It’s each parent’s dream to educate children. They sacrifice a lot to fund children’s education. They are ready to use lifetime savings to pay tuition fees. Higher education these days costs a lot. An MBA from a popular institution would cost no less than Rs 8 Lakhs in India. Not all can afford to fund education on their own. This is when an education loan comes in handy. Education loan is inevitable for most if they decide to pursue MS or MBA in a foreign university.
Education loan, also called student loan, is a loan tailored to help students fund higher education and other related expenses, like books and gadgets, along with living expenses. Funds received towards education loan, can be used only on education.
Generally, education loans are sanctioned to those students who have a good academic track record. The education loans are sanctioned against collateral and a loan guarantor. Banks don’t ask for collateral on education loans up to Rs 4 Lakhs. In some banks it’s Rs 7.5 Lakhs. Generally, an earning parent stands as the education loan guarantor. Following are the general eligibility criteria for education loan:
SEE ALSO: Tax Benefits on Educational Loan
Education loans availed for self, spouse, children (both biological and adopted), pupil to whom the taxpayer is a legal guardian, are eligible for a tax deduction on education loan interest as per section 80E of the Income Tax Act.
Section 80E says that education loan must be availed from an authorized financial or charitable institution. Tax deductions are not allowed if the education loan is taken from relatives and the employer.
Financial institutions refer to banks that operate as per the Banking Regulation Act, enacted in 1949. Charitable institutions are those authorities under the clause 23C of the Section 10. It includes universities and educational institutes established for education purposes only.
Tax deductions on education loan are allowed only for individuals and not for a Hindu Undivided Family, HUF. Tax deductions under Section 80E is not allowed for companies or firms. Tax deductions are allowed only for the individuals availing the loan and are also responsible for repaying the loan from his/her income.
Tax deductions under Section 80E is allowed only on the interest paid for education loan. There is no upper limit on the deductions; the entire amount paid towards interest on education loan is eligible for tax deduction. Note that principal on education loan is not covered under Section 80E.
Tax deduction under Section 80E is offered only if the education loan is taken for higher studies. Higher studies refer to the education, post completion of the secondary examination. This includes vocational courses and regular courses, both in India and abroad. Loans availed for funding post graduation courses in management, engineering, medicine, applied sciences and so on, are covered for tax deductions under Section 80E.
Tax deductions under Section 80E can be made from the year in which you start paying interest on education loan. If you begin paying interest within the same year of availing the loan, then you are allowed to claim deductions on interest payment. The maximum period allowed for tax deduction is 8 years, starting from the year of repayment of education loan.
Individuals availing education loans enjoy tax benefits as per Section 80E of the Income Tax Act, 1961. The most important tax benefit of education loan is that you can avail the deduction under Section 80E on education loan interest, even if you have availed the entire deduction of Rs 1.5 Lakhs a year under Section 80C.
Section 80C offers tax benefits with respect to tuition fees paid on higher education for up to 2 children, while Section 80E offers tax benefits on interest paid for the education loan.
The table below shows the interest rate offered on education loan in India by various lenders:
Education loans are categorized under priority sector by the RBI. That means, a certain percentage of funds is kept aside in banks, exclusively for sanctioning education loans. Education loans up to Rs 10 Lakhs for education in India and Rs 20 Lakhs for education in foreign countries are offered at a very attractive rate of interest.
You borrow money to finance higher education or pay college fees. Payments are deferred when you are in college, and for a certain grace period post completion of the course, called moratorium period.
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