As per the provisions of Income Tax Act, an assessee is allowed certain deductions while computing total income. One of such deduction is, for the amount of interest repaid on education loan under section 80 E of chapter VI A of Income Tax Act, 1961. This deduction helps the assessee to reduce the overall all cost of the education loan. Education loans are a convenient and popular option for many people to meet their cost of higher education.
Conditions for income tax deduction under section 80E
For claiming income tax deduction on education loan, an assessee must comply with the following conditions
Amount of deduction
The Deduction under Section 80E is allowed only for the repayment of interest on education loan and not for the amount repaid as principal. Unlike home loan, no benefit is available to the assessee under income tax act for repayment of principal amount of education loan. However, there is no cap on the amount of interest to be deducted from the total income. The assessee can deduct the entire interest expense while computing his taxable income.
At the time of issuing Education Loan, the banks and financial institutions issue a Statement showing amount which is to be paid as principal repayment of loan and the amount which is to be paid for Interest on education loan. Such statement is commonly termed as repayment schedule. Apart from this, you can also read about tax deduction on pension funds and medical insurance
Eligible assessee:
Deduction under this section is available only to individuals and not to HUF’s or any other category of assessee.
Income tax deduction on education loan can be availed by the individual assessee for loan taken for the Higher Education of
- self or
- spouse or
- children or
- Student, of whom the Individual is the legal guardian.
Hence, parents can claim deduction for interest paid by them for the education loan taken for the higher studies of their children.
Earlier to previous year 2006-07 this deduction was allowed only for Interest on education loan taken and repaid by the assessee for his own studies.
Nature and Purpose of Loan:
For the purpose of claiming income tax deduction on education loan, education loan must have been taken for the higher education of self or spouse or children or student, of whom the Individual is the legal guardian.
Central government has provided the definition of Higher Studies. It means any regular course pursued after clearing the Senior Secondary Examination or its equivalent from any school, board or university recognized by the Central Government or State Government or local authority or by any other authority authorized by the Central Government or State Government or local authority to do so.
Also education loan taken on or after 1st April 2009 (with effect from assessment year 2010-11) for the purpose of pursuing any Vocational Course would also be covered under this section along with other regular courses for the purpose of claiming deduction under this section.
Benefit of such deduction is available to students for courses pursued in India as well as for courses pursued outside India.
Over and above 100000/-:
The deduction under Section 80E is available in addition to deduction of Rs. 100000/- under section 80C. We have earlier mentioned complete details about section 80c instruments and eligibility. There is no maximum limit for claiming deduction under this Section for the amount of interest on education loan.
Loan must be from approved or recognized organisations.
For the purpose of claiming Deduction under this Section, loan must have been taken from any bank or Financial Institution or approved Charitable Institution.
Any loan taken from any other source such as friends and relatives does not qualify for deduction under this Section of the Income Tax Act.
Thus, only loans taken from any bank or financial institution or approved Charitable Institution are allowed to be claimed as deduction under this Section.
Eligible period of income tax deduction on education loan
Deduction under this Section 80E is allowed to be claimed by the assessee from the financial year in which the he starts making payment of the interest on education loan. This deduction shall remain available to him for 7 succeeding financial years.
Therefore, this deduction shall remain available for a maximum period of 8 financial years or until the Interest is repaid in full by the Individual, whichever is earlier.
This implies that if the assessee’s loan period exceeds 8 years, then he cannot claim deduction beyond 8 years. Hence it is advisable to the assessee to repay the education loan within eight years. Unless, the loan amount is too high and it becomes difficult for the assessee to afford high equated monthly instalments (EMI), one should not take an education loan with longer tenure.
Actual payment of interest
Deduction under this section shall be allowed to the assessee only if the interest on loan has actually been paid by him. No deduction shall be allowed to the assessee where interest is yet to be paid.
Also, deduction will be available to the assessee only if he pays interest during the previous year and is paid out of income chargeable to tax which means if repayment is made from income not chargeable to tax than deduction will not be available.
Loan must be in the name of the Individual
For the purpose of claiming deduction under this section, education loan must have been taken in the name of the assessee. If the loan is being taken by the parents, spouse or siblings for the studies of an individual, then the individual under consideration shall not entitled to claim tax benefit under this section.
Expenditure included.
For claiming income tax deduction on education loan, the loan amount includes not only tuition or college fees but also other incidental expenses for pursuing such studies like Hostel Charges, Library / Laboratory Fees, Travel Expenses and Passage money for studies abroad. We have special tutorial on how to become crorepati in 15 years
Loan must have been taken for full-time studies for any graduate or postgraduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics and statistics, Professional Courses and other Courses approved by the UGC, the government of the AICTE.
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