Understanding Section 80E: Education Loan Tax Deductions

Understanding Section 80E: Education Loan Tax Deductions

Education is a must for a complete and successful life. However, the cost of education is increasing rapidly nowadays, as cost of studying at a reputed institution is already very high.  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 to curb the problem of education and education loan plays a main role for such problem. Education loan plays a main role in such scenario of cash crunch which helps to problem of short fall of amount required for education.

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 1^st 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.
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.

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.