CA Sandeep Kanoi
Tax saved is money saved. Therefore tax planning is a must for all the tax payers. One of the best way to save tax for those tax payers who have children, who are either just entering college or going to take professional degree course, must think about not investing his own savings in education. Rather he should take the educational loan which is easily available these days. Here is a guide that will assist you to know tax benefits on education loans. These benefits help you to reduce the overall cost of your education loan.
The deduction under section 80E is available to an individual if following conditions are satisfied:
1. Deduction available only to Individual not to HUF or other type of Assessee.
2. Deduction amount: – The amount of interest paid is eligible for deduction and moreover there is no cap on the amount to be deducted. You can deduct the entire interest amount from your taxable income. However there is no benefit available on the repayment of principal amount of the loan.
3. Deduction available if Interest is been paid during the previous year and was paid out of income chargeable to tax which means if repayment is made from income not chargeable to tax than deduction will not available. There is no upper limit of the rate of interest which will be allowed as a deduction.
Note: – Earlier to previous year 2006-07 the above deduction was available only for Interest on loan taken and repaid by the assessee for his own studies.
4. Interest should have been paid on loan taken by him from any financial institution or any approved charitable institution for the purpose of pursuing his higher education. Interest on Loan taken from relatives or friends will not be eligible for deduction under section 80E.
a. approved charitable institution means an institution specified in, or, as the case may be, an institution established for charitable purposes and [approved by the prescribed authority] under clause (23C) of section 10 or an institution referred to in clause (a) of sub-section (2) of section 80G;
b. financial institution means a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf;
5. Loan should have been taken for the purpose of pursuing higher studies of Individual , Spouse, Children of Individual or of the student of whom individual is legal Guardian.
Higher studies means full-time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics and statistics;
Income tax department has added (W.e.f. A.Y. 2010-11) additional fields of studies (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from any school, Board or University recognised by the Central or State Government will also be covered under deduction in respect of interest paid on loan taken for higher education.
6. Interest should have been paid for the loan taken for the purpose of pursuing his higher education or of the spouse and children. From A.Y. 2010-11 Relative also includes student for whom the individual is the legal guardian.
Education loan taken for siblings (brother / sister) or other relatives (in-laws, nephew, niece, etc.) would not qualify for section 80E benefit.
7. Deduction period: – Deduction shall be allowed in computing the total income in respect of the initial assessment year* and seven assessment years immediately succeeding the initial assessment year or until the interest is paid by the assessee in full, whichever is earlier.
The tax benefits on education loan are only valid once you start the repayment and moreover they are only available up to eight years. For instance if your loan tenure exceeds eight years, you cannot claim for deductions beyond eight years.
Hence it is better that the education loan is repaid within eight years. Unless if the loan amount is very high and it is difficult to afford a high amount of equated monthly installment (EMI), one should not opt for education loan with longer tenure.
*Initial assessment year means the assessment year relevant to the previous year, in which the assessee starts paying the interest on the loan.
8. Loan should be in the name of Individual: – Deductions on education loan can only be claimed if the loan has been taken in your own name. If your parents, spouse or sibling has taken the loan for your studies, then you are not entitled to get tax benefit.
9. The loan includes not only tuition or college fees but also other incidental expenses for pursuing such studies like hostel charges, transport charges etc.
10. Repayments of education loan NOT covered under Section 80C.
11. There is no condition that the course should be in India. This special deduction is also allowed even for education loan availed for study abroad.
12. An individual can avail of tax benefit if he/she has taken an education loan to support higher studies of self, spouse, children or for the student of he/she is the legal guardian. So education loan taken for siblings or other relatives don’t qualify for Section 80E benefit.
13. To avail tax benefits on education loan, inform your company’s HR/accounts department so that less TDS is deducted from your salary. Else, you can claim it by filing tax returns.
Frequently asked question and answers
Question: Mr. Ramesh has taken a Education loan for his higher studies on 20.06.2010 and started paying installments including interest from 20.06.2011, from which year and up to which year Mr. Ramesh can claim deduction under section 80E of the Income Tax Act, 1961?
Ans: Mr. Ramesh will get tax benefit under section 80E from financial year 2011-12 i.e initial year of payment and next seven year i.e up to previous year 2018-19 or upto full payment of loan which ever is earlier.
Question: Mr. Manoj Sharma has taken a loan for his higher studies on 20.06.2010 and paid Rs. 25,000/- interest in previous year and his father has paid 20,000 interest payments in previous year 2014-15. Who can claim benefit of deduction?
Answer: Only Mr. Manoj will be eligible for deduction of Rs. 20000. His father is not eligible for deduction, the reason behind this is that loan has been taken by Mr. Manoj and not by his father, despite the fact that father satisfies the condition of relative and paid the interest too.
Question: Can son /daughter can claim the benefit of deduction for loan taken for higher studies of his /her father/mother.
Answer: No. Parents can claim the deduction in respect of interest paid on education loan taken for the education of children but children can not claim the deduction in respect of Interest Paid for Education of Parents.
Question: Mr. Ram has taken a loan for his higher studies ,and has repaid the loan interest amount but unfortunately he has not succeeded in exams and could not complete his higher studies.
Answer: As per section loan should be for “pursuing his higher education or for the purpose of higher education of his relative” and Ram has pursued the higher course so he should be eligible for the deduction as he has fulfilled all the conditions and there is no condition that the course assessee has persuaded should be completed or assessee should be passed definitely in the course the main demand of the section is purpose of the loan should be higher education and it should be drawn and used for the purpose of higher studies for his or his relatives.
Question:- I would like to know the tax benefit gained on bulk repayment of an education loan. Considering it as a bulk repayment,is the benefit available on the total interest “payable” in a particular financial year or the total interest actually paid in that year ? Suppose i joined college in 2008 and took the loan (of say 2 lacs). Say, before 2014, the interest accrued was 80,000/- and in 2014 it is 20,000/-. Now I make a bulk repayment of 3 lacs in June, 2014. So, for the year 2014-2015, will the tax benefit be available on the whole 1 lac Interest component or only 20,000/-?
Answer:- Tax benefits on education loans help you reduce the overall cost of the loan.You can claim a deduction under section 80 E of the Income-Tax Act for the interest paid on an educational loan. 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. Education loan taken for the higher education of siblings (brother or sister) is not covered in this regard.
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(Republished with amendments)