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Education Loans in India and Tax Benefits
If you want to go for higher education for your beloved child and your bank balance doesn’t allow you to take a step forward, education loans looks like the best option to meet the cost of higher education especially if your son or daughter is aspiring for top B-School or engineering college in India. Deduction under Section 80E of Income tax Act allows you to claim income tax deduction on interest paid on education loan.
Eligibility
The eligibility criterion for Section 80E tax deduction is available only to individuals which doesn’t includes HUF. Education loan must be availed from some approved financial institution or charitable institution which should be specifically availed for the purpose of pursuing higher education. Otherwise, if you have taken education loan for the student from your relative, then no tax deduction would be allowed under Section 80E. In such a case, a financial institution means a bank which is covered under Banking Regulation Act of 1949
Tax Deduction Limit under Section 80E
There is no maximum limit for the amount of tax deduction under Section 80E. You can also avail the entire interest paid on education loan as an income tax deduction. But there is no income tax benefit on the principal repayment on education loan availed for your child. This 80E tax deduction is over and above the normal Rs 1,00,000 tax deduction available under Section 80C which helps you to save tax by investing in mutual funds and long term fixed deposits
Section 80E – Purpose of Deduction
The said deduction should be availed only for the purpose of “higher education”. By higher studies, we mean full time course in management or engineering, medicine, applied sciences, hotel management for the purpose of graduation or post graduation. It includes regular courses pursued after passing out Senior secondary examinations from approved Board. The loan may be taken for your child or for your spouse.
Period of Tax Benefit
You can avail this tax benefit for a total of eight years and if your education loan is for a period of say 10 years, you won’t be able to claim deduction on interest paid after 8 years.
Points to Note
- The education loan can be taken on the additional hostel fees and transportation charges apart from the regular tuition fees
- Under the new rules of Income Tax, deduction under Section 80E is available to parent who has taken the education loan for his child, the person himself for whom the education loan is availed and the legal guardian also which includes relatives. The scope of relative availing this tax deduction is recently added from assessment year 2010-11
- The education loan has to be in your name(not in the name of the parents) in order to claim income tax deduction under Section 80E
- The education loan shall be available for higher studies and you are eligible to claim deduction on the interest paid
- The deduction is available and the individual can claim it in the year in which he has just started paying his interest installment to the financial institution and next 7 succeeding year
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