Education plays a crucial role in the economic development of all societies. While there is a universal acknowledgement to the need for public funding of primary and secondary education, public funding of higher education in a developing country like India is not feasible.
Thus, recognising the importance of higher education and the role of institutional funding to deal with rising cost of higher education, the policymakers came out with tax deduction on education loans under Section 80E.
The objective was to relieve interest burden from education loan borrowers through tax incentives. However, to claim the tax deduction, the borrowers have to meet certain conditions.
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Principal component does not qualify for tax deduction:
Borrowers often misunderstand tax exemption provisions available on education loan. This stems from tax exemptions available on home loan where both principal and interest components of EMIs qualify for tax deductions under Section 80C and 24b, respectively.
However, in the case of education loans, the repayment of principal amount does not qualify for tax deduction. Only the interest component of education loan EMI qualifies for tax deduction under Section 80E.
The lack of tax deduction for principal repayment in education loan has been somewhat compensated by the absence of an upper cap on claiming tax deduction on interest payment. You can claim the entire interest component for tax deduction.
Not all education loans qualify for tax deduction:
The tax deduction available under Section 80E is applies only to education loans availed from banks, financial institutions notified under the Income Tax Act and approved charitable institutions. You cannot claim tax deduction on funds borrowed from family members or friends for higher education.
Similarly, not all NBFC education loans will qualify for tax deduction. Only those education loans availed from non-banking financial companies (NBFCs) notified by the central government through official Gazette as a ‘Financial Institution’ for the purpose of education loan tax deduction will qualify for the deduction.
This is especially relevant as banks are increasingly getting cautious with education loans due to the rising non-performing assets in the segment. Since the NBFCs are aggressively pushing to fill in this gap, students may get education loans from NBFCs with relative ease. Hence, to ensure that you do not miss out on the Section 80E tax deduction later, check out whether that NBFC has been notified as such through the official Gazette.
Tax deduction period is capped for 8 years:
Tenures of education loan can go up to 15 years. However, the period of availing tax deduction under Section 80E has been capped at 8 years. You can claim the tax deduction from the year of the commencement of your repayment period.
For example, even if you complete the repayment of your education loan within 12 years, the tax deduction under Section 80E can only be claimed for the interest repaid within 8 years of the commencement of your repayment period.
Only loans taken for higher studies qualify for tax deduction:
Tax deduction under Section 80E is only available for loans taken for pursuing higher education. Section 80E defines 'higher education' as any full-time course pursued after passing the Senior Secondary Examination or its equivalent from any educational institutes, board or universities recognised by the government or local authorities.
Even vocational studies and courses pursued outside India would qualify for deduction under Section 80E. However, the courses need to be post-senior secondary education.
Education loans taken for certain relationships will qualify for tax deduction:
Education loan taken for pursuing higher studies for self, children, spouse or for a student for whom one is a legal guardian would qualify for tax deduction.
Thus, parents and legal guardians are eligible to claim the deduction for the interest component paid by them.
However, one cannot claim this deduction for education loans taken for his sibling or other relatives. Moreover, only the borrower who has availed the education loan can claim the tax deduction.
For example, if a person takes an education loan for his child, spouse or his legal ward, only he can claim the tax deduction. The student, i.e. the child, spouse or his legal ward, cannot claim the deduction even if the loan is repaid from his funds after the completion of his studies.
However, if the loan is taken in the joint names of parent/legal guardian and child/legal ward, then both of them will have the flexibility to claim the tax deduction based on their tax liability.