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T. Banusekar

OUR company provides the employees an allowance of Rs 450 per month per child as educational allowance, subject to a maximum of two children.

This allowance is given specifically as per the terms of employment to provide for the employees to meet the expenditure on admission fees, tuition fees, cost of books, uniform, hostel fees and transportation expenses for their children's education.

In a case where the employee's child is staying in a hostel, will the exemption u/s.10(14) be restricted to Rs 100 or can Rs 400 be claimed as exemption if the employee is spending Rs 300 on hostel rent for the child?

K. K. Shah

Reply

Under section 10(14)(ii) read with Rule 2BB(2), children's education allowance qualifies for an exemption of Rs 100 per month per child subject to a maximum of two children and any allowance granted to meet the hostel expenditure of the employees children qualifies for an exemption of Rs 300 per month per child subject to a maximum of two children. The issue that has been raised is probably because the allowance in the instant case is granted as a children's education allowance to meet the expenditure of the employee's child's education, which is in the nature of admission fee, tuition fee, cost of books, uniform, hostel expenditure and transportation.

It can be seen that though the allowance is termed as `children's education allowance', the said allowance is also meant to meet the expenditure on hostel accommodation of the child.

It is in this background that the issue has been raised as to whether the exemption will be restricted to Rs 100 towards children's education allowance or whether the exemption of Rs 300 being hostel expenditure allowance can also be claimed.

It can be seen that Rule 2BB(2) refers to `children education allowance' and `any allowance granted to an employee to meet the hostel expenditure of his child'.

A plain reading of the Rule makes it clear that so far as hostel expenditure is concerned, what is relevant is that the allowance should have been granted to meet the hostel expenditure of the child.

It is not relevant as to the name in which such allowance is granted by the employer.

In your case, since the employer has given the allowance of Rs 450 for the children's education as well as for hostel expenditure, the exemption can be claimed to the extent of Rs 400, Rs 100 towards children's education and Rs 300 towards hostel expenditure particularly where the expenditure of the employee towards hostel rent is Rs 300 per month.

Query

I was working in India till January. My annual income until this period was Rs 1,20,000. My employer was deducting tax at source on my salary income.

I have not filed the returns and I have also not obtained a permanent account number.

I have got a contract appointment from a Singapore-based company to work from Bangladesh for two years. My monthly emoluments will be $ 1,700. Out of this 84 per cent will be remitted by my Singapore based employer directly to my NRE account in India. The tax if any on this portion of the salary will have to be paid by me.

The balance 16 per cent of my salary will be paid to me in Bangladesh and the tax if any on this portion is to be borne by my employer.

Will my income that I receive to my NRE account for working abroad be taxable in India?

Subra

Reply

The taxability of income under the Income Tax Act will depend on your residential status and also on where the income accrued or was deemed to have accrued or on where the income was received or was deemed to have been received.

The Table shows the taxability based on these criteria as provided for in Section 5 of the Act.

In your case, it appears that since you have been working in India until January, you will be resident and ordinarily resident for the financial year 2004-05.

In the successive years, since you will be in Bangladesh, you are likely to be a non-resident according to the Act. Therefore, the income received by you in the financial year 2004-05 will be taxable fully in India, which means that the entire salary irrespective of where it is received or accrued will be taxable in India. The income of the financial year 2005-06 will be taxable in India to extent of 84 per cent of the salary since it is received in India by way of credit directly to your NRE account in India. The balance of 16 per cent received outside India will not be taxable in India. The salary received to the extent 84 per cent will not be taxable in India if it is first received outside India and thereafter remitted into India.

You may note that in the financial year 2004-05, the tax paid by your employer on your behalf in Bangladesh would also be taxable as a perquisite in your hands in India.

You may also have to examine the taxability in accordance with the double taxation avoidance agreement between India and Bangladesh.

The relevant details for determining the same are not available in the query and hence no attempt is made to examine the taxability on this front.

You may note that an assessee can choose to be taxed in accordance with the Income Tax Act or in accordance with the double taxation avoidance agreement whichever is more beneficial to him.

(Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002)

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