Let us take a look at how an education loan, how is its tax deductable, what you need to to claim the tax benefit and the other benefits of education loans.
How does an Education Loan Work?
An education loan is taken for the purpose of higher education from a banking institution for pursuing a career goal. This loan can be taken for any course that an individual wishes to take after completing Class 12 or the equivalent. Just like any other loans, once the pupil starts earning, they start paying back the loan amount to the bank and are also charged an interest on the amount financed. This interest amount is tax deductible, however here are a few things one must note:
- The provision for this tax deduction on education loan is based on the Section 80E, Income Tax, 1961.
- The income tax benefit can be only availed on the interest amount of the loan. Hence, the principal amount can be claimed for any tax benefit.
- The entire interest amount of the education loans repaid is deductible when calculating the taxable income. There is no restriction for grant of deduction pertaining to the interest on loan for the higher education course. There is no restrictions on the rate of interest that is permissible as deduction.
- An person can claim tax benefit if he or she has taken an education loan to support higher studies of self, his or her spouse, children or for a student of whom he/she is the legal guardian. Therefore, note that education loan taken for siblings or other relatives don't qualify for Section 80E benefit.
- Income tax deduction can be claimed by an individual under the clause that the loan has been taken in their name.
- This special deduction can be availed for education loan availed to study abroad.
Tax Deduction under Section 80e Income Tax Act, 1961
When calculating the total income of an individual, based on the provisions of this section, there will be tax deduction, any amount paid by him or her in the prior year, out of his income chargeable for tax, by way of interest on an education loan taken by him or her from a financial institution or in other cases an approved charitable institution to pursue higher education or even the higher education of his or her relative, who they are responsible for as a legal guardian.
The deduction specified in the sub-section (1) of this section from the Income Tax Act, 1961, is allowed for calculating the total income pertaining to the initial assessment year and also seven assessment years succeeding the initial assessment year immediately or until the interest referred to in the same sub-section is paid by the individual in full, whichever happens earlier.
Things To Note for Tax Deduction Through Education Loan Based on 80E
Here are some terms that you need to know when referring to Section 80E for some defined terms such as:
- According to Section 80E, “approved charitable institution” refers to an institution specified in, or, as an institution established for the purpose of charity as well as approved by the concerned authority under the clause (23C) of the section 10 or an institution or organization referred to in clause (a) from the sub-section (2) of the section 80G.
- According to Section 80E, a “financial institution” refers to a bank to which the Banking Regulation Act, 1949 does apply which includes a bank or banking institution referred to in section 51 of the Act as well. Any other financial institution which the Central Government notified by the Official Gazette, specified pertaining to this.
- “Higher education”, according to the Section 80E, refers to any study course pursued by an individual after passing the Senior Secondary Examination (Class 12), or its equivalent from a school, board or a University that is recognised by the Central or State Government or even local authority or if any other authority authorised by the Central or State Government or a local authority, to do it.
- According to 80E, of the Income Tax Act, the “initial assessment year” refers to the assessment year that is relevant to the last year, in which the individual starts paying the interest on the education loan.
- A “relative”, is referred to in relation to an individual, meaning a spouse, children of the individual or a student for whom the individual is acting as a legal guardian.
How to Avail Tax Benefit for Education Loans
When an individual is submitting their tax deductions forms and documents they need to simply mention the amount of interest they have payed for the previous year for an education loan. In most cases, education loans are paid in installments. The interest amount from the year’s installments have to be summed up and reported. This tax deduction is on the income tax filing and not other taxes paid. Education cess or any other minor taxes are not included. The tax filing can be done online and when doing it, simply do not forget to mention the education loan interest amount and provide supporting documents if necessary.
What are the other Benefits of Education Loans?
The other benefits of an Education loan include:
- You do not have to pay any early repayment fees for your student loan.
- Infact, interest rates decrease, if your bank finds that you are paying loan repayments on time.
- These loans are generally very flexible meaning that the individual can take their time to pay up, as long as they are making regular payments, even if it is in small amounts. However, the interest payable for the amount increase if you take longer to pay the amount.
- Student loans may not require any assets but they do require a guarantor.
- Tuition fees, hostel fees and traveling fees are often covered in the loan, based on the bank’s discretion.
- Education loans can be taken for diplomas and other professional courses as long as they are been taken for higher education from a financial institution as defined by the bank you are borrowing from.