An education loan allows you the finances and flexibility to take up higher education and pay for it systematically over a longer period. At the same time, it gives you tax breaks that make the repayment less expensive. However, there are some caveats involved in availing these benefits. Understand the tax exemptions available with the education loan and how to make best use of them.
You can claim tax deductions against education loans under Section 80E of the Income Tax Act. However, there are a few things to keep in mind about tax deductions on education loans.
The first point is that while there is no upper limit on the amount you can claim, you can claim tax benefits only on the interest paid on the education loan and not on the principal.
Second, only the person availing the loan can claim deductions. Education loans need not be taken by the student themselves. You can take a loan for your children or your spouse. So, “if you take an education loan for your daughter and repay it, you can claim the tax deduction. However, if your daughter repays the loan from her source of income after she starts earning herself, neither you nor she can claim deductions. This is because the loan is in your name, but the repayment is not made out of your taxable income. Simply put, if the borrower wants to claim tax benefit, they must ensure the EMIs go from their accounts,” says Adhil Shetty, CEO, BankBazaar.com.
Bear in mind that some institutions would allow you to take an education loan to fund your sibling or cousins’ higher studies. However, unless you are their legal guardian, you cannot claim tax deductions on the loan.
Third, not all education loans are eligible for tax exemptions. “Section 80E specifies that only loans from specified financial institutions, including banks and any other financial institution notified by the Central government, are eligible for exemptions. While most leading NBFCs fall in this list, you need to ensure that your loan provider is included in this list if you plan to take a loan from an NBFC. Money borrowed from family, friends, or employers does not fall under the category of education loan and is not liable for exemptions,” informs Shetty.
You can avail deduction for the interest for a maximum of 8 years starting from the year in which you start repaying the loan. If your loan tenor exceeds 8 years, then you cannot claim a deduction for the interest paid beyond 8 years.
It is clear, thus, that interest paid on educational loans obtained to pursue higher studies in India or overseas can be claimed as a deduction from taxable income of the individual. “The deduction can be claimed starting from the year interest payment commences and ending with loan repayment or 8th year, whichever is earlier. One should note that these loans should be availed from banks/financial institutions/ approved charitable institutions only. Interest paid on loans from friends and relatives for this purpose do not qualify for such deduction. A certificate from the institution would be necessary to support the interest amount paid for claiming a deduction,” says Aarti Raote, Partner, Deloitte India.
It may also be noted that loans obtained for self or spouse, children and legal wards would be permitted for this purpose. Higher education has also been defined to mean study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognised by the government.