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Loan taken by a brother to fund sister’s education is not eligible for tax benefits

LiveMint logoLiveMint 28-08-2017 Parizad Sirwalla

My son works in a public sector organisation. He wants to take an education loan to fund his sister’s higher education. Is he entitled to any tax break?

—Arun Abrol

A deduction can be claimed under section 80E of the income-tax Act in respect of interest paid on an education loan, subject to other specified conditions, but only where the loan is taken by your son to fund the higher education of his wife or children or a student for whom he is a legal guardian. The loan should be taken either from a specified financial institution or approved charitable institution to fund the costs of pursuing a course of study after senior secondary examination or its equivalent, from a school, board or university recognized by the government or local authority. Thus, tax deduction will not be available to your son for education loan relating to his sister’s education.

I regularly contribute from my taxable income to a Public Provident Fund (PPF) account in my wife’s name and claim the section 80C deduction in my income tax return. This is allowed as per the income-tax Act. When the account matures, will the sum received be my capital or my wife's? How will the clubbing provisions apply to the sum received on maturity or account closure? Can she further invest this money and earn from it without clubbing provisions applying to me?If my wife saves a little out of the money given to her for household expenses, that money is her own, and she can invest it without attracting clubbing provisions to me. What is the thumb rule for a reasonable amount for a year for such amount?

—Name withheld on requestUnder Section 80C of the Income-tax Act, an individual is eligible to claim tax deduction in respect of contribution to any PPF belonging to self, spouse or any child, subject to overall limit of Rs1.5 lakh for a financial year. On closure of the account, the amount of corpus received is not taxable as it is composed of the interest accrued (already disclosed as exempt income on a yearly basis) and the principal contribution. 

On any further reinvestment made by your wife, clubbing provisions have to be examined in detail with specific facts and circumstances as clubbing provisions are complex and there are a plethora of judicial precedents in this regard.

Further, in response to the second part of your query, there are judicial precedents wherein it was held that any income earned by wife from the savings made from the allowance provided for household expenses would be taxable only in the hands of the wife and clubbing provision would not be applicable. However, the reasonable amount has not been defined and it should stand the test of reasonableness based on facts and circumstance of each individual taxpayer. 

As per section 80TTA, interest accrued from savings bank account up to Rs10,000 is exempt. I have a savings bank account with an MOD (multi-option deposit) facility and the interest accrued is Rs40,000 on that account. Am I eligible for the exemption of Rs10,000 under 80TTA?

—Tarun Biswas 

We presume that you are referring to the Multi-Option Deposit Scheme offered by State Bank of India. We understand that a multi-option deposit (MOD) scheme is a combination of savings bank account and term deposits. While the MOD is linked to the savings account, you earn interest on such deposits at the bank’s term deposit rates. Since the deduction under section 80TTA of the Income-Tax Act, 1961, is allowed only in respect of savings account interest, you should request your banker to provide you a bifurcation of the interest earned from your savings account and the term deposit interest earned by you under the MOD scheme. You will need to offer the term deposit interest under the MOD scheme to tax. In fact, the banks would have also deducted tax at source (TDS) on such interest income if the said interest is higher than Rs10,000. In case any part of the interest earned is savings account interest, you would be eligible for the tax deduction under section 80TTA, subject to the cap of Rs10,000 per financial year. 

Parizad Sirwalla is partner (tax), KPMG.

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