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April 30, 2020

Taking Education loan for self and children, know how to take Income Tax Deduction

by facelesscompliance in Income Tax

Taking Education loan for self and children, know how to take Income Tax Deduction in section 80E as per Income Tax Act

Basic Education is a must for a successful life and higher education is needed for living a luxury life . However, the cost of education is increasing rapidly nowadays, as cost of studying at a reputed institution is already very high be it in Medical, Engineering, CA or else.  Keeping this point in mind, parents, who wishes to provide their children with the best possible education, invest their money in various investment plans like mutual funds (MFs), fixed deposits (FDs), unit-linked insurance plans (ULIPs), etc., for the long term. Despite doing all this the parents face shortage of funds when it comes to higher and professional education and may have to take loan. Even if students are planning to study abroad then taking loan is inevitable as cost of education is very high abroad.. Education loan plays a main role in such scenario of cash crunch which helps to problem of short fall of amount required for education.

Education Loan can be obtained from various banks easily now a days if parents have sufficient income to support payment of EMI. If you are repaying your education loan then the interest paid on that loan is allowed as deduction under section 80E of the Income tax act, however the deduction is provided for the interest part of the EMI. Section 80E has come into effect from 1st April 1995, it was inserted in the Income Tax Act, through The Finance act 1995. The other conditions for claiming this deduction is as under:

  1. Only an individual can claim this deduction
  2. The loan should be taken for the purpose of higher education of self, spouse or children or for student for whom the assessee is a legal guardian. The tax benefit can be claimed by either the parent or the child (student), depending on who repays the education loan to start claiming this deduction
  3. Parents can claim this deduction against the loan taken for the higher education of their children.
  4. The assessee must take the loan from any bank/ financial institution or any approved charitable institution.
  5. Loan taken from relatives or friends are does not qualify for deduction
  6. The assessee must take the loan for higher education/ studies. Higher studies include all the fields of study pursued after passing the senior secondary examination or its equivalent exam. It includes both vocational as well as regular courses. It does not matter whether such loan is taken for higher education in India or outside India. Tax deduction under Section 80E is only available for loans taken for pursuing higher education. Section 80E defines ‘higher education’ as any full-time course pursued after passing the Senior Secondary Examination or its equivalent from any educational institutes, board or universities recognised by the government or local authorities.
  7. Borrowers often misunderstand tax exemption provisions available on education loan. However, in the case of education loans, the repayment of principal amount does not qualify for tax deduction. Only the interest component of education loan EMI qualifies for tax deduction under Section 80E.

What is the amount of deduction under section 80E?

The assessee is eligible for deduction against the interest amount for a period of 8 consecutive years starting from the year in which the assessee starts paying interest. The assessee cannot claim interest deduction beyond the period of 8 years even if the tenure of the loan is more than 8 years. For instance, the assessee has taken education loan which is to be repaid within 5 years then the assessee can claim deduction only for 5 years.

For instance, if your gross taxable income after other deductions is Rs 9.7 lakh and you repay Rs. 2,00,000 as the interest component of the education loan; your total income to calculate income would become Rs 6.7 lakh and taxed accordingly. 

Incase of Early repayment,  if you repay the education loan in 6 years from the date of repayment, the tax deduction would be available for this 6 year period only, even though you could repay over 8 years and enjoy the tax benefits.

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