Children Education Allowance

According to the latest available information, India’s literacy rate is 77.7%. This data was made publicly available by the NSO in September 2020 on the occasion of World Literacy Day. To further advance the cause of literacy, especially among the backward states, India’s Income Tax department provides a number of tax breaks collectively known as Children Education Allowance or CEA. 

CEA Limits and Taxation

Most children education allowance exemptions are categorised under Section 80C of the IT Act. 

The 7th Pay Commission provides several major boosts to such allowances and tax breaks. That said, several states are yet to implement the 7CPC recommendations and follow older tax regimes. 

Hence, child education allowance limits are slightly different across India’s states. 

Also of note is the fact that for several salaried individuals, their children’s education fees, including tuition and hostel fees, plus allowances for purchasing recommended textbooks together form a separate component of their pay packages. 

Children Education Allowance Rules

This section contains a gist of all provisions that govern the allowances. 

Exemption for education and hostel charges

Children education allowance covers 2 broad areas of expenses for the concerned employee – the costs incurred for schooling and education per se, and hostel charges. It has been pointed out by several leading experts on education policymaking that many Indian children are forced to leave school due to excessive hostel or similar accommodation charges. 

To any individual gainfully employed in India, the following allowances are allowed –

• Education allowance: This is fixed at Rs. 100 each month for each child. Note that the exemption is limited only to 2 children. If CEA is applied for a 3rd child, it will not be eligible for reimbursement.

•  Hostel charges allowance: Currently, this allowance is Rs. 300 per child, only for 2 children of a family.

Section 10(14) of the IT Act of 1961 covers the details of costs incurred.

• Section 80C and tuition fee exemptions

Section 80C makes it amply clear which overheads will come under children education allowance section and which will not.

As of 2020, an individual can claim tax breaks on all sums paid as tuition fees deduction to schools, colleges, universities, and other educational institutions. Note that the exemption will be entertained only if these institutions are recognised by competent Central or State bodies. 

No exemption will be entertained for payments of ‘development fees’, transportation costs, and any other amount which are not directly associated with educational purposes. 

Furthermore, CEA is payable up to Standard 12 as of 2020. There have been a number of propositions from salaried individuals and education policy experts to extend this exemption to Graduate and Post-Graduate courses too.

However, there has been no word from the IT Department or the Central Government on these latter demands.

Eligibility criteria to apply for exemptions under Section 80C

To take full advantage of dedicated children education allowance income tax benefits, all salaried individuals must take cognisance of the eligibility criteria. They are the following:

• The ambit of eligibility: Deductions are available only to biological parents, failing which a child’s legal guardian or sponsor can seek exemptions. 

• Maximum benefits allowed: Each parent or guardian can apply for a maximum deduction of Rs. 1.5 Lakh each year. According to existing provisions under Sections 80C, 80CCC, and 80CCD, the total amount to be considered for tax relief cannot exceed Rs. 1.5 Lakh per annum.

An example will make this point easier to comprehend. Since both parents can claim tax benefits under children education allowance of Rs. 1.5 Lakh each year, the total claim rises to 2 times this maximum deduction, i.e. Rs. 3 Lakh. However, tax relief will still remain at Rs. 1.5 Lakh only.

• Deductions are available for children studying up to class 12. It is available even if the institution or school is affiliated with foreign higher-education facilities or universities.

• Only full-time courses are eligible for these exemptions. Part-time educational courses are not admissible under existing rules.

• Finally, the deduction can be claimed by a single parent too. Also, if a couple decides to adopt a child, they can apply for these tax benefits.

Procedure to Claim Tax Exemptions for CEA

There has been considerable debate over the complexity of claiming these exemptions under Section 80C. Vouchers are a way of claiming reimbursements; however, there is no uniformity on which type of vouchers will be acceptable.

The simplest process is the following –

• To avail education allowance tax benefits: An employee must show a certificate duly attested by the head of the institution where the child is enrolled. This certificate must reflect the fact that the child is indeed a bonafide student of that establishment.

• To avail hostel charge allowance: Again, a duly-attested certificate from the institution head with the total costs incurred for boarding and food mentioned explicitly must be provided by the employee. This will be proof that the enrolled child is indeed using hostel accommodation.

Note that all these details must also be reflected in Form 12BB before children education allowance is sought from the employer.

The 7CPC and Allowances

For those Government employees eligible for 7th Pay Commission benefits, the following tables reflect the increase in monthly children education allowance.

Before 7CPC recommendations

After 7CPC recommendations

While these increments are considerable, they apply to very few children in India. 

There is speculation that the Central Government will revamp the existing laws governing the CEA. However, no timeline has been declared for the same. 

Until these benefits trickle down to the poorest and most marginalised portions of our society, there is little hope that India’s literacy rate will improve quickly. As of now, the ball is squarely in the court of the Ministry of Education, known formerly as the HRD Ministry, and the Department of Higher Education.

The National Policy of Education or NPE is expected to deal with some thorny issues in this insular field.