An education allowance is cash paid by the employer to the employee for his children's education. It is a special allowance, taxable as salary except for the part exempted under section 10(14)(ii):

• Children education allowance: exempt up to ₹100 a month a child, for at most two children;
• Hostel expenditure allowance: exempt up to ₹300 a month a child, for at most two children;
• the rest is taxable. Under the normal provisions the exemption is available to every employee, whatever his salary, and it does not depend on how much is actually spent (Income-tax Rules, 1962, rule 2BB(2), Table, entries 5 and 6: inserted by CBDT Notification No. 9807 of 7 July 1995 (S.O. 617(E)), at ₹50 and ₹150 a month a child for up to two children, and raised to ₹100 and ₹300 by CBDT Notification No. 11344 of 24 April 2000 (S.O. 403(E)), with effect from 1 August 1997).
• Not under section 115BAC. From assessment year 2021-22, an employee who opts for the new regime loses both exemptions: his total income is computed without any exemption prescribed under section 10(14) other than those prescribed for the regime (section 115BAC(2)(i), inserted by the Finance Act, 2020, section 53), and rule 2BB(3) (CBDT Notification No. 38/2020) allows such an employee only the allowances in rule 2BB(1)(a)-(c) and entry 11 of the Table, not entries 5 and 6. For assessment year 2022-23 the whole education and hostel allowance is then taxable.

Example (our own): Ms. Neha gets ₹1,500 a month for each of her three children. Under the normal provisions: exempt ₹100 × 12 × 2 = ₹2,400; taxable ₹51,600 of the ₹54,000. If she opts for section 115BAC, all ₹54,000 is taxable.

2. Education facility

An education facility is a benefit in kind: the employer provides or pays for the education itself. Free or concessional education is a benefit or amenity under section 17(2)(iii), so it is a perquisite only for a specified employee: a director of the company, an employee with a substantial interest in it, or any other employee whose income under the head Salaries, leaving out benefits not provided in money, exceeds ₹50,000 (section 17(2)(iii)(a)-(c)). Fees paid directly are a separate perquisite under section 17(2)(iv) (last item below). The value is found in one of these ways:

• Free education in an institution maintained and owned by the employer, or in another institution because of the employment: the value is what the same education would cost at a comparable institution in or around that place, less anything the employee pays. For the employee's children, nothing is taxed where that cost does not exceed ₹1,000 a month a child (proviso to Income-tax Rules, 1962, rule 3(5), as substituted by the Income-tax (13th Amendment) Rules, 2009).
• Any other free or concessional education for a member of the household: the value is the expenditure the employer incurs on it, less anything paid by or recovered from the employee (Income-tax Rules, 1962, rule 3(5)).
• Fees paid by the employer directly to the school, or reimbursed to the employee: the employer is meeting the employee's own obligation, so the whole amount is a perquisite for every employee (section 17(2)(iv)).

3. The difference in brief