Strictly speaking, since the fee has been paid by the employer, it does not satisfy the condition of ‘paid by the individual’ and hence should not qualify for a deduction in the hands of the employee.
In order to attract and retain the best talent, in addition to the conventional practice of paying only salaries to employees, companies provide various other benefits to them. These may take the form of payments made directly to vendors/third parties for services/amenities/benefits provided to employees and their families.
One such popular benefit is the payment of school fees by the employer to the educational institution where the children of the employee are enrolled. This arrangement is especially common in the case of employees on deputation/secondment.
Section 80C (2) of the Income Tax Act provides for a deduction of school fees paid (subject to conditions specified therein) during the relevant financial year. However, as per section 80C (2), individuals can avail deduction of the expenses only if they are ‘paid by the individual’ in a given financial year.
This brings us to the question of whether a deduction can be claimed by the employee under section 80C (2) in respect of the tuition fees paid for his/her children, directly by the employer, as these payments are not actually ‘paid by the individual’ as per Section 80C (2); rather they have been paid by the employer.
Strictly speaking, since the fee has been paid by the employer, it does not satisfy the condition of ‘paid by the individual’ and hence should not qualify for a deduction in the hands of the employee. Hence the employee should not be allowed a deduction for such fees under section 80C. However, let us explore another view.
As per section 17(2) of the Act, a perquisite includes any payment made by an employer which otherwise was an obligation of an employee. Payment of school fees to educational institutions or a school is an obligation of the employee which is to be met in order for his/her children to enjoy uninterrupted education from these institutions.
With a view to increase employee productivity and allow employees to focus on work, the employer agrees to take over the task of arranging for the children’s schooling and pays the fees directly to the institution/school, and such an arrangement is a part of the contract of employment of the employee. Hence, this being an obligation of the employee met by the employer, such payment made by the employer qualifies as a perquisite which is taxable in the hands of the employee.
The school fee payment is therefore added in the employee’s income as perquisite and, consequently, is borne by the employee. It is a mere application of income; i.e., the income is first accrued to the individual and then it is apportioned or spent (i.e. applied) by the individual or on his behalf/under his instructions. Had the employer not paid the fees directly to the school, the employee would have received a higher salary and would have paid the fees himself.
The employer merely acts as a conduit/facilitator in the entire transaction for making school fees payment, as agreed with the employee. In such a case, even though the actual payment is made by the employer, the employee can claim a deduction for such payment under section 80C(2) of the Act as the fees are, in essence, paid by the employer.
While the former view is safer view, the latter view, though litigious, is still arguable.