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Tax Benefits on Education Loan Research Team | Posted On Tuesday, June 24,2008, 11:29 AM

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Tax Benefits on Education Loan



What is an Education Loan?

An education loan is a special type of loan designed to suit the needs of students. An education loan is money borrowed to finance and manage the expenses related to higher education. The amount borrowed can be repaid after the completion of the course, along with the interest. In India, almost all financial institutions like banks, NBFCs and other lending institutions offer education loans to students pursuing courses in India and abroad.

These loans can be availed for various professional courses, post graduation courses in the field of engineering, management or medicine. The loans can also be availed for vocational and part-time courses as well. The interest rates on education loans are lowered for students securing admission to premier institutes like IITs, IIMs or NITs. This type of loan helps aspirants fulfill their educational commitments and career goals. 

An education loan not only helps you fund higher education, but it also helps borrowers save on taxes. Given below are the points you must learn on tax benefits on education loans:

The Principal Component Does Not Qualify for Tax Deduction

Borrowers are often confused on the tax benefits offered on education loans. Most borrowers are unaware of the fact that the principal part of the education loan, does not qualify for an Income Tax deduction. Only the interest part of education loan qualifies for tax exemption under Section 80E of the Income Tax Act.

There are also some conditions attached vis-à-vis the tax deduction. The tax deduction on education loan can be claimed only when you commence the repayment. The tax benefits can be availed up to 8 years from the date of sanction of the loan. No tax deduction can be claimed once the loan is cleared.

As there is no tax benefit on the principal part of the education loan, the interest part can be fully claimed for an Income Tax deduction with no upper cap.

See Also: Education loan in India

Not all Education Loans Qualify for Tax Deduction

An education loan must be availed from a reputed financial institution notified under the Income Tax Act. The tax deduction on education loans is applicable only on the loans sanctioned by banks, NBFCs and other scheduled banks. A tax deduction cannot be claimed for money borrowed from peers or relatives or from an employer for funding education of self or spouse/children.

Additionally, all education loans sanctioned by NBFCs do not qualify for tax deduction under the Income Tax Act. Only those education loans availed from non-banking financial companies (NBFCs) notified by the central government through the official Gazette as a ‘Financial Institution’ for the purpose of education loan tax deduction, qualify for the deduction.

Tax Deduction Period is Capped for 8 Years

Education loans are sanctioned for tenure as long as 15 years. However, the period for claiming tax deduction under Section 80E is capped at 8 years. The tax benefits on education loan, can be claimed only when you start the repayment and is available up to eight years, or until the payment of interest is made in full, whichever is earlier.

For example, if you repay the loan within five years, then you can claim a tax deduction for the interest paid only till 5 years. Similarly, if you take 12 years to repay the education loan, you can claim a tax deduction for the interest repaid for only 8 years.

Education Loans Taken for Certain Relationships will Qualify for Tax Deduction

You can get tax benefits if you have availed an education loan to pay for educational expenses for higher studies of spouse, children or self or for students for whom the borrower serves as a legal guardian. However, education loan availed for siblings or other family members do not qualify for deductions under section 80E of the Income Tax Act.

Moreover, only the borrower in whose name the loan is sanctioned can enjoy these tax exemptions. But, if the loan is availed in joint names where the parent or the legal guardian is the co-borrower along with the main applicant, then both get a tax deduction on this loan based on proportion of repayment.

Only Loans Taken for Higher Studies Qualify for Tax Benefits

Tax deduction on education loan can be claimed only when the money is used for funding higher education. This means the applicant must complete the higher secondary exams, before applying for an education loan. Additionally, tax deductions can not only be claimed on loans taken for funding full-time courses, but also on loans taken for vocational and part-time courses.

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.

Tax Benefit Under Section 80E

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.

See Also: Checklist for Applying an Education Loan

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.

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