Income Tax deductibility of Foreign Education Funded by Employers

 

Issue:

Many multinational and large Indian companies sponsor their employees for higher education abroad-such as MBA, technical training, or research programs-often with a bond to serve the company after completion.

Sometimes, even dependents of employees receive such benefits. While this practice helps in skill-building, the tax treatment under the Income Tax Act, 1961, requires careful analysis.

The key question is: Is such funding a perquisite taxable in the employee’s hands, or an allowable business expenditure for the employer?

Legal position:

Section 37(1) allows deduction of business expenditure incurred wholly and exclusively for business.

If education is for training an employee in line with business needs (e.g., sending a finance executive for IFRS training abroad), courts have held it allowable.

If the expenditure is more in the nature of personal development of the employee without nexus to business, deduction can be disallowed.

Can Expenses for a Director’s Child’s Education Abroad Be Business Expenses?

Hon Delhi HC held in the case of Kostub Investment Ltd. vs. CIT (Del); ITA No. 10 of 2014 dated 25-02-2014 that, Expenditure On Foreign Education Of Employee (Son Of Director) Is Deductible If There Is Business Nexus

However, In ‘Mac Explotec Private Limited V. Commissioner of Income Tax’ – 2006 (6) TMI 86 – KARNATAKA HIGH COURT Karnataka High Court held that the expenses incurred by the assessee company in sending the director’s son abroad for training in general management were not allowable since the training did not pertain to the assessee’s business.

Structuring Options for Employers

Bond/Service Agreement – To strengthen business nexus, employers should enter into service bonds requiring the employee to serve after completion of studies.

Treating as Training Expense – If course is directly related to job profile, employer can justify it as “training” rather than “education.”