I always think of saving my readers money to the maximum through all possible ways. So, today I am trying to give you the complete details of tax laws applicable for educational loan and the interest payable on it. As I have posted articles on Tax Planning and Tax rates for Individuals for the Financial Year 2007-08, here I am not discussing those things again. I will concentrate particularly on the tax benefits, which can be availed on Educational Loan.
Educational Loan means the loan taken for pursuing higher education. The term "higher education" would mean graduate or postgraduate course in engineering, medicine, management or postgraduate course in applied sciences or pure sciences, including mathematics and statistics.
The educational loan must have been taken from a financial institution or any approved charitable institution for the purpose of pursuing higher education, so that it will be eligible for tax benefit under prevailed tax laws.
You will get the tax benefit on an education loan only if the loan is in your name and is taken for the purpose of higher education of yourself, your spouse or your children. Loan taken for the higher education of siblings (brother or sister) are not covered in this regard.
You can claim tax benefit under section 80E of Income Tax Act of 1961. The Finance Act, 2005 has substituted Section 80-E, whereby only the interest on loan taken for higher education is eligible for deduction as against the earlier provision which allowed deduction in respect of repayment of loan.
The tax benefit can be availed only on the interest paid not on the principal. Earlier, the lesser of the two amounts were eligible for tax deduction: total amount (includes principal repaid and interest paid) paid during the year or Rs 40,000. But now it has been changed and you can claim only the entire interest paid on educational loan from your taxable income without any limit. These deductions are available only for a period of eight years starting from the year in which you start paying the interest.
Do remember that you cannot claim tax deductions if you have taken loan from your employer or family, or friends. You can get tax benefits only if the loan is from a financial institution, bank or approved charitable institution. Do remember, repayments on your education loan are NOT covered under Section 80C. As mentioned above, they are covered under Section 80E of the Income Tax Act.
You can utilise the benefit of tax exemption under this Act to the maximum, if your Financial Planning is effective.